In the recently published decision of Balfour Beatty Civil Engineering Ltd v Astec Projects Ltd (In Liquidation), a company in liquidation (Astec) was permitted to proceed with three adjudications on the basis that it satisfied conditions intended to bring the case within the exception established in Meadowside Building Developments v 12-18 Hill Street Management Company to the general rule in Bresco v Lonsdale.
In the pre-Coronavirus age, I wrote a blog post about issues that arose in Meadowside due to the nature of the third party funding in that litigation. Six months on, and in advance of the Supreme Court reaching a decision in the Bresco appeal, I consider the development of this line of authorities dealing with the third party funding of liquidation adjudications.
(Un)common business models
The widespread use of adjudication and arbitration in construction means that a large part of its dispute resolution market does not involve reserved legal activities under the Legal Services Act 2007. This has given rise to a more liberalised market for the development of alternative business models, particularly from the providers of claims management services, compared with other sectors.
This is particularly clear from the Bresco, Meadowside and Astec series of cases. Each of the proceedings followed the respective liquidators of Bresco, Meadowside and Astec appointing the same agent/funder, Pythagoras Capital Ltd, and then seeking to pursue claims through adjudication that had previously been left dormant. Bresco and Meadowside went into liquidation in 2015 and only served notices of adjudication in 2018. For Astec, the dates were 2014 and 2020 respectively.
In Meadowside, the agent/funder explained that its business model involved it taking steps to recover sums considered to be due to insolvent companies, generally by funding the pursuit on behalf of the insolvent company in return for a pre-agreed percentage of any recoveries. The availability of adjudication formed part of this business model because adjudications often lead to amicable settlements and could be run by the agent/funder because they were not a reserved activity.
The Bresco, Meadowside and Astec series of cases therefore involve a common third party that had a direct financial interest in the outcome of each of the particular cases, and whose business model gave it a general interest in the relationship between liquidation and adjudication, and has led to a line of authorities in this area.
From rule to exception
The Bresco, Meadowside and Astec series started with the first instance decision in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd (In Liquidation), where Fraser J held that a company in liquidation could not refer a dispute to adjudication when that dispute included cross-claims against the company in liquidation. For convenience, I will refer to adjudications commenced by companies in liquidation where there is a cross-claim as “liquidation adjudications”.
In the Bresco appeal, the Court of Appeal removed this absolute prohibition and left a small opening for liquidation adjudications. In the leading judgment, Coulson LJ held that an adjudicator had the jurisdiction to consider liquidation adjudications. However, there was a basic and fundamental incompatibility between adjudication and insolvency. This meant that it would only be in “exceptional circumstances” that liquidation adjudications could be enforced. In the ordinary case, liquidation adjudications would be incapable of enforcement and therefore an exercise in futility.
In Meadowside, Adam Constable QC widened the small opening for liquidation adjudications. Although, on the facts of the case, he concluded that the security developed by Meadowside over the course of the proceedings did not create the required exceptional circumstances, he set out conditions which, in his judgment, would likely make a liquidation adjudication an exception to the normal rule in Bresco. In summary, these were that:
- The adjudication determines the final net position between the parties under the relevant contract (although the court would also need to take account of the extent to which the adjudication was not capable of dealing with the entirety of the parties’ mutual dealings).
- The company in liquidation provides satisfactory security in respect of: (a) any sum awarded in the adjudication; and (b) any adverse orders for costs in respect of: (i) any unsuccessful application to enforce the adjudication; and (ii) the subsequent litigation to overturn the adjudication decision.
- The agreement to provide the funding or security on which the company in liquidation relied did not amount to an abuse of process.
Meadowside therefore established that third party funding and security could allow adequate safeguards to be put in place to balance the interests of the parties in light of the contractor’s insolvency, and so provide the “exceptional circumstances” needed for a liquidation adjudication to proceed.
Balfour Beatty v Astec
In Balfour Beatty v Astec, Astec sought to pursue three liquidation adjudications in respect of three construction contracts arising from the works to and around Blackfriars Station. Balfour Beatty sought an injunction restraining these adjudications on the basis that they fell outside the exceptions to the rule in Bresco.
When the matter came before him, Waksman J held that the fact that there would be three liquidation adjudications dealing with three contracts did not prevent them from taking place. Although the parties could agree to have one adjudication for all three contracts, these could also be adjudicated upon in three separate but parallel adjudications. The results of these adjudications could then be netted off against each other to arrive at a complete and comprehensive account of the parties’ mutual dealings.
As Waksman J found that there was no fatal jurisdictional objection to the three adjudications proceeding, or that any exercise of discretion must inevitably prevent them from occurring, he refused to grant the injunction Balfour Beatty sought. Instead, he set out the conditions required to meet the security requirements of Meadowside and directions to take account of the fact that three adjudications would be proceeding. In summary, these were that:
- The parties had to ensure that the same adjudicator was appointed to deal with all three adjudications together on a timetable set by the court.
