The un-fettered rights of insolvent construction companies to commence adjudication proceedings: the Supreme Court rules in Bresco

• United Kingdom

• Construction and engineering - Articles
• Litigation and dispute management

24-06-2020

On Wednesday 17 June 2020, the Supreme Court handed down its much anticipated decision in Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd[1], in which it allowed Bresco’s appeal against an injunction restraining it from further conduct of an adjudication owing to its entry into liquidation.

The effect of this decision is to confirm that there is no bar to an insolvent claimant commencing and pursuing adjudication. In its decision, the Supreme Court expressly endorsed adjudication as a successful method of dispute resolution, and confirmed that previous prerequisites imposed on insolvent claimants, including that the adjudication must determine the net final position of the parties, do not apply.

In terms of practical implications, defendants party to an adjudication where the claimant is insolvent will have to proceed with the adjudication and, if they lose, raise any insolvency challenge in enforcement proceedings (either through defending a summary judgement application from the successful claimant, or by raising their own application for a stay of execution). In addition, it would be prudent for such a defendant to ensure that any cross claims are crystallised and the subject of parallel proceedings to reduce the risk of having to make payments in the interim.

This decision comes at a time when the impact of COVID-19 on construction companies’ cashflow and supply chain has already resulted in a number of them entering insolvency processes. Contractors (and insolvency practitioners) will be looking to utilise adjudication as an effective method of recovering cash due under construction contracts, likely giving rise to an increase in adjudications.   

This also coincides with the imminent implementation of the Corporate Insolvency and Governance Bill, which, amongst other things, imposes a temporary restriction on the use of statutory demands (used by contractors as an efficient way to recover outstanding debts) which it is anticipated will also likely give rise to an increase in adjudications. See our article here.

Case Summary

As a short reminder of the facts of this case, Bresco were Lonsdale’s sub-contractor, engaged to perform electrical installation works at the London premises of the mining corporation Rio Tinto for just over £350,000. The Contract was signed in August 2014, and in December 2014 Bresco left site, with both parties alleging wrongful termination. In March 2015, Bresco entered into voluntary liquidation.

Both parties asserted claims and cross claims and, in June 2018, Bresco commenced adjudication proceedings claiming declarations in respect of Lonsdale’s repudiatory breach, and for the value of the work it had completed prior to leaving site.

Lonsdale disputed the jurisdiction of the adjudicator, as, it claimed, once Bresco entered into liquidation, claims and cross claims fell to be decided by the liquidator for the purpose of determining the balance of payments between them. As such, the claims advanced by Bresco were no longer “a dispute arising under the contract” and instead, were disputes in the liquidation. In July 2018 Lonsdale commenced proceedings seeking injunctive relief to prevent Bresco from continuing the adjudication.

At first instance[2], Lonsdale was granted the injunction it sought, as the Court reviewed the wording of the Housing Grants, Construction and Regeneration Act 1996 (the “Act”), and found that Parliament did not intend to give adjudicators the power to resolve disputes in the manner contended for by Bresco.  

On appeal[3], Lonsdale conceded that Bresco’s claim was not extinguished due to its entry into insolvency, and that the liquidator would be entitled to pursue the claim in court or arbitration proceedings. The Court found therefore that the adjudicator had jurisdiction. However, the Court of Appeal upheld the first instance decision, as it found an injunction to be the correct solution between the incompatibility of adjudication proceedings (quick means of improving cashflow) and the insolvency regime (an accounting exercise directed at achieving results for creditors). An adjudication in such circumstances would be “an exercise in futility”.

Bresco appealed against the decision to continue the injunction, and Lonsdale cross-appealed against the Court of Appeal’s finding that the adjudicator had jurisdiction. The Supreme Court rejected Lonsdale’s cross appeal and allowed Bresco’s appeal for the following reasons:

• following Lonsdale’s concession that a liquidator could pursue the instant claim in litigation or arbitration, there was no reason why adjudication should be treated differently
• despite Bresco’s entry into liquidation, it was correct for claims arising under the construction contract to continue to be treated separately to the claim for insolvency set-off
• whilst accepting adjudication had been used successfully as a means to improve cashflow, it was a successful method of dispute resolution in its own right, even in circumstances where enforcement may be unavailable
• a construction expert may be more successful in resolving a construction dispute arising during an insolvency than a liquidator
• the right to commence adjudications was provided for in the Act and the contract between the parties. It would not be an exercise in futility for the court to allow the Bresco to commence and continue an adjudication in spite of cross-claims falling within insolvency set-off

[1]   [2020] UKSC 25

[2]   [2018] EWHC 2043 (TCC)

[3]   [2019] EWCA Civ 27