Construction litigation in uncertain times


Posted by Nicholas Ellor, senior underwriter at Litigation Futures Associate Temple Legal Protection

Ellor: Our policies have now been through fire and water

Liquidators of insolvent contractors in construction disputes have hitherto been reluctant to refer the dispute to an adjudicator for fear of being injuncted on the grounds of:

  • Jurisdiction: the insolvency regime trumps adjudication and the two are incompatible; and
  • Futility: no adjudicator’s decision would be enforced if a valid cross-claim exists unless the adjudicator’s decision addresses all the claims and cross-claims and adequate security is in place to protect the solvent counterparty on its costs in contesting any enforcement proceedings and any proceedings to challenge the adjudicator’s decision.

The right to refer construction disputes to adjudication is statutory (section 108 of the Housing Grants Construction and Regeneration Act 1996 (as amended)).

Adjudication is a quick, cheap and costs-neutral process. In addition, it is believed that only a very small percentage of adjudicator’s decisions are ever challenged. This makes it very attractive.

The adjudicator’s decision is binding unless challenged in separate proceedings.

It is often the case that a contractor engaged in a construction project goes into liquidation as a direct result of it not being paid sums due to it by the employer. The contractor may have spent a lot of money as a result of delays and disruption for which it is entirely blameless.

Two key questions then arise:

  • Why should a contractor in these circumstances effectively be deprived off exercising its statutory right to have the dispute adjudicated?
  • Why would an adjudicator be deemed no less able to determine the net balance of the mutual dealings between the parties than a liquidator under the set-off insolvency rules?

This has finally been resolved in the landmark decision of the Supreme Court in Bresco Electrical Services Ltd (In Liquidation) (Appellant/Cross-Respondent) v Michael J Lonsdale (Electrical) Ltd (Respondent/Cross-Appellant) [2020] UKSC 25. The hearing took place in April and judgment was given on 17 June.

In brief, Lord Briggs found that the adjudicator does have jurisdiction to determine the dispute and any cross-claim. Construction adjudication was not “incompatible with the operation of the insolvency code in general, or with insolvency set-off in particular”. The cross-appeal on jurisdiction was dismissed.

Given an insolvent company has the statutory and/or contractual right to refer the dispute to adjudication, it is not appropriate to deprive it of that right on the basis that the adjudicator’s decision is unlikely to be enforced.

Any assessment as to the enforceability of the adjudicator’s decision can be made at the hearing of the summary judgment application, but should not be a reason for granting of injunctive relief to prevent or stay an adjudication.

Thus, construction adjudication is not an exercise in futility. The appeal was allowed.

This gives welcome clarity and certainty in allowing liquidators to refer construction disputes to adjudication so as to determine any net balance due to the insolvent company without fear of being injuncted or threatened with injunction.

Enforcement of the adjudicator’s decision

The concern has been that in enforcing an adjudicator’s decision, the solvent counter party will be ordered to pay sums to an insolvent company. These sums will then form part of the insolvent company’s estate for ultimate distribution to creditors.

What if the referring party wishes to challenge the adjudicator’s decision? It will have to start separate proceedings in the Technology and Construction Court which, if successful, will find itself as an unsecured creditor in the insolvent estate with very little prospect of recovering anything meaningful. This is not a very satisfactory state of affairs.

This problem was addressed in Meadowside Building Developments v 12-18 Hill Street Management [2019] EWHC 2651 (TCC).

The court held that an adjudicator’s decision could be enforced subject to:

  • The adjudication’s decision having addressed all claims and cross-claims in the mutual dealings between the parties and a ‘net’ position having been arrived at;
  • The sum awarded being ringfenced for a period of time (say, six months) either by way of payment of the sum into court or otherwise protected by the liquidator’s undertaking to the solvent counterparty to hold such sums in a protected account for a similar period pending any proceedings commenced to overturn the adjudicator’s decision; and
  • Adequate security for the solvent party’s costs of defending any summary judgment application and/or prosecuting any final determination proceedings issued by it challenging the adjudicator’s decision, such as an after-the-event (ATE) insurance policy.

Temple Legal Protection insured an insolvent sub-contractor, Astec Projects Ltd, in respect of its claims against Balfour Beatty Civil Engineering Ltd arising out three sub-contracts.

Put to the test

Temple’s ATE insurance policies provided cover in respect of four risks: adjudicator’s fees, injunction proceedings, enforcement proceedings, and final determination proceedings. Separate levels of indemnity were provided in respect of each risk.

Astec commenced adjudication in respect of one of the sub-contracts in January 2020 and in early February 2020 Balfour applied for a mandatory injunction seeking to compel Astec to withdraw its notice of adjudication and a prohibitory injunction seeking to restrain Astec from further pursuing the adjudication.

The principle grounds for so doing were the inadequacy of Temple’s ATE policies, the impossibility of the adjudication to be able to address the entirety of the mutual dealings between the parties, and unenforceability of any adjudicator’s decision.

The injunction was heard before Mr Justice Waksman on 27 February 2020 in Balfour Beatty Civil Engineering Ltd v Astec Projects Limited (In Liquidation) [2020] EWHC 796 (TCC). Please note that this was heard before Bresco.

A significant part of the hearing was devoted to scrutinising and attacking various provisions of Temple’s ATE insurance policies.

Waksman J found that there was no reason why three separate adjudications could not take place in respect of the three sub-contracts and that a net position be arrived at covering the entirety of the mutual dealings between the parties.

Temple’s ATE insurance policies did, with certain amendments, constitute adequate security for Balfour’s costs in any enforcement proceedings and/or any final determination proceedings.

Once the net position had been established, any enforcement proceedings would be stayed for a period of six months to allow Balfour to issue legal proceedings for final determination.

Balfour’s claim for an injunction was dismissed and application for permission to appeal was refused.

Prior to the hearing, Temple was asked by Astec to make various amendments to the terms of the policies to address perceived inadequacies in them identified by Balfour’s legal advisers. We agreed to the majority of these requests and in a timely manner, demonstrating our willingness to accommodate such concerns and to put Astec in the best position possible.

In addition, we attended the hearing and were able to give Astec the assurances sought in respect of the increases in the level of cover for final determination proceedings. Our presence at the hearing had a definite bearing on the outcome.

Our policies have now been through fire and water, analysed and picked over in detail by Balfour’s counsel and the judge, and ultimately found, after certain amendments, to be fit for purpose.

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