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Adjudication: The effect of Liquidation and Limitation

In the case of Bresco Electrical Services Limited (In Liquidation) v. Michael J Lonsdale (Electrical) Limited [2019] the Supreme Court had an opportunity of reviewing the impact of liquidation on adjudication.

At first instance, the Court held that the effect of insolvency set-off was that an adjudicator lacked jurisdiction to deal with a claim and that the claims, and cross claims, between the parties were mutual dealings that were subject to set-off under IR14.25. Therefore, the claims and cross claims had merged into a single claim for a net balance.

The Court of Appeal overturned the first instance decision concerning jurisdiction. The Court, however, upheld the injunction application made on the alternative basis that the adjudicator’s decision would lack practical utility and therefore it was not just or convenient to allow the adjudication to succeed.

The Court considered that referring the underlying dispute was likely to be futile because an award in favour of an insolvent company would not usually be enforced; it was a waste of the limited resources of the liquidation to incur cost of adjudication where the award was unlikely to be enforceable; the responding party should not be forced to incur costs of adjudication when it knows that it will be able to resist enforcement; and even if enforcement of the award was permitted, the responding party would be entitled to commence litigation to overturn the result of the adjudication. There was also an obvious risk that recovery of sums paid pursuant to the adjudicator’s award would be rendered impossible by the liquidation.

The Supreme Court held that an insolvent company can refer a construction dispute for adjudication and the adjudicator’s jurisdiction to determine the dispute referred. The right to refer a dispute under a construction contract to adjudication pursuant to Section 108 of the Housing Grants Construction and Regeneration Act 1996 is not extinguished or precluded by the operation of insolvency set-off. The Court held further that an insolvent company has a statutory or contractual right to pursue adjudication as a way of resolving disputes and injunctive relief will only very exceptionally be available to restrain an attempt to enforce a contractual or steal their statutory right. The Court held that the process of adjudication was not necessarily incompatible with insolvency set-off or an exercise in futility. The issue of whether or not it is appropriate to enforce an adjudicator’s award in favour of an underfunded insolvent state should be dealt with at enforcement stage. Where there remains a real risk that the summary enforcement will deprive the respondent of its right to have recourse then the Court will deal with this and refuse summary judgment but those risks could be appropriately mitigated by the liquidator offering appropriate undertakings in relation for example to cost security.

Separately, the question has recently arisen as to whether the Limitation Act 1980 applies to adjudication and the question was considered in the decision of Aspect Contracts (Asbestos) Limited v. Higgins Construction Plc.

Section 38(1) of the Limitation Act 1980 provides that a remedy is barred in relation to an “action” and that is defined in Section 38(1) as including “any proceeding in a Court of law including an ecclesiastical Court”.

Adjudication does not fall within the description of Court of law.

When the Limitation Act came into force in 1981, Section 34 expressly stated that arbitration was included within the definition but this was not repeated in relation to adjudication.

There are several Court decisions that support the view that adjudication proceedings are not an action subject to the Limitation Act 1980, for example Austin Hall Building Limited v. Buckland Securities Limited; Braceforce Warehousing Limited v. Mediterranean Shipping Company (UK) Limited. It is generally accepted that commencing an adjudication does not stop time running for the purposes of the Limitation Act 1980, whereas commencement of legal proceedings does.

In Connex South, the party who commenced adjudication at the expiry of the relevant limitation period run the risk that limitation defence is taken the adjudicator will make an award in favour of the other party.

In terms of enforcement, there is no clear statement on the current, limited, range of a defence available to adjudication enforcement as the limitation defence would apply. However, it appears that whilst a party can commence and obtain an adjudicator’s decision after the expiry of the relevant limitation period, the respondent can immediately commence Court proceedings to which a limitation defence would apply.

In Aspect v. Higgins, the Supreme Court confirmed that a new cause of action arose to comply with the adjudicator’s decision and, therefore, once the decision is obtained a new limitation period applies. This applies to both parties.

However, the position is not free from doubt.

For help and advice that is tailored to the needs of you and your business, please contact Martin Collingwood, head of construction at Andrew Jackson Solicitors, on 01482 325242 or email martin.collingwood@andrewjackson.co.uk

 

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