The Supreme Court decision in Bresco v Lonsdale [2020] - when can insolvent companies adjudicate?

17 June 2020

In May 2020, we reviewed the most up to date position in the developing area of adjudication by insolvent companies in our insight relating to the decision in Balfour Beatty Civil Engineering Limited and Astec Projects Limited (in liquidation) [2020]. In this case, the Technology and Construction Court (TCC) emphasised the type of strict conditions that will need to be satisfied to enable such adjudications (in the context of insolvency set-off) to proceed.

The much anticipated Supreme Court decision the leading case of Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] has now been handed down and we analyse the key points in this article.



The background: Bresco

For ease of reference, we set out again the background to the Supreme Court decision.

In Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2019], the Court of Appeal (with the leading judgment given by Lord Justice Coulson) concluded that there was no absolute jurisdictional bar preventing an insolvent claimant commencing and pursuing an adjudication (our review of that decision is here).

Notwithstanding the Court of Appeal's conclusion in Bresco, Lord Justice Coulson noted (in that judgment) that the existence of a "fundamental incompatibility" between the adjudication regime on the one hand and the insolvency set-off regime on the other still remained. This incompatibility was reflected in the Court of Appeal decision in Bresco. While it was not said that the adjudicator would have no jurisdiction at all because of the insolvency, it was thought that in this case (and very many others) an adjudication would be futile because it could never reach a position where the ultimate mutual account could be determined as a result of the adjudication. This, together with difficulties arising out of security, would mean that any adjudication decision in the circumstances would never be enforced.

In the Court of Appeal therefore, whilst Bresco succeeded on jurisdiction, the injunction restraining the further conduct of the adjudication was continued - since there could be no enforcement, an adjudication would be an exercise in futility and a waste of time and money. Bresco then appealed to the Supreme Court against the continuation of the injunction restraining the adjudication. Lonsdale cross-appealed to the Supreme Court seeking to restore the first instance ruling that the adjudicator lacked jurisdiction.

We now have the Supreme Court decision in Bresco, as reviewed below.

The Supreme Court decision in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020]

The Supreme Court judges were unanimous in their decision and the lead judgment was given by Lord Briggs.

Lord Briggs summarised the dispute as follows: "it is argued on this appeal that, if there are cross-claims between parties to a construction contract and one of them is in liquidation, then there can be no adjudication of any dispute between them about those cross-claims even if, but for the liquidation and the existence of cross-claims, one or more of those disputes would fall within the right to refer to adjudication conferred by section 108 [of the Housing, Construction and Regeneration Act 1996 as amended]".

Put simply, that argument was that the two regimes are incompatible and that the insolvency regime trumps the right to adjudicate on two grounds: jurisdiction and futility.

  1. The jurisdiction argument

    Insolvency set-off replaces the former cross-claims with a single claim for the net balance meaning that there is no longer a dispute under the construction contract, so that the adjudicator’s statutory jurisdiction is not engaged.
     
  2. The futility argument

    Even if there is jurisdiction, an adjudication in the context of insolvency set-off will not generally lead to an enforceable award, and will therefore be an exercise in futility that the court can and ordinarily should restrain by injunction.

Lonsdale's cross appeal on jurisdiction

The parties were in agreement that if Lonsdale had not had a cross-claim qualifying for insolvency set-off, the dispute referred by Bresco would have been within the adjudicator's jurisdiction, even though Bresco was by then in liquidation and the contract had ended. The crux of Lonsdale's argument on jurisdiction was that the net claim was a dispute under the insolvency regime and no longer a dispute under the Contract (which could in principle afford jurisdiction to an adjudicator).

Here, differing with the Court of Appeal, Lord Briggs was extremely clear that he (and the Supreme Court) did not consider construction adjudication "in any way incompatible" with the insolvency regime and that the contention that in this scenario, the dispute under the construction contract and any cross-claim ceased to exist as they are replaced by an insolvency claim is wrong. Such claims could not "simply melt away so as to render them incapable of adjudication".

The Supreme Court confirmed that there was no absolute jurisdictional bar preventing an insolvent claimant commencing and pursuing an adjudication - the cross appeal by Lonsdale on jurisdiction failed and was dismissed.

Bresco's appeal against the continuation of the injunction

Lord Briggs set out the context of injunctive relief stating that it may "restrain a threatened breach of contract but not, save very exceptionally, an attempt to enforce a contractual right, still less a statutory right [such as here, the right to adjudicate]".

In the view of the Supreme Court, in this case, Lonsdale had failed to overcome "that very steep hurdle". Lord Briggs described adjudication as "a mainstream method of ADR" and emphasised the fact that in many cases, it led to a "speedy, cost effective and final resolution" [emphasis added]. Lord Briggs made it clear that dispute resolution is an end in itself, even where (say) an adjudication decision cannot be enforced.

In terms of the arguments relating to costs of adjudication and the contended burden on the TCC in relation to such claims, Lord Briggs was firm in the conclusion that in fact (counter to the arguments put forward in support of the injunction), these factors militate against allowing injunctions restraining adjudications. Adjudication is made cost-neutral by statute and in any event, the fact that costs will be incurred does not mean that an injunction preventing the exercise of a statutory right to adjudication is justified.

The Supreme Court reached the opposite view to the Court of Appeal on the issue of futility - the appeal was allowed - the injunction was not continued and the adjudication can now proceed.

Adjudication - often the final outcome

The Supreme Court was wholly clear in its endorsement of adjudication, not just as a form of temporarily binding ADR, but as "a mainstream dispute resolution mechanism in its own right, producing de facto final resolution of most of the disputes which are referred to an adjudicator…… solving the cash flow problem [in the construction industry] should not be regarded as the sole objective of adjudication" [emphasis added].

A strong endorsement then for adjudication, although Lord Briggs did accept that "when compared with arbitration and litigation, [adjudication's] speed and economy come at an inevitable price in terms of reliability".

Adjudication and insolvency in a pandemic economy

After the Court of Appeal decision in Bresco and subsequent decisions, adjudication by an insolvent company was not impossible, but it was certainly not available by default. The Supreme Court judgment in Bresco has swept away those restrictions and undoubtedly, opened the door for many more adjudications to follow.

In this unforeseen pandemic and post-pandemic landscape, insolvency is unfortunately going to characterise in part the "new normal" for the construction industry - clearing the path for adjudications in this context is likely to prove of fundamental importance.

If you have any queries on this issue, please contact Ashley Pigott.


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