A recent Court of Appeal decision has highlighted the "basic incompatibility" between the adjudication of construction disputes and the insolvency regime, granting an injunction to restrain an insolvent company from pursuing adjudication that would otherwise be an "exercise in futility" (but recognising the distinction between a company in insolvent liquidation, and a company under a company voluntary arrangement (CVA)). The judgment also serves as a reminder that a general reservation at the outset of an adjudication of the right to raise a jurisdictional objection in the future may not be sufficient if it is too vague.
Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd
At first instance Fraser J granted an injunction preventing an adjudication brought by Bresco from proceeding on the basis that Bresco was in liquidation. Fraser J had reasoned that an adjudicator did not have jurisdiction over a referring party in liquidation because the contractual rights of a company in insolvent liquidation are lost and replaced by the netting off process in the insolvency regime.
On appeal, Coulson LJ held that an adjudicator's jurisdiction is not automatically lost when a referring party enters into insolvency, and therefore that an adjudicator does have jurisdiction in respect of an adjudication brought by a company in liquidation. In doing so, Coulson LJ overruled the Court's previous position on the point.
However, Coulson LJ also held that an adjudication brought by a company in liquidation was an "exercise in futility" because a subsequent decision would be incapable of enforcement. Coulson LJ described the "basic incompatibility" between the construction adjudication process and the insolvency regime: the adjudication process is intended to generate quick cashflow, whereas the insolvency regime is a netting-off process designed to allow liquidators to recover assets. He noted that an appropriate solution to this "basic incompatibility" (when supported by the facts) is for a court to grant an injunction preventing an adjudication brought by a company in insolvency from continuing.
Cannon Corporate Ltd v Primus Build Ltd
At first instance HHJ Waksman QC had enforced an adjudicator's decision by granting summary judgment in favour of Primus, and declined to grant a stay of execution, despite the fact that Primus had entered into a CVA prior to commencing the adjudication.
Coulson LJ held that, while each case will turn on its own facts, the mere fact that Primus had entered into a CVA did not mean that summary judgment should be refused, or that a stay of execution should be granted. Unlike a company in liquidation, an adjudication brought by a company under a CVA is not a meaningless exercise.
Coulson LJ also found that Cannon had waived its right to raise a jurisdictional objection on the basis of Primus' CVA. Cannon had made a general reservation of rights at the commencement of the adjudication, and had subsequently raised two specific jurisdictional arguments. However, Cannon's specific jurisdictional objection based on Primus' CVA was raised for the first time at the enforcement stage. Coulson LJ warned that the purpose of the adjudication scheme would be "substantially defeated" if a party were to generally reserve its position on jurisdiction at the start of an adjudication, and then only raise specific jurisdictional points at the enforcement stage. The case serves as a warning that where a party seeks to reserve its rights to raise a jurisdictional challenge, it must be as specific as possible.
Authors: Tom Duncan and Lucy McKenzie
Cases referred to:
Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27
Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd [2018] EWHC 2043 (TCC)
Primus Build Ltd v Cannon Corporate Ltd [2018] EWHC 2143 (TCC)
