Insolvency is no barrier to adjudication

Impact of the Supreme Court’s judgment in Bresco Services Limited v Michael J Lonsdale [2020]

With an economic downturn widely expected as a consequence of the Covid-19 pandemic, social housing providers will be understandably concerned about the potential for key suppliers and contractors to become insolvent. Contractor insolvency can have two significant impacts. Firstly, interruption to the delivery of the works and services being delivered by that contractor, for instance, delivery of new build developments, responsive repairs, or gas servicing. Secondly, insolvency often results in the administrators or liquidators of an insolvent contractor seeking payment from social housing providers of sums allegedly due to the contractor, often through adjudication.

Claims for payment by insolvent contractors

Adjudication is a statutory dispute resolution process under which a party to a construction contract can refer a dispute at any time to an independent third party known as an adjudicator. The process is very swift, with the adjudicator being required to give their decision within 28 days of the detailed claim being made, and both parties are required to comply with that decision. The swift nature of the process, and the lower costs involved compared to court proceedings or arbitration, provides administrators and liquidators with a cost-effective and rapid means of pursuing claims, particularly in relation to sums claimed at the interim valuation stage. This poses a risk to social housing providers who may have incurred additional costs as a consequence of the contractor’s insolvency, but who often will not be in a position to fully assess those costs and raise a counterclaim until the works are complete and the final account is calculated.

In 2019, the case of Bresco Services Limited v Michael J Lonsdale offered social housing providers some protection against administrators and liquidators aggressively pursuing claims on behalf of insolvent contractors. In that case, the Technology and Construction Court (“TCC”) granted an injunction to prevent the liquidators of the insolvent contractor (Bresco) from commencing an adjudication against Lonsdale, on the basis that the courts do not ordinarily enforce adjudicator’s decisions in favour of insolvent companies, and consequently, such an adjudication would be an exercise in futility.

Following the TCCs judgment in Bresco, it has been possible to dissuade administrators and liquidators from commencing adjudications to recover payment allegedly due to insolvent contractors. However, Bresco appealed to the Court of Appeal and subsequently to the Supreme Court. On 17 June 2020, the Supreme Court handed down judgment in the long-running dispute, reaching a very different conclusion to the TCC and Court of Appeal.

The Effect of Bresco

In a judgment that removes the protection enjoyed by social housing providers, the Supreme Court has confirmed that administrators and liquidators are entitled to refer disputes to adjudication, and that injunctions to prevent adjudication should only be granted in exceptional circumstances.

The immediate effect of the Supreme Court’s judgment in Bresco is that administrators and liquidators are now free to commence adjudications where they consider sums are due to the insolvent company. While the risk associated with adjudication will depend on the precise details of the claim pursued, administrators and liquidators are now more likely to use adjudication to pursue claims for payment, and this increases the risks posed by contractor insolvency.

One small comfort to social housing providers who find themselves being directed by an adjudicator to pay an insolvent company is that the Supreme Court indicated that, in some circumstances, it is still open to the losing party to resist enforcement of an adjudicator’s decision in favour of an insolvent party, in line with the earlier case of Wimbledon v Vago. Social housing providers are recommended to seek specialist legal advice if their suppliers or contractors threaten adjudication.

There are a number of preparatory steps that social housing providers can undertake to place themselves in the best possible position to respond to contractor or supplier insolvency:

• Ensure that contracts are signed by all parties, and that signed copies are readily to hand;
• Ensure that the interim payment mechanisms are properly administered, including issuing Payment Notices by the contractually required deadline for every interim payment cycle;
• Ensure, that where contractors or suppliers are required to provide collateral warranties, performance bonds, or parent company guarantees, these are provided at the outset of the works and are easily accessible in case you need to exercise your rights under those documents;
• Make sure that delivery teams understand the insolvency and termination mechanisms in your key contracts. Run “testing the brakes” sessions to identify how well your delivery teams respond to contractor insolvency events; and
• Pay attention to warning signs of contractor insolvency, including aggressive invoicing, high staff turnover, increased volume of resident complaints, and requests from subcontractors to pay them directly.

We are experienced in advising social housing providers on how best to respond to contractor and supplier insolvency. If you are concerned that a contractor or supplier is at risk of insolvency or want to discuss what appropriate insolvency-readiness steps are available to you, please contact Andrew Lancaster and Faiza Rafiq.

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