Supreme Court judgment in Bresco Electrical Services Ltd (In Liquidation) v MJ Lonsdale (Electrical) Ltd [2020] UKSC 25

The Supreme Court on Wednesday 17^th June 2020 issued judgment in an attempt to resolve differing views regarding  the statutory adjudication regime under the and the insolvency regime.

Facts

In 2014 Bresco Electrical Services Ltd (“Bresco”) carried out electrical installation works for Michael J Lonsdale (Electrical) Ltd (“Lonsdale”) on a construction site in London. In March 2015, Bresco went into creditors’ voluntary liquidation. Both Bresco and Lonsdale claimed that they were owed monies by way of breach of contract.  Lonsdale claimed that as a result of Bresco entering liquidation they had to subsequently employ another contractor to carry out the works, which cost them around £325,000.00.  Bresco alleged that they had not been paid by Lonsdale for some of the works carried out and therefore Lonsdale owed Bresco around £219,000.00 plus damages for lost profits.  In many ways the competing arguments were a classic example of insolvency related construction litigation.

In June 2018, Bresco’s liquidators referred its claim to an adjudicator.  In response, Lonsdale challenged the ability of Bresco’s liquidators to refer the matter to adjudication by seeking an injunction on two grounds: 

1. The jurisdiction point – Lonsdale had a cross-claim against Bresco and as a result claimed the insolvency set-off rules applied, so in effect any claims and cross-claims would be merged into a single claim for the net balance. Lonsdale alleged this meant there was no longer a dispute under the contract and therefore an adjudicator’s jurisdiction was not engaged; 

2. The futility point – Even if the adjudicator had jurisdiction Lonsdale argued an adjudication would be a futile exercise as any award would not be enforceable until the liquidator calculated the net balance. 

Judgment 

In the High Court Fraser J held that the adjudication regime and the insolvency regime were incompatible on the point of jurisdiction and therefore granted the injunction sought. Bresco appealed.  The Court of Appeal disagreed with the Technology and Construction Court’s decision on the jurisdiction point and held that the futility point had merit as an adjudication award would not be enforceable until the liquidator calculated the net balance.  The Court of Appeal also held that it would not be “just or convenient” for the responding party to be forced to incur adjudication costs where enforcement could be resisted.  The injunction was upheld by the Court of Appeal.

Bresco appealed to the Supreme Court and Lonsdale cross-appealed on the Court of Appeal’s decision in relation to the jurisdiction point. In the Supreme Court, Lord Briggs delivered the leading judgment and held that the courts should not interfere with the statutory and contractual rights to adjudicate and where a claimant is insolvent then such rights should only be restricted by an injunction in very exceptional circumstances. Whilst the exceptional circumstances were not expanded upon the Supreme Court held that adjudication costs being irrecoverable was not a sufficient reason to restrict that right.  

The Supreme Court concluded that:

1. The jurisdiction point – There was no absolute jurisdictional bar preventing an insolvent claimant from commencing an adjudication as the statutory and contractual right to adjudication still existed. Therefore, in essence the insolvency set-off between Bresco’s claim and Lonsdale’s cross-claim did not mean there is no longer a dispute under the construction contract, or that the claims have melted away; 

2. The futility point – It was held that adjudications by insolvent claimants can be useful to a liquidator in determining the net balance. It was held that “in the context of construction disputes adjudication has, as was always intended, become a mainstream method of ADR, leading to the speedy, cost effective and final resolution of most of the many disputes that are referred to adjudication.” 

Conclusion

The Supreme Court’s decision makes it clear that liquidators able to bring adjudications on behalf of insolvent claimants. This provides greater flexibility in using the adjudication regime during construction insolvencies.  In one sense this provides assistance to insolvent companies as it gives an tool by which to address matters in dispute.  However there is a clear counterbalance.  The Supreme Court did not provide clear direction on the circumstances surrounding the enforcement of adjudication awards.  It did identify that insolvency practitioners should be ready to ringfence funds awarded in any adjudication and provide security for costs to cover adverse costs in any subsequent enforcement proceedings/subsequent litigation, raising questions of how much assistance Bresco will bring.  The benefits of adjudication in overcoming an intractable/uncooperative debtor using insolvency as a first line of defence can be seen, but as with any adjudication enforcement of the award is often as important a question as whether to start an adjudication in the first place.

DJM specialises in Construction Law, with a niche practice in construction insolvency and adjudication.  If you have a query please contact Philip Graham on psg@djm.law.co.uk / 01792 656536