Adjudication ‘Boost’ for Liquidators: The Supreme Court Rules Against ‘Futility’ in Bresco v Lonsdale

Bresco Electrical Services Ltd (In Liquidation) (Appellant/Cross-Respondent) v Michael J Lonsdale (Electrical) Ltd (Respondent/Cross-Appellant) [2020] UKSC 25. On appeal from: [2019] EWCA Civ 27

The long awaited judgment determining the relationship between the right to adjudicate and the principles of insolvency law was delivered by the Supreme Court on 17 June 2020.

The Court’s decision in Bresco v Lonsdale, to allow adjudication despite a claimant being in a formal insolvency process, now enables administrators and liquidators to pursue debts owed to insolvent companies using any mechanism available – including adjudication.

The timing of this decision is welcome, given the anticipated insolvencies that the construction industry might face as a consequence of the COVID-19 pandemic. The right of a party to refer a dispute to adjudication in a formal insolvency process, now established by the Supreme Court, may well be relied upon over the coming months. However, whether the Court’s reluctance to enforce an adjudicator’s decision in favour of an insolvent company will change in the light of the Bresco judgment, is a moot point.

Background

The essence of the argument in Bresco v Lonsdale centres around the tension between (1) the right to refer a dispute in a construction contract to adjudication at any time, under the Housing Grants (Construction and Regeneration) Act 1996; and (2) the automatic and mandatory set-off of cross-claims between a company in liquidation and each of its creditors, giving rise to a single net balance owed by one party to the other, in accordance with the Insolvency Rules 2016 .

In 2018, Bresco (in liquidation) sought to refer a dispute for monies owed under a construction contract to an adjudicator. Lonsdale sought to prevent the adjudication by means of an injunction. The subsequent judgments focused on two arguments; “jurisdiction” and “futility”.

Lonsdale argued that it had a cross-claim under the contract which would result in the two claims being set-off under the Insolvency Rules. It was argued that the adjudicator (Tony Bingham) did not have jurisdiction since insolvency set-off replaced the former cross-claims with a single claim for the net balance. There was no longer a claim, or therefore a dispute under the construction contract, meaning that the statutory right to refer a “dispute” to adjudication did not apply.

In relation to futility, Lonsdale argued that because the Courts would not generally, in the context of insolvency set-off, enforce an adjudicator’s award, the adjudication itself would be an exercise in futility which the court should restrain by injunction, before costs would be thrown away, pursuing a case for no useful, tangible purpose.

Initially, the Technology and Construction Court accepted both the “jurisdiction” and “futility” arguments and granted an injunction in favour of Lonsdale preventing the adjudication from going ahead. On appeal, the Court of Appeal rejected Lonsdale’s jurisdiction argument, but accepted the futility argument and upheld the injunction.

Supreme Court

The case went, on appeal, to the Supreme Court which (by Lord Briggs’ judgment, with which Lords Reed, Kitchin, Hamblen and Leggatt agreed) unanimously reversed the decision of the lower courts and ruled in favour of Bresco and its right to adjudicate. In relation to the jurisdiction and, specifically, the point about futility, the Supreme Court held:

• Jurisdiction – insolvency set-off did not eliminate the right to refer a dispute to adjudication under a construction contract. Set-off is purely financial and does not eliminate claims under contract.
• Futility – adjudication, on the application of the liquidator, is not incompatible with the insolvency process. It is not an exercise in futility, either generally or merely because there are cross-claims falling within insolvency set-off. Insolvent companies had the right to submit disputes to adjudication, a right which Parliament has chosen to confer. Financial enforcement aside, adjudication is a useful, cost effective method of ADR in its own right, which has proven successful in a construction context and insolvent companies should not be deprived of using it.

Whilst this decision may put a smile on the faces of Insolvency Practitioners in England & Wales, its impact remains to be seen. The Court’s reluctance to enforce adjudication awards where a company is in a formal insolvency process is a separate matter and may remain unchanged. Adjudication may be relatively low cost, but the irrecoverable costs involved for all parties remain significant, and in consequence the Bresco case probably improves an insolvent company’s bargaining power. Even so, the decision for an insolvent company to pursue adjudication won’t be taken lightly.

The Bresco judgment is worth a read. It’s only 25 pages long and, along with the above, provides a useful review of the law around adjudication. Something to put in the brief case, maybe for that commute to work – if anyone ever does that anymore!

This article was co-written by Richard Wade, Katie James and Sophie Latham.