This is one of the most significant construction insolvency cases for two reasons: 1) arguments relating to the Insolvency Rules 2016 (“the Rules”), that have not previously been raised at an adjudication enforcement hearing were addressed by the leading authority on construction law in the Court of Appeal; and 2) that authority departed from a number of first instance decisions.
This was a conjoined appeal – before the President of the Family Division (Sir Andrew McFarlane), King and Coulson LJJ – from separate decisions of Fraser J (“the Bresco appeal”), and HHJ Waksman QC (“the Cannon appeal”). Coulson LJ gave the leading (and only substantive) judgment, rightly introducing it as raising “important issues as to the interplay between the construction adjudication process, on the one hand, and the insolvency regime, on the other.”
The Bresco appeal considered whether an adjudicator could ever have jurisdiction to deal with a claim by a company in insolvent liquidation. The Cannon appeal considered the exercise of the judge’s discretion, both in relation to the decision to grant summary judgment, and to refuse an application for a stay of execution.
There is “a basic incompatibility between adjudication and the regime set out in the Rules”. Adjudication is a method of obtaining an improved cashflow quickly and cheaply, whereas the latter is an abstract accounting exercise, principally designed to assist the liquidators in recovering assets in order to pay a dividend to creditors.
Only in exceptional circumstances can a company in insolvent liquidation (and facing a cross-claim) refer a claim to adjudication, succeed in that adjudication, obtain summary judgment, and avoid a stay of execution. Ordinarily, even though the adjudicator may technically have the necessary jurisdiction, “it is not a jurisdiction which can lead to a meaningful result”. The solution is to grant an injunction to restrain adjudication “if the nascent adjudication is a futile exercise”.
The purpose of the Housing Grants (Construction and Regeneration) Act 1996 – providing a party to a construction contract with the right to refer a dispute arising out of that contract for adjudication – “would be substantially defeated” if a responding party could, as a matter of course, reserve its position on jurisdiction in general terms at the start of an adjudication. Accordingly, the position in adjudication is “rather different to that in arbitration”. There are five “applicable principles on waiver and general reservations in the adjudication context”.
In the Bresco appeal, Bresco’s right to refer a dispute to adjudication was not automatically lost when they went into liquidation, however, “the theoretical existence of the adjudicator’s jurisdiction is only the start of the analysis.” There was no reason why adjudication should have been permitted to continue. On the contrary, it was just and convenient to grant an injunction. The appeal was dismissed, “not on the grounds of theoretical jurisdiction, but on the grounds of practical utility.”
In the Cannon appeal, no further order was required. Had it remained live, the appeal against the judge’s decision to grant summary judgment in favour of Primus would have failed. If it was open to the judge to grant summary judgment (which it was) then, on the particular facts, the refusal of the application for a stay was almost inevitable.