This overturns a ruling, much-discussed in legal circles, that appeared to prevent companies in liquidation using adjudication proceedings.
The case of Lonsdale v Bresco related to claims and counter-claims between the two electrical contractors over a sub-subcontract. When Bresco began adjudication proceedings to identify its financial entitlement, Lonsdale responded by calling on Bresco to withdraw the proceedings and also requested that the adjudicator, who had already been appointed, should resign, based on an earlier judgement. After Bresco and the adjudicator both refused to withdraw, Lonsdale went to court.
The effect of the initial judgment appeared to be that companies in liquidation would not be able to use adjudication to pursue financial claims where there are claims and cross claims between the parties.
The issue went to the Court of Appeal in January 2019, and now the Supreme Court, which has ruled in favour of Bresco.
Bresco Electrical Services Ltd (in liquidation) was represented by Blaser Mills Law, which was instructed on behalf of Pythagoras Capital Limited (acting as agent for the liquidator). Michael J Lonsdale (Electrical) Ltd was represented by Fladgate LLP.
Blaser Mills partner Jackie Ray said after the Supreme Court result: “This is an excellent result for our client and clarifies the statutory and contractual right to adjudication despite the insolvent state of the referring party”.
Adjudication was introduced by parliament in 1996 to help resolve disputes in the building industry. Parties to a construction contract have the right to refer their disputes to an independent adjudicator for a quick decision. The adjudicator’s decision is binding unless and until it is successfully challenged in court. In the meantime, the losing party must comply with the adjudicator’s decision – a principle known as “pay now, argue later” which is designed to stop financial disputes from holding up the project’s cash flow.
Insolvency set-off means that, when a company enters liquidation and there are mutual debts between the company and one of its creditors, the debts in each direction automatically cancel each other out. This leaves a single net balance owed in one direction. The liquidator of the company will calculate the balance and decide how much the company owes or is owed overall.
Bresco and Lonsdale are electrical contractors. In 2014 Bresco carried out installation work for Lonsdale on a construction site at 6 St James’s Square, London SW1. In 2016 Bresco entered insolvent liquidation. Both parties claimed they were owed money by the other. Lonsdale said Bresco had abandoned the project prematurely, forcing it to pay £325,000 for replacement contractors. Bresco said Lonsdale had never paid for some work Bresco had done, so Lonsdale owed £219,000 in unpaid fees plus damages for lost profits.
In 2018 Bresco’s liquidators took steps to refer their £219,000 claim to an adjudicator.
Lonsdale objected to the adjudication. It said Bresco’s claim (if any) and Lonsdale’s cross-claim had cancelled each other out by the process of insolvency set-off. This meant there was no longer any claim, or therefore any dispute under the contract, so adjudication was unavailable (‘the jurisdiction point’). In any case the adjudicator’s decision would not be enforced until the liquidator calculated the net balance. So an adjudication was pointless (‘the futility point’).
Mr Justice Fraser accepted both Lonsdale’s points and granted an injunction to stop the adjudication. Following an appeal by Bresco, the Court of Appeal rejected the jurisdiction point but upheld the injunction on the basis of the futility point. Bresco appealed again to the Supreme Court. Lonsdale cross-appealed on the jurisdiction point.
The Supreme Court concluded that the adjudicator does have jurisdiction; it allowed the appeal and dismissed Lonsdale’s cross-appeal, with the result that the adjudication can go ahead.
Mark Clinton, partner and head of construction at Irwin Mitchell, who has written on this topic before for The Construction Index, commented: “The Court of Appeal had previously said that the adjudication should be stopped by injunction because it was futile. That is because, in line with previous cases, the court will generally not enforce a decision in favour of an insolvent company. They considered it was wrong to force a responding party to go through an expensive process if it was futile.
“However, the Supreme Court concluded that the problems at enforcement stage did not justify an injunction to stop the adjudication. So the result is that such adjudications can still proceed, but the difficulties in enforcing the decisions arising from them remain. The decision does not change the position as to whether adjudication in these circumstances is futile; it just means parties may have to get to enforcement to find out.
“The parties might agree to accept the adjudicator’s decision. Alternatively, the liquidator might adopt it in its own determination/adjudication of the creditor’s proof of debt. In the latter case, the creditor can challenge the liquidator’s determination in court.”
The full judgement is available at www.supremecourt.uk