Supreme Court: adjudication and insolvency

The Supreme Court’s decision in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 (17 June 2020) has been eagerly anticipated.

The appeal raised important questions about the compatibility of adjudication with the operation of insolvency set-off. The Supreme Court allowed the appeal, deciding that a liquidator was entitled to refer an insolvent company’s claims to adjudication where there were cross-claims between the parties.

The facts

The parties were in dispute and made claims against each other for breach of contract and damages. Bresco went into liquidation and the liquidator commenced an adjudication on behalf of Bresco against Lonsdale. Lonsdale issued proceedings in the Technology and Construction Court (TCC) for an injunction to stop the adjudication. Lonsdale argued that if parties to a construction contract are in dispute and one of the parties is insolvent, there can be no adjudication of those disputes where there are cross-claims between the parties. They relied on the following reasons:

• Jurisdiction - insolvency set-off replaces the cross-claims with a single claim for the net balance in the liquidation by the party who ultimately has the larger claim. Therefore, there is no longer a claim (or dispute) under the construction contract and the adjudicator does not have jurisdiction.
• Futility - an adjudication in these circumstances would not result in an enforceable award and would be an exercise in futility and a waste of both party’s time and money.

The TCC agreed and granted an injunction restraining the pursuit of the adjudication. The Court of Appeal disagreed with the jurisdiction point but agreed with the futility argument and therefore upheld the injunction.

The decision

The Supreme Court unanimously disagreed with both arguments and set the injunction aside. The following reasons were given:

1. Adjudication, on the application of the liquidator, is not incompatible with the insolvency process - The existence of insolvency set-off does not mean there is no longer a claim (and a dispute) under the construction contract. Claims and cross-claims in the context of insolvency set-off will remain separate for the purposes of resolving any dispute about them.

2. It is not an exercise in futility – The fact that an adjudication award cannot be enforced immediately does not mean the adjudication process was futile.  The Supreme Court stated that, for example, the liquidator might not seek to enforce the adjudicator’s decision summarily; or might offer to ring-fence any enforcement proceeds. Alternatively, the adjudication award might be accepted by both parties as finally resolving the dispute. In addition, the Supreme Court stated that summary enforcement might sometimes be allowed: “There may be no dispute about the cross-claim, and the claim may be found to exist in a larger amount, so that there is no reason not to give summary judgment for the company for the balance in its favour. Or the disputed cross-claim may be found to be of no substance. Or, if the cross-claim can be determined by the adjudicator, because the claim and cross-claim form part of the same “dispute” under the contract, the adjudicator may be able to determine the net balance. If that is in favour of the company, there is again no reason arising merely from the existence of cross-claims why it should not be summarily enforced”.

3. Statutory right to adjudicate - Adjudication under a construction contract is a statutory and contractual right and the Supreme Court held that it would be exceptional circumstances where a court would restrain by injunction “an attempt to enforce a contractual right, still less a statutory right”.

Judicial support for adjudication

This decision is timely given the current economic outlook post COVID-19. With an increase in insolvencies predicted, this decision will be welcomed by those looking to recover sums owed to insolvent companies. However, whilst a liquidator has the green light to resolve an insolvent company’s claims by adjudication even where there are cross-claims, a decision in the insolvent company’s favour will not necessarily be enforced by the court. The Supreme Court stated: “Where there remains a real risk that the summary enforcement of an adjudication decision will deprive the respondent of its right to have recourse to the company’s claim as security (pro tanto) for its cross-claim, then the court will be astute to refuse summary judgment”.

In the judgment, it is notable that the Supreme Court acknowledges the benefits of adjudication, commenting that since its introduction adjudication had been “conspicuously successful”. The decision recognises that adjudication does not simply achieve interim payment to protect cash flow but, in many instances, results in the final resolution of disputes between the parties: “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”.

Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 (17 June 2020)