The Supreme Court recently decided that bankruptcy and liquidation is no bar to adjudication resolving issues in the construction sector.  Could adjudication solve cash flow issues for all sectors?  As the UK’s battered economy is about to go into freefall our blog looks at the decision in Bresco (17.06.2020) and speculates – is adjudication a form of ADR for all sectors?


Adjudication: ADR for all sectors?

A recent Supreme Court decision ensures that insolvency is no bar to adjudication in commercial construction contracts.  What if adjudication applied to all business disputes?

ADR – the time has come

We have been tracking the seeming insatiable passion of the Courts for ADR for some time now.  Neutral evaluation has been held by the Court of Appeal to be compulsory, and may be capable of applying to mediation too according to Sir Geoffrey Vos.  In mediation cases no less than 4 decisions of the High Court this year (in as many months) have imposed swingeing indemnity costs orders or denied costs (in part or at all) in respect of those parties refusing to mediate.

ADR’s time has certainly come.

The latest case on ADR came from the Supreme Court on 17 June 2020. In Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 (https://www.bailii.org/uk/cases/UKSC/2020/25.html).

 

Bresco

In 2014 Bresco (an electrical sub-sub-contractor) from Lonsdale left site in St James’s Square, SW1 alleging repudiatory breach by Lonsdale.  Bresco claimed ca £220,000 from Lonsdale who cross-claimed ca £325,000 for the cost of having another contractor finish the work that should have been done by Bresco.

In March 2015 Bresco went into creditors’ voluntary liquidation.  In 2018 the Liquidator of Bresco served Lonsdale with notice of referral to adjudication the underlying contract being a construction contract caught by s.108 of the Housing Grants, Construction and Regeneration Act 1996 (the 1996 Act).  Lonsdale opposed on various grounds including the fact that the adjudication could not proceed as Bresco was in liquidation and the Insolvency set-off regime applied to the determination of cross-claims by a Liquidator between a company in liquidation and each of its creditors, giving rise to a single net balance between them, to be ascertained by the taking of an account.

This clash of regimes was at the heart of this appeal.

Lord Briggs gave the Court’s unanimous decision.  At para 60 he held that:

“…the insolvent company has both a statutory and a contractual right to pursue adjudication as a means of achieving resolution of any dispute arising under a construction contract to which it is a party, even though that dispute relates to a claim which is affected by insolvency set-off. It follows that it would ordinarily be entirely inappropriate for the court to interfere with the exercise of that statutory and contractual right. Injunctive relief may restrain a threatened breach of contract but not, save very exceptionally, an attempt to enforce a contractual right, still less a statutory right.”

The utility of the adjudication process under the 1996 Act was graphically explained by Adam Constable, QC sitting in the TCC in Meadowside Building Developments Ltd v 12- 18 Hill Street Management Co Ltd [2019] EWHC 2651, at paras 63-64 held that:

“Although [adjudication] may have been a process which had its origins in a desire to maintain cashflow …. it would in my view be wrong to restrict the utility of adjudication, in light of the breadth of the statutory scheme and its practical use within the industry, as being solely about short term cashflow. The scheme is, for example, used to determine final account disputes, and professional negligence claims, neither of which are usually primarily (or at all) about cashflow. Adjudication is often about achieving a quicker and cheaper resolution to the parties’ disputes. Where one party regards an adjudicator’s decision as a real miscarriage of justice, it has the right to take the dispute to litigation or arbitration to have that decision effectively overturned; where, as is so often the case, the parties regard the decision as a decent attempt to arrive at a fair resolution of the competing positions, the parties generally treat the decision as binding or negotiate a settlement around it.”

However, the stay on litigation imposed upon companies in liquidation remains in place as confirmed in Wimbledon Construction Co 2000 Limited v Vago [2005] EWHC 1086 (TCC).  This may not trouble many liquidators though as it is estimated only 2% of adjudications are challenged.

 

The Lockdown

Sadly every day now brings fresh news of more and more businesses closing and the consequential job losses as the economy begins its rapid descent into recession.  What if businesses could take advantage of a scheme similar to the construction adjudication scheme under the 1996 Act?  A scheme which is semi-compulsory ADR with a rapid 28 day turnaround and the option to litigate the issues if the adjudicator makes some terrible error of judgement (only 2% of construction adjudications are litigated).  Furthermore, an ADR scheme that can be used “at any time” even after the contract has ended.

Would more businesses be saved and/or creditors paid more cash if a decision about who owed what within 28 days despite one of them being in liquidation or bankrupt with cash paid shortly instead of slowly?

The Government needs to stimulate the economy, generate fiscal receipts and avoid economic melt-down and all by Christmas.  Could adjudication in the mould of the 1996 Act be a way to keep cash flowing not just in the construction industry but in every sector of the economy?

 

Other applications for business adjudication

Adam Constable in Meadowside correctly identified professional negligence disputes as one claim type that is resolved through adjudication.

The Professional Negligence Barristers’ Association has an adjudication scheme: just for allegations of professional negligence: https://pnba.co.uk/pnba-adjudication-scheme/

This country has a thriving software development and technology sector.  Why should we not enable those disputes to be resolved via adjudication in the style of 1996?  There is a technology disputes scheme set up by the Society for Computers and Law: https://www.scl.org/adjudicationscheme

Media, telecoms, SMEs all have disputes that need to be resolved rapidly, fairly and lead to business spending time growing business not chasing cash.

 

Adjudication for all and all online

Since 1996 the internet has come and there is nothing to be gained by running this expanded adjudication scheme using the paper systems that prevailed in 1996.

To cope with the volumes involved adjudication would need an online platform to manage it and one as accessible to the lay person as to the lawyer.  DEF has built that Platform and it is in operation now helping ADR service providers resolve millions of pounds of disputes – but we can do more.

With Bresco the Supreme Court have uncorked a genie which can help the UK economy survive and thrive.