- There would be an initial six-month stay on the enforcement of any adjudicator’s decisions in Astec’s favour that would continue until the termination of any litigation Balfour Beatty commenced to seek a different result.
- Astec had to provide security (through its insurer) for the adjudication fees and for any adverse costs orders up to £750,000, that being three times the security of £250,000 Astec had in place for one of the disputes, and subject to Balfour Beatty having the right to seek further security if the £750,000 appeared to be insufficient.
- Certain clauses in Astec’s insurance policy had to be reworded to resolve issues raised with the coverage provided by Astec’s insurer.
Therefore, Astec shows the shift in the court’s approach towards being more supportive of liquidation adjudications. As in Meadowside, the court allowed the security Astec offered to be developed and refined in the course of the proceedings. Indeed, the directions for the conduct of the three adjudications show the court not simply permitting the liquidation adjudications to proceed, but proactively trying to ensure their effectiveness.
Purpose and role of liquidation adjudications
The inherent tensions between the insolvency and adjudication regimes means that the conditions laid out in Meadowside and imposed in Astec are onerous. This necessarily means that liquidation adjudications have a different purpose and role to adjudications commenced by trading parties.
In Bresco, Coulson LJ observed how adjudication is a “method of obtaining an improved cashflow quickly and cheaply”. However, in Astec, Waksman J observed that there was:
“… no business now for which cashflow is required on the part of Astec because it is in insolvent liquidation.”
This is particularly clear from the requirement for security in respect of any sums awarded in liquidation adjudications. Where these sums are to be ring-fenced, or where there is a stay of enforcement, incurring the costs of pursuing the liquidation adjudication will not bring any cash flow benefit (at least in the short term) for the insolvent company, its liquidators, its funders and/or its creditors.
Liquidation adjudications must therefore serve as a precursor to, and potential replacement for, full litigation or arbitration. In Meadowside, Adam Constable QC noted that adjudication is “often about achieving a quicker and cheaper resolution to the parties’ disputes” than pursing litigation. In Astec, Waksman J explained that the:
“… rationale for the adjudications here, in the first instance, is to get a relatively cheap and admittedly rough-and-ready decision on these very familiar types of dispute without the immediate and heavy costs of entering into litigation.”
This appears to open up the potential abuse of the “cost-neutral adjudication regime as a cheap assessment service”, to which Coulson LJ objected in Bresco. However, Meadowside and Astec avoided this by imposing a heavy burden for the liquidation adjudication to be potentially enforceable, and so not liable to be injuncted as an exercise in futility.
This effectively front loads the processes for, and costs of, applications for security for costs, but in circumstances where the conditions for liquidation adjudications are more onerous. This is most clearly illustrated by the court’s approach in Absolute Living Developments Ltd v DS7 Ltd and others, where an order for security for costs was dismissed because it would stifle a bona fide and genuine claim brought by a liquidator.
The effect of Meadowside and Astec is that liquidation adjudications can provide liquidators with a mandatory form of early neutral evaluation, albeit one that can, if favourable, force the other side to try and overturn the outcome within a shortened limitation period to prevent it becoming enforceable.
Liquidation adjudications therefore have a potential practical benefit for liquidators. If a liquidation adjudication produces an outcome that is sufficiently favourable as to make the exercise worthwhile, but which falls within the range of outcomes that the other side is willing to accept, then it will produce a positive and final conclusion to the dispute. As Adam Constable QC noted in Meadowside, where the parties regard an adjudication decision “as a decent attempt to arrive at a fair resolution of the competing positions”, they will “generally treat the decision as binding or negotiate a settlement around it”.
However, there are disadvantages in pursuing liquidation adjudications compared with following the pre-action protocol process and then litigation. Significant additional irrecoverable cost will be incurred, both in seeking to obtain the requisite security and in pursing the adjudication itself.
In addition, the focus of the parties shifts away from the substantive dispute towards the funding and the security arrangements that are needed to allow the insolvency adjudication to proceed and/or be enforced. However, this may simply be a development of the existing position where parties may ignore threatened claims where they do not consider there to be a realistic prospect of them being pursued.
It will be for liquidators and their advisors to decide on the best course of action in each case. The Supreme Court decision in Bresco will potentially shore up, or cut through, the legal basis for insolvency adjudications in the future. However, irrespective of the outcome of that appeal, this series of cases shows how third parties may drive future developments in the law that they think will benefit them more broadly.
This creates issues for the courts to consider both in the individual cases, particularly on costs where there may be significant mismatches in the broader interests of the parties on points of principle that arise in a case, and in relation to its processes more generally. Given the challenges that arise due to the costs of litigation, and the cash-flow pressures facing the construction industry once we emerge into the post COVID-19 economy, these are issues that will continue to develop in the future.