Case Law Update: Supreme Court delivers important adjudication judgment in Bresco v Lonsdale
In Bresco Electrical Services Limited v Michael J Lonsdale (Electrical) Limited , the Supreme Court unanimously decided that the insolvency regime is not incompatible with the adjudication process, meaning that companies in liquidation can continue to refer disputes to adjudication. Here, our Construction team explore this decision and consider what effect it may have on the construction industry moving forward.
Both Bresco and Lonsdale were electrical contractors. In 2014, Bresco was engaged by Lonsdale to carry out installation works. Bresco entered liquidation in 2016, at a time when both parties were claiming wrongful repudiation (termination) of the construction contract and alleging sums were owed by the other. To recover these owed sums, Bresco’s liquidator commenced an adjudication against Lonsdale. In response, Lonsdale challenged the ability of Bresco to refer a matter to adjudication by seeking an injunction on two grounds:
1) The Jurisdiction Point
Since Lonsdale had a cross-claim against Bresco, the insolvency rules of set-off applied. Under the Insolvency Rules, the claims and cross-claims would be ‘merged’ into a single claim for the net balance. By merging in this way, the claim would no longer be a dispute under the construction contract and would take it beyond the statutory jurisdiction of an adjudicator.
2) The Futility Point
Regardless of the jurisdiction point, were the adjudication to be allowed it would be a futile exercise. Any positive award resulting from the adjudication would not be enforceable – rendering adjudication pointless.
The Story So Far
The question of balancing insolvency set-offs with adjudication is not a new one – it has come up time and again. Typically (at least until this decision) it has not been unusual for a respondent to successfully block an adjudication for reason of the claimant’s insolvency. Fraser J in the original Technology and Construction Court (TCC) decision agreed with Lonsdale that adjudication and insolvency were incompatible on the jurisdiction point and granted the injunction.
Bresco then appealed. The Court of Appeal disagreed with the TCC decision on the jurisdiction point, but considered the futility point to have merit – there was no practical utility to adjudication if the award could not be enforced by summary judgment in the TCC due to the claimant’s insolvency (following the case of Wimbledon Construction Co Ltd v Vago ). Stemming from that, the Court of Appeal considered that it was not just or convenient for the responding party to be forced to incur adjudication costs where it knows it will be able to resist enforcement. So, the injunction was upheld by the Court of Appeal.
Bresco appealed again to the Supreme Court. Lonsdale cross-appealed solely on the finding of the Court of Appeal on against the jurisdiction point, effectively seeking to restore the decision made in the TCC.
In Lord Briggs’ judgment (unanimously agreed), the Supreme Court concluded that:
— On the jurisdiction point – there was no absolute jurisdictional bar preventing an insolvent claimant commencing an adjudication. Even when insolvent, the statutory and contractual right to pursue adjudication is not extinguished. The construction contract claims/cross-claims “do not simply melt away so as to render them incapable of adjudication”.
— On the futility point – that it is not a foregone conclusion that adjudications by insolvent claimants have no utility. In fact, “there is a chorus of observations, from experienced TCC judges and book writers to the effect that adjudication does, in most cases, achieve a resolution of the underlying dispute which becomes final because it is not thereafter challenged”. The resolution of the construction dispute could be of real utility to the liquidator within the set-off process in determining the net balance.
— The courts should not interfere with the statutory and contractual rights to adjudicate. Even in the case of insolvent claimants, these rights should only be restricted by injunction in very exceptional circumstances. Simply the fact that (possibly irrecoverable) costs may be incurred is not sufficient reason to restrict that right.
The Supreme Court decision makes it absolutely clear that liquidators can bring adjudications on behalf of the insolvent claimant. They will likely do so in greater numbers as a result, and with more confidence than before. Previous doubts that a liquidator may have had about whether the respondent would be able to resist adjudication will be eased by this decision.
This clear path to adjudication may be prove to be especially important in the current climate, where it is fair to assume the economic effects of Covid-19 could lead to an increase in insolvencies in the construction industry and adjudications as a result. Businesses will be rightly concerned that they will be forced to incur the costs defending an adjudication that cannot be recovered if the adjudicator rules in their favour.
However, irrespective of the Supreme Court decision, there is still a significant question mark over the merits of adjudication as a recovery method for insolvent companies. The issue of enforcement of awards has not gone away and is difficult to ignore, which may continue to act as a brake on a liquidator’s appetite to start adjudication.
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