Insolvent Companies and Adjudication: Bresco Services Limited v Michael J Lonsdale [2020] UKSC 25
June 2020The much-anticipated Supreme Court decision in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] has now been handed down.
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 removed those restrictions and undoubtedly, opened the door for many more adjudications to follow by insolvency practitioners in the name of insolvent construction companies.
The facts
A contract was entered into between Bresco Electrical Services Limited (‘Bresco’) and Michael J Lonsdale (‘Lonsdale’) whereby Bresco agreed to perform electrical installation works for Lonsdale (‘the Contract’).
In December 2014, Bresco left site in controversial circumstances and both Bresco and Lonsdale alleged wrongful termination against each other.
In March 2015, Bresco went into liquidation.
In October 2017, Lonsdale intimated a claim against Bresco alleging wrongful termination of the Contract and claimed the direct costs of completing the works. Bresco maintained it was Lonsdale who had wrongfully terminated Bresco’s employment under the Contract and therefore Lonsdale owed them money.
The Adjudication
In June 2018, Bresco sought to refer its claim to adjudication seeking payment for works done and damages for breach of contract. However, Lonsdale invited Bresco to discontinue with the adjudication on the basis that the Adjudicator had no jurisdiction as a result of Bresco having become insolvent.
The Adjudicator issued a ‘non-binding’ decision declaring that he did have jurisdiction to determine the dispute. Lonsdale subsequently issued Part 8 proceedings against Bresco in the Technology and Construction Court (‘TCC’) for declarations and a permanent injunction to prevent Bresco from bringing a claim to adjudication.
The TCC Proceedings
For a full summary of the TCC proceedings – please see our previous article here.
Fraser J held that as at the date of liquidation, and as a direct result of what occurs upon the appointment of the liquidator and the operation of the Insolvency Rules, the dispute between Lonsdale and Bresco that consisted of claims and cross claims ceased to be capable of separate enforcement and become replaced with a single debt. That is thereafter ‘the dispute’ (namely the result of the account that determines the balance payable and in which direction), and being the only dispute remaining in law. An adjudicator cannot conduct such an account dispute under the Insolvency Rules.
Therefore, in August 2018, Fraser J found that the adjudicator did not have jurisdiction to determine the dispute referred to him and issued the declarations requested by Lonsdale.
The Court of Appeal decision
For a full summary of the Court of Appeal decision- please see our previous article here.
Bresco appealed the TCC decision and argued that the dispute did fall within the Adjudicator’s jurisdiction and that the injunction should not be upheld.
- The Adjudicator’s jurisdiction
The Court of Appeal overturned Fraser J’s finding that the Adjudicator lacked jurisdiction.The Court of Appeal (with the leading judgment given by Coulson LJ) concluded that there was no absolute jurisdictional bar preventing an insolvent claimant commencing and pursuing an adjudication. - The injunction
However, the Court of Appeal upheld the injunction on the alternative basis that the Adjudicator’s decision would lack practical utility and therefore it was not ‘just or convenient’ to allow the adjudication to succeed.In his leading judgment, Coulson LJ considered that referring the underlying dispute was likely to be futile because:
- An award in favour of an insolvent company would not usually be enforced (applying the principles in Wimbledon Construction Co Ltd v Vago [2005] EWHC 1086 (TCC)).
- It was a waste of the limited resources of the liquidation to incur the costs of an adjudication where the award was unlikely to be enforceable.
- The responding party should not be forced to incur the costs of an adjudication when it knows that it will be able to resist enforcement.
- Even if the enforcement of the award were permitted, the responding party would be entitled to commence litigation to overturn the result of the adjudication (and incur the costs of doing so) where there was an obvious risk that recovery of sums paid pursuant to the adjudicator’s award was rendered impossible by the liquidation.
Notwithstanding the Court of Appeal’s conclusion in Bresco, Coulson LJ noted 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. 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 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 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.
The Supreme Court decision
The Supreme Court judges were unanimous in their decision and the lead judgment was given by Lord Briggs.
Lord Briggs summarised the dispute as being a question around the compatibility of the insolvency regime and the adjudication regime. Put simply, the dispute revolves around the argument that the insolvency regime trumps the right to adjudicate on two grounds: jurisdiction and futility.
- Lonsdale’s cross appeal on jurisdiction
Lonsdale’s argument on jurisdiction was that the dispute fell under the scope of the insolvency regime and was no longer a dispute under the Contract. Therefore the dispute was no longer under the scope of the Housing Grants, Construction and Regeneration Act 1996. An adjudicator would not have jurisdiction on a dispute falling under the insolvency regime.The Supreme Court differed with the Court of Appeal when stating that it did not consider the construction regime incompatible with the insolvency regime and that the contention that in this scenario, the dispute under the 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. Therefore, 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’ . Lord Briggs made it clear that dispute resolution is an end in itself, even where 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 Adjudication is provided for 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.
Comment
The decision not only puts it beyond doubt that there is jurisdiction for an insolvent company to refer a dispute to adjudication but the Supreme Court was wholly clear in its strong endorsement of adjudication, not just as a form of temporarily binding ADR, but as ‘a mainstream dispute resolution mechanism in its own right’.
Insolvency professionals will likely welcome this decision and view adjudication as a quick and convenient route to determine the value of claims and cross-claims in the liquidation of construction companies. However, insolvency professional swill still need to prove the claim. Where disputes rely on factual and/or valuation evidence, it may be difficult to find a former employee of the insolvent company to assist.
Nevertheless, the fact that constraints remain on the insolvent company’s right to enforce an adjudicator’s award by summary judgment in the TCC, means that it’s utility as a method of recovery remains up for debate.
In the current pandemic and future post-pandemic landscape, insolvency is unfortunately going to be more prominent within the construction industry – clearing the path for adjudications in this context is likely to prove of fundamental importance.
For further information please contact James Vernon.
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