June 19, 2020

Ground-breaking decision from the Supreme Court: Liquidators can adjudicate

News Article

Bresco Electrical Services Ltd (In Liquidation) (Appellant/Cross-Respondent) v Michael J Lonsdale (Electrical) Ltd (Respondent/Cross-Appellant) [2020] UKSC 25 allowed Bresco’s appeal against the Court of Appeal decision. It is a major breakthrough in that it will allow administrators and liquidators to recover debts owed to insolvent companies by adjudication and resolved the ‘incompatible’ relationship between two statutory regimes, the adjudication regime for construction disputes and a rule of insolvency law called insolvency set-off. This decision could not have come at a better time, since the recent Covid-19 impact on the construction industry may cause many more insolvencies in the future.

Background

In 2014 Bresco carried out works for Lonsdale on a construction site in London. In 2016, Bresco entered into insolvent liquidation. Both parties claimed they were owed money from the other and in 2018 Bresco’s liquidators took steps to refer their claim to an adjudicator to recover costs.

However, Lonsdale objected to the adjudication on two grounds and applied for injunctive relief to stop the adjudication:

  1. Jurisdiction: Lonsdale stated that insolvency set-off, under Rule 14.25 of the Insolvency Rules 2016, meant that Bresco could no longer claim and adjudication was no longer available under the construction contract. Therefore, the adjudication could not be engaged.
  2. Futility: Lonsdale argued that even if jurisdiction was established, an insolvency set-off would not generally lead to an enforceable award and would therefore be an exercise in futility, as the decision could never been enforced, that the court could and ordinarily should restrain the adjudication by way of an injunction.

The issue in this case was whether the court could grant an injunction to restrain an insolvent company from referring a dispute to adjudication, with arguments on the ‘incompatibility’ between insolvency and adjudication. This tension between two statutory provisions is:

  • Section 108 of the Housing Grants, Construction and Regeneration Act 1996 (the “1996 Act”) which confers an unfettered right upon a party to a construction contract to refer a dispute to adjudication at any time; and
  • Rule 14.25 of the Insolvency Rules 2016 which provides for the set off of cross-claims between a company in liquidation and a creditor.

At first instance, Mr Justice Fraser, sitting in the Technology and Construction Court (“TCC”), granted an injunction in favour of Lonsdale restraining the continuing of the adjudication on the basis that the Adjudicator lacked jurisdiction. Bresco appealed this decision and succeeded on the jurisdiction point but the Court of Appeal maintained the injunction as it considered any adjudication would be an exercise of futility as there could be no enforcement of the adjudicator’s decision.

Bresco further appealed to the Supreme Court. The Supreme Court, in a unanimous decision concluded that the adjudicator does, in fact have jurisdiction because construction adjudication is in no way incompatible with the operation of the automatic insolvency set-off applicable to a company in liquidation, meaning any claims could still be referred to adjudication.

On the other hand, the Supreme Court dismissed Lonsdale’s cross appeal resulting in the decision that the adjudication can proceed, finding that the use of adjudication is not futile, whether due to concerns about enforcement or otherwise, and made it clear that the mere existence of cross-claims is not a reason to resist summary enforcement.

Commentary

The 1996 Act introduced a statutory right for parties to a construction contract to refer their disputes to adjudication. It was intended to avoid long-running arbitration or court litigation keeping one party out of its money, while having to fund expensive legal costs to recover that money. The Supreme Court recognises that maintaining cash flow is not the only purpose of adjudication under the 1996 Act. Adjudication was designed to be a method of alternative dispute resolution (ADR) in its own right. In reality most decisions of an adjudicator are never challenged in court and they lead to a speedy, cost effective and final resolution of the dispute

The Supreme Court judgment has removed the previous restrictions preventing insolvent companies from starting adjudications and consequently allowing for more adjudication in the future. Given the current Covid-19 impact on construction projects, it is likely that more companies will unavoidably become insolvent in the near future.

But, however, it remains to be seen how the court, in particular the TCC, would use its discretion when dealing with the enforcement of adjudications by insolvent companies, which would only take after both parties have expended costs in both the adjudication and enforcement proceedings.