The Supreme Court yesterday handed down its judgment in a case that construction and insolvency professionals alike have been eagerly monitoring. The case centres around the ability of an insolvent party to exercise its statutory right to refer a construction dispute to adjudication. The earlier decisions, while not prohibiting insolvent parties from adjudicating, certainly made it more difficult to do so owing to a perceived incompatibility with insolvency legislation. The Court of Appeal had questioned what the ‘utility’ of the adjudication was if the adjudication decision would not be enforced due to the insolvency of the claimant.
The subsequent decision in Meadowside Building Developments Ltd -v- 1218 Hill Street Management Co Ltd  EWHC 2651 (TCC) case provided some further guidance to parties unfortunate enough to find themselves in that position and allowed some flexibility. In particular, issues considered in Meadowside included the degree of security that would need to be offered by an insolvent company to be allowed to proceed. As was seen more recently in the case of Balfour Beatty Civil Engineering Ltd -v- Astec Projects Limited (In Liquidation)  796 (TCC) the Court was prepared to take a proactive role in the terms and amount of security, ordering substantial sums of security.
The Supreme Court has agreed that an adjudicator has jurisdiction to deal with an adjudication referred by an insolvent company. However, the Court of Appeal’s previous decision on the key issue of the utility of adjudication by an insolvency company was overturned. The key issues to be taken from Lord Briggs’ leading judgment (with which the other judges were agreed) are summarised as follows:
- An adjudicator has jurisdiction to deal with an adjudication referred by an insolvent party.
- An injunction to prevent an insolvent party from adjudicating will be the exception rather than the rule. This is the point where the Supreme Court differs from the Court of Appeal (where it was decided that it would be exceptional for such adjudications to proceed).
- The Supreme Court appears to support the guidance taken from the Meadowside case, and in particular the requirement for security to be provided in relation to the enforcement of an adjudicator’s decision.
Lord Briggs reiterated the importance of the cash flow within the construction industry, and reaffirmed that adjudication is a vehicle that enables that. His judgment is complimentary about the adjudication process generally.
The case provides an interesting analysis of why the mere existence of a cross-claim should not preclude a party from adjudicating. Lord Briggs concludes for that this potentially gives rise to ‘a triumph of technicality over substance’ given that a cross-claim forming even a small percentage of the value of the insolvent party’s claim could hypothetically restrict it from seeking recovery of its own claim via adjudication.
Lord Briggs concludes, crucially, that construction adjudication is not incompatible with the insolvency process. He rejects the Court of Appeal’s finding that it is ‘an exercise in futility’ and sets out that ‘…there is no reason why the existence of such cross-claims can constitute the basis for denying the company the right to submit disputes to adjudication…’.
For anyone interested in further reading, paragraph 67 of the judgment provides some brief analysis as to ‘appropriate undertakings’ of the type identified in the Meadowside case, in respect of security. Lord Briggs appears to be of the view that a court should refuse to enforce an adjudication decision where the losing party would be deprived of its subsequent recourse. For example, where it would not be possible for the losing party to recover its claims of overpayment.
What we can extract from the judgment is that insolvent parties can and will continue to adjudicate. Those claims that leave unanswered questions as to the net position between the parties (such as smash and grab adjudications based on interim applications) are likely to be met with robust rejections from the responding party which in turn will require the insolvent referring party to satisfy the security requirements of Meadowside. For those responding to claims by an insolvent company, consideration should be given to the building contract terms (particularly those which delay payment rights of an insolvent company), defence of the adjudication itself and how to secure its recourse.