Insolvent Companies and Adjudication: Bresco Services Limited v Michael J Lonsdale [2020] UKSC 25

Adjudication is a quick and comparatively cheap method of dispute resolution and for those reasons is attractive to insolvent companies seeking to recover debts. However, a respondent was likely to be able to restrain the insolvent company from referring the matter to adjudication on the basis that it would be futile to do so, since any positive decision was unlikely to be enforced as a result of the very fact of the company’s insolvency. Therefore, any award lacked practical utility. Following the decision of the Supreme Court in Bresco v Lonsdale, that is no longer the case.

The Supreme Court has held that not only is there jurisdiction for an insolvent company to refer a dispute to adjudication but that:

• the court should only restrain the exercise of that statutory and contractual right in ‘very exceptional’ circumstances; and
• the reference of a construction dispute to adjudication will (notwithstanding that the adjudicator’s decision has only temporary finality) often prove useful to the liquidator.

The Core Facts:

Bresco had agreed to perform electrical installation works for Lonsdale pursuant to a construction contract. Both Bresco and Lonsdale alleged that the other had wrongfully repudiated the underlying construction contract. A variety of claims and cross-claims lay between them.

Bresco subsequently entered into CVL in 2015. Bresco sought to refer its claim seeking payment for works done and damages for breach of contract to adjudication. Lonsdale disputed that the adjudicator had jurisdiction to determine the dispute as Bresco was in liquidation and issued proceedings restraining Bresco from proceeding with the adjudication.

The Reasoning in the Courts below:

At first instance, Fraser J, based on the dicta of Lord Hoffman in Stein v Blake [1996] AC 243, held that the effect of insolvency set-off was that the adjudicator lacked jurisdiction. The claims and cross-claims between Lonsdale and Bresco were mutual dealings that were subject to set-off under IR 14.25 and therefore the claims and cross-claims had merged into a single claim for the net balance.

Bresco appealed. The Court of Appeal overturned Fraser J’s finding that the adjudicator lacked jurisdiction. However, the Court 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 the leading judgment in the Court of Appeal, 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. Coulson LJ rejected the submission that the adjudicator’s award could be useful as an estimate of the true value of the claims and cross-claims because adjudication was not any kind of assessment of the parties’ mutual dealings but was often based on an employer’s failure to operate the payment notice provisions.
• 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.

The Judgment in the Supreme Court:

The appeal and cross-appeal in Bresco v Lonsdale raised important questions regarding: (i) the compatibility of the adjudication of construction disputes and the operation of insolvency set-off and (ii) when, if ever, an insolvent company can be restrained from referring a construction dispute to adjudication.

The Supreme Court, in the judgment of Lord Briggs (with whom Lords Reed, Kitchin, Hamblen and Leggatt agreed) it was held:

• An insolvent company can refer a construction dispute to adjudication and the adjudicator has jurisdiction to determine the dispute referred. The right to refer a dispute under a construction contract to adjudication pursuant to s.108 of the Housing Grants, Construction and Regeneration Act 1996 (“the 1996 Act”) is not extinguished or precluded by the operation of insolvