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Adjudication Matters – July 2020

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06/07/2020

Can an insolvent construction company adjudicate? – Supreme Court hands down landmark decision

Bresco Electrical Services v Michael J Lonsdale [2020] UKSC 25

Introduction

In this case, the Supreme Court accepted Bresco Electrical Services Limited’s (Bresco) appeal, and held that Insolvency Practitioners (IPs) are permitted to refer claims on behalf of insolvent companies to adjudication in circumstances where there are cross-claims between the parties.

Traditionally, the accepted position was that insolvent companies did not have a right to refer a dispute to adjudication. Instead IPs were given significant statutory powers to recover the insolvent company’s assets and distribute them to its creditors.

However, the absence of a right to refer a dispute to adjudication meant that debt recovery was historically low. The other, solvent company in receipt of the claim could simply bring a counterclaim for monies from the insolvent company.  This ultimately left IPs with limited options for recourse in order to recover monies for the creditors of the insolvent company.

Background

This case has had a long journey to the Supreme Court.

Bresco and Michael J Lonsdale (Lonsdale) entered into a contract for the performance of electrical installation works by Bresco (the Contract).

In December 2014, Bresco left site and both parties alleged wrongful termination of the Contract. Bresco then entered liquidation in March 2015. In October 2017, Lonsdale intimated a claim against Bresco for wrongful termination of the Contract and the direct costs of completing the works. However Bresco disputed this and maintained it was Lonsdale that owed money to Bresco in respect of the works.

Adjudication Proceedings

Bresco sought to refer its claim to adjudication in June 2018. However Lonsdale asserted that the adjudicator did not have jurisdiction to deal with the proceedings, as Bresco was now insolvent. The adjudicator held that they did have jurisdiction to determine the dispute.

TCC Proceedings

Lonsdale then brought Part 8 proceedings in the Technology and Construction Court (TCC) against Bresco and sought an injunction preventing Bresco from issuing adjudication proceedings.

The injunction was sought on the following basis:

  • Any cross-claims are replaced by insolvency set-off, resulting in a single claim for the net balance in the liquidation brought by the party with the larger claim. There is no longer a claim under the construction contract and the adjudicator therefore does not have jurisdiction to determine the dispute.
  • In these circumstances, an adjudication would be an exercise in futility and would waste the parties’ time and money.

At the TCC in August 2018, Fraser J held that the adjudicator did not have jurisdiction to determine the dispute in light of Bresco’s insolvency. The TCC granted the injunction against the adjudication proceedings. Bresco appealed to the Court of Appeal.

Court of Appeal

The Court of Appeal overturned Fraser J’s decision regarding jurisdiction, but upheld the injunction on an alternative basis. Coulson J considered that referring the dispute to adjudication would be futile, as any award given was unlikely to be enforceable, thus wasting the (often limited) resources of the liquidation. This confirmed the view of the wider construction market that an insolvent company does not have a right to refer a dispute to adjudication once it enters liquidation.

Supreme Court

 Bresco appealed to the Supreme Court. Lonsdale brought a subsequent cross-appeal, claiming that the dispute fell within the scope of the insolvency regime rather than under the Contract and that the adjudicator therefore did not have jurisdiction to determine the dispute.

The Supreme Court overturned the Court of Appeal’s decision, allowing Bresco’s appeal and dismissing Lonsdale’s cross-appeal. This meant that Bresco’s adjudication proceedings could continue.

Ultimately, the Supreme Court held that, Bresco’s statutory and contractual right to adjudicate was not incompatible with the insolvency process, and was not an “exercise in futility”. The Supreme Court noted that such claims under the Contract could “not simply melt away so as to render them incapable of adjudication” when the insolvency procedure came into play. It was held that there is no absolute jurisdictional bar preventing a company in liquidation commencing adjudication proceedings. Lonsdale’s cross-appeal was therefore dismissed.

Regarding the injunction, Lord Briggs commented that although this type of relief may restrain a threatened breach of contract, it would only very exceptionally restrain an attempt to enforce a contractual or statutory right, such as the right to adjudicate.

Practical Implications

Given the post-pandemic economic outlook, we are likely to see significantly more insolvencies within the construction industry. The Supreme Court decision will be welcomed by IPs looking to recover sums owed to insolvent companies. The case promotes adjudication as “a mainstream dispute resolution mechanism in its own right”.

However, an insolvent company which secures an Adjudicator’s decision in its favour might still encounter difficulties in enforcing this decision in the TCC. The sums awarded in the adjudication may need to be ring-fenced in the liquidation for the benefit of the paying party rather than being distributed to the creditors.

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