Home > Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27

Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27

6th February 2019

Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27

This case concerned both the appeal in Bresco v Lonsdale and Cannon Corporate v Primus Build. The present case comment is only concerned with the former.

Background

Bresco appealed to set aside the order of an injunction from Fraser J. That injunction prevented the continuation of an adjudication in which Bresco (in liquidation) and Lonsdale sought sums from each other in claims and cross-claims.

Fraser J justified his injunction on jurisdictional grounds. The only claim that could be enforced was a claim for the net balance arising out of insolvency set-off. Set off occurred automatically when Bresco entered liquidation. Bresco’s claim against Lonsdale was therefore not a claim that arose from the construction contract but rather from the Insolvency Rules. It followed that the adjudicator did not have jurisdiction over the matter.

Decision

1. Jurisdiction

Coulson LJ giving the judgment of the Court of Appeal upheld Fraser J’s injunction against the adjudication. However, despite allowing the injunction, he rejected the argument that the adjudicator did not have jurisdiction, stating clearly at [28] that, “Liquidation set-off does not, in principle, preclude the determination of the underlying claims.”

There were two main points that Coulson LJ made in support of this position. First, it is the law that liquidation does not extinguish the right to refer a dispute to arbitration. That being so, the underlying claim could not have been extinguished by insolvency set-off. As he puts it at [31], “as a matter of principle, the choice of forum cannot dictate whether or not the claim exists or has been extinguished.” Fraser J’s analysis produced an inconsistent position by comparison with arbitration. Nor was the fact that adjudication was only temporarily binding a relevant difference with arbitration. Adjudications may become final if both parties agree to treat it as final, or where parties fail to challenge the decision.

Second, the Court of Appeal preferred Bresco’s reading of Stein v Blake [1996] 1 AC 243. The crucial point was that Lord Hoffmann did not state that the underlying clams ceased to exist for all purposes upon the operation of insolvency set-off. Rather, his statement was more limited in scope, namely that after all the calculations had been resolved and determined, there was, strictly speaking, only a single enforceable claim for the net balance.

But this did not mean the underlying claims were excluded from being the subject-matter of an adjudication. In fact, Lord Hoffmann, clearly envisaged that the underlying claims continued to exist for the purposes of determining the balance. As he states at page 255 in Stein v Blake,

The cross-claims must obviously be considered separately for the purpose of ascertaining the balance. For that purpose they are treated as if they continue to exist. So for example, the liquidator or trustee will commence an action in which he pleads a claim for money due under a contract and the defendant will counterclaim for damages under the same or a different contract.

2. Practical Utility

Coulson LJ upheld the injunction on the basis of practical utility. There was nothing to be gained from Bresco pursuing adjudication because any subsequent enforcement of the adjudication award would either fail or be stayed.

This was because the responding party, in circumstances where they have a cross-claim, would effectively be deprived of their security against the cross-claim were the payment to be enforced. Similarly, the responding party would be exposed to the risk that any judgment sum could not be repaid due to the liquidation of the claimant.

Since an adjudication would almost certainly fail to be enforced, pursuing it would effectively be futile, and an injunction was justified on the basis of preventing wasted costs. This is of particular importance, where costs incurred by a responding party in defending an adjudication are unable to be recovered due to the insolvency of the claimant, or where there is simply no security for costs.

Coulson LJ stressed that there could of course be exceptional circumstances where an adjudication could have practical utility. However, on the facts of Bresco v Lonsdale, no such utility could be found. It followed that Fraser J’s grant of an injunction was a suitable mechanism for preventing the futile usage of adjudication.

Comment

There are two main points to take away from the Court of Appeal’s judgment in Bresco v Lonsdale. First, as Coulson LJ stressed in his judgment, the case demonstrates the incompatibility between the insolvency and adjudication regimes.

In particular, it featured a conflict between the policy considerations of adjudication, as a method of ensuring liquidity by providing cashflow, and that of the insolvency regime, which is “an abstract accounting exercise, principally designed to assist the liquidators in recovering assets in order to pay a dividend to creditors.”

In Bresco v Lonsdale, it is the policy considerations of insolvency that has had priority. This primacy seems correct. Considerations of cash flow are naturally relegated when a party is no longer solvent and has already entered into liquidation. At that stage, it must necessarily be more important to protect the interests of creditors.

There may of course be exceptions to that. Wimbledon Construction v Vago [2005] EWHC 1086, stresses, for instance, in its principles at [26] that if the claimant’s financial position was wholly or in significant part caused by the defendant’s failure to pay the sums awarded by adjudication, then the insolvency of the claimant may not be sufficient to justify the grant of a stay. It was on this basis that in Cannon v Primus, the decision to refuse a stay was upheld.

The second point to take away from the appeal in Bresco v Lonsdale is that the judgment sheds light on the operation of insolvency set-off. It confirms that automatic insolvency set-off does not extinguish underlying claims for all purposes.

The purpose of the insolvency set-off mechanism is that, once the claims and cross-claims have been properly determined, it automatically gives rise to a claim for the net balance. This ensures that the interests of creditors are properly protected, as it secures their cross-claims against any claims that the party in liquidation may have had against them.

But it is not inconsistent with that mechanism that underlying claims exist for the purposes of determination. After all, any net balance must still be calculated and confirmed. If that is true for litigation and arbitration, then it is also true of adjudication. The proviso, of course, is that where there are cross-claims, adjudication will usually not be of any practical benefit.

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