‘A subcontractor has gone bust during our adjudication’

A reader contacted CM’s ‘Contract Clinic’ to say a subcontractor has gone into administration during an adjudication their firm is involved with. Bill Bordill looks at what may follow.

The question

A key subcontractor involved in our adjudication has gone into administration. What are the implications?

The answer

An important question here is whether the insolvent subcontractor is one of the parties to the adjudication or involved in some other, less direct way. There are three likely scenarios: where the subcontractor is the referring party, the responding party, or plays an indirect supporting role in either the claim or the defence.

Referring party

Cases involving an insolvent referring party have been well documented recently: JDC v Erith; Meadowside; Bresco; and Bouygues v Dahl-Jensen. They illustrate the complexity of the issue and why the position has ebbed and flowed over time and between different courts.

In summary, the current position is that the administrator of an insolvent company is entitled to seek an adjudicator’s decision. However, there is a relatively high bar to success, to achieve enforcement by the courts.

Insolvency rules impose ‘mandatory set-off’. Therefore, any determination in a dispute must settle the ‘net balance’ between the parties. This may not necessarily be the case in an adjudication for a single dispute. Also, the insolvent party is required to provide ‘security of payment’. This is to protect the solvent party in the event the enforced decision is ultimately overturned on appeal.

“The inevitable implication of a key subcontractor going into administration is that your job has just become a lot harder.”

In this instance, one implication of a subcontractor in administration is that adjudication is now less attractive. Litigation, by the way, is more expensive and takes longer and so offers no olive branch.

Responding party

So, what if the responding party has gone into administration? You may well ask, “What is the point of pursuing a company with little or no means to pay?” Well, you may want an end to your dispute, simply to establish your position in the event the administrator successfully turns around the insolvent subcontractor. Also, your dispute may not be financial. You may have a dispute over specifications or products. Certainty may assist with the resolution of other disputes with other parties.

The crux

The answer lies in the evidence required to support your claim or defence. If a key subcontractor has gone into administration, you may no longer have access to the staff you require to substantiate your claim (witness statements) or to records needed to evidence your claim.

There are ‘four corners of a claim’: cause, effect, entitlement, substantiation. Like a jigsaw, if any one corner is missing, it cannot be completed. Without adequate records to substantiate the amounts claimed, that element of your claim will fail.

It may also be the case that your contract restricts entitlement to recovery of the costs incurred. You could end up in a situation where you cannot settle with the administrator and so this element of your claim may fall away as you have not, at that point, actually incurred extra costs. However, you retain a liability to the subcontractor. Not a good place to be.

The inevitable implication of a key subcontractor going into administration is that your job has just become a lot harder. Not impossible, so don’t necessarily give up, but definitely harder. Get some help, seek professional advice and act swiftly.

Bill Bordill is a director with Decipher Consulting.

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