Balfour v Astec: A party in liquidation is permitted to proceed with an adjudication | Fieldfisher
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Balfour v Astec: A party in liquidation is permitted to proceed with an adjudication

Dan Preston
04/05/2020

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United Kingdom

Astec's right to pursue adjudication against Balfour Beatty despite the former being in liquidation reconciles important differences between insolvency and adjudication laws.

 
While we await the Supreme Court's decision in Bresco, and as adjudications continue during lockdown (as set out in our article on 6 April: Application for injunction to prohibit an adjudication due to COVID-19 rejected virtually by the TCC), Mr Justice Waksman's decision in Balfour Beatty v Astec Projects Limited (in liquidation) [2020] EWHC 796 (Balfour) has provided further clarity on when parties in liquidation may be able to adjudicate.
 
The decision is an important extension to Bresco and Adam Constable QC's decision in Meadowside v 12-18 Hill Street [2019] EWHC 2651 (Meadowside), with the TCC taking further strides in its reconciliation of adjudication and insolvency laws.
 
In Balfour, Astec sought to commence adjudications against Balfour Beatty emanating from works carried out to Blackfriars Station, pursuant to three separate sub-contracts.
 
The works started in 2010, but Astec entered administration followed by liquidation in 2014. Astec was eventually able to obtain ATE insurance for potential adverse costs from enforcement proceedings, as well as funding from Pythagoras Capital (which also funded the Bresco and Meadowside cases).
 
After a number of claims and counter-claims were exchanged between the parties, Astec issued notice of intention to adjudicate in January 2020, seeking about £4 million for works Astec said were carried out but not paid for.
 
Balfour Beatty however maintains it is due about £1 million for defective works and delays to the project.
 
Balfour Beatty sought to resist the adjudications by applying for injunctive relief, on the basis that Astec is in liquidation and only one contractual dispute can be adjudicated at a time.
 
Taking an entire account between the parties
 
Balfour Beatty's arguments rested on the Court of Appeal's reasoning in Bresco that while an adjudicator technically has jurisdiction to determine issues in an adjudication commenced by an insolvent company, the decision would be pointless because it would not survive enforcement proceedings.
 
The Insolvency Rules (rule 14.25 of Insolvency Rules 2016, previously rule 4.90 of the Insolvency Rules 1986) require an entire mutual account to be made between the parties, whereas an adjudicator can only determine one dispute at a time (section 108 of the Housing Grants, Construction and Regeneration Act 1996 refers to "the right to refer a dispute" only).
 
The Court of Appeal held that:
 
"The adjudication process on the one hand, and the insolvency regime on the other, are incompatible. It would only be in exceptional circumstances that a company in insolvent liquidation (and facing a cross-claim) could refer a claim to adjudication, succeed in that adjudication, obtain summary judgment and avoid a stay of execution. Thus, in the ordinary case, even though the adjudicator may technically have the necessary jurisdiction, it is not a jurisdiction which can lead to a meaningful result."
 
Balfour Beatty relied on these findings, repeated at paragraph 87(1) of the Meadowside judgment, to say that where there is more than one contract, an adjudicator is unable to determine the net position between the parties.
 
However, Mr Justice Waxman distinguished the facts in Meadowside from those in Balfour because in the latter "all the contracts could be adjudicated upon if in separate but parallel adjudications. Taken together, such adjudication would deal with entirety of the mutual dealings and would mirror rule 14.25".
 
It appears that most important was the fact that the works all related to the same site. Therefore, the adjudications could be run in parallel with at least 84 days to hear all three, as long as Astec provided adequate security.  
 
Security
 
In Bresco, inadequate security was held to be a reason why a party in liquidation could not invoke the adjudication procedure.
 
That was developed in Meadowside (as we discussed in February – see: The right of companies in liquidation to adjudicate), where it was held there are exceptions to the Bresco rule, with there being circumstances in which a company in liquidation may commence adjudication.
 
An adjudication may be possible if a final net position under the relevant contract can be determined and the extent of all dealings between the parties can be taken into consideration at the same time (as referred to above).
 
In addition, satisfactory security must be provided by the referring party for:
 
  1. Any sum awarded by the adjudicator (thereby 'ring-fenced' from creditors should an appeal by the responding party be successful); and
 
  1. Adverse costs as a result of legal proceedings to enforce or overturn the adjudicator's decision.
 
In Meadowside, ring-fencing the award, the provision of third party funding by way of a guarantee or bond and ATE insurance, were all discussed as viable measures for security. Mr Justice Waksman, in Balfour, referred to these as the "Meadowside conditions".
 
In Balfour, Balfour Beatty could pay any sum awarded to them by the adjudicator into court to ring-fence it from Astec's creditors and the ATE insurer could pay £750,000 as security for costs in respect of three separate adjudications (this was increased from £250,000 for one adjudication Astec previously estimated should be due by way of security).
 
Balfour Beatty objected to some of the terms of the ATE insurance policy, over whether it was sufficient for the purposes of security.
 
There were policy terms that entitled the insurer to terminate the policy if the prospects of success of Astec's case in litigation diminished and an exclusion clause to cover any failed litigation as a result of want for prosecution or negligence by Astec's lawyers.
 
These were both held to be acceptable policy terms for providing security under the Meadowside conditions.
 
As well as a number of other conditions imposed on Astec to proceed with the adjudications, a stay of proceedings of six months was directed to enable Balfour Beatty to commence legal proceedings (which has to be more than simply issuing a claim form) following the adjudications.
 
Importance
 
While we wait for the Bresco decision, Balfour sheds helpful light on the ability of parties in liquidation to pursue adjudications.
 
It may be a catalyst for a flurry of claims brought by companies in liquidation and energise new business models, such as that developed by Pythagoras, to pursue such actions.
 
Bresco and Meadowside went into liquidation in 2015 and served notices three years later. Astec served its notice for the first adjudication almost six years after it entered liquidation.
 
It is worth remembering that these parallel adjudications Mr Justice Waxman deemed able to run in Balfour were all in respect of the same project i.e., the works to Blackfriars Station.
 
It will be interesting to see whether the same conclusions are reached in relation to separate contracts for works carried out on different sites.
 
Perhaps, in those situations, insolvent companies will have more difficulty overcoming the Insolvency Rules. We hope this will be addressed by the Supreme Court.
 
The full judgment can be read here.
 
 

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Construction

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