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Legal ruling says CVA is no escape from adjudication

30 Jan 19 A Court of Appeal decision handed down on 24th January 2019 has created new law on whether or not a construction dispute can be referred to adjudication when one of the parties is in insolvent liquidation or a company voluntary arrangement.

Lawyers say that the pivotal case resolves the basic incompatibility between the insolvency ‘netting off’ and adjudication regimes.

In essence, it states that construction companies that have entered company voluntary arrangements (CVAs) cannot avoid third party adjudication of any disputes they happen to be embroiled in.

The decision handed down by Lord Justice Coulson also provides the current statement of the law on how to effectively reserve the right to challenge the jurisdiction of the adjudicator.

The case concerned two conjoined appeals, Bresco Electrical Services Limited (in liquidation)/Michael J Lonsdale (Electrical) Limited and Primus Build Limited/Cannon Corporate Limited. It was heard by the Court of Appeal in November 2018.

In the Bresco appeal, Bresco was in insolvent liquidation, where the ‘netting off’ provisions automatically applied. In the Primus appeal, Primus was in a company voluntary arrangement (CVA), which adopted the same provisions as a contractual matter.

The central question for the Court of Appeal was whether netting off provisions had the effect of removing the jurisdiction of a construction contract adjudicator to decide who owed what via an adjudication, or whether only the liquidator (in a liquidation) or the supervisor (in a CVA) could decide that question.

After a review of the authorities, Lord Justice Coulson decided that:

• There was a basic incompatibility between the insolvency ‘netting off’ and adjudication regimes.

• Technically, although an adjudicator has the power to determine a claim by a company in insolvent liquidation, where there is also a cross-claim, the adjudication outcome is incapable of enforcement because this would be an "exercise in futility" where the court can grant an injunction to stop any adjudication continuing.

• Conversely, Lord Justice Coulson decided that an adjudicator does have the jurisdiction to determine a claim by a company in a CVA because, in some situations, a company may emerge from a CVA and carry on trading.

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• On the question of jurisdiction, as is typical in many pre-dispute written exchanges between parties, the right to challenge the jurisdiction of the tribunal (here, an adjudicator) was expressly reserved. 

The court considered what amounted to a proper reservation on jurisdiction and decided that:

• A challenge to the jurisdiction of an adjudicator must be made in clear and precise terms. If a party does not reserve its position effectively and participates in the adjudication, it will have waived any jurisdictional objection and will be unable to avoid enforcement on jurisdictional grounds.

• It is only really possible for a jurisdiction reservation to be effectively made if it is based on a specific objection, the rationale being that it is only then that an adjudicator can determine the challenge and decide whether or not to proceed.

• If a specific challenge to jurisdiction is rejected by the adjudicator (and by the court if raised again on enforcement), the party challenging jurisdiction cannot later raise a different jurisdictional challenge.

• A general reservation of rights may be effective, but this is unsafe and will depend on the wording in each case. A general reservation is unlikely to be effective if, at the time it was made, the objector knew, or should have known, of specific grounds for a jurisdictional objection but failed to articulate them, or if the court concludes that the general reservation was worded simply to try and keep all options open.

Commenting on the case, Katherine Flynn, senior associate in Fieldfisher's contentious construction team who led the case for Cannon, said: "The case is new law: it decides, for the first time, whether or not a construction dispute can be referred to adjudication when one of the parties is in insolvent liquidation, or is in a CVA, in each case incorporating the insolvency offset rules.

"The lower first instance courts had given conflicting decisions, and even Coulson LJ overruled himself in reaching the conclusion he did.

"The case also provides authoritative guidance on how to effectively reserve jurisdiction challenge rights in an adjudication, for use in later court proceedings."

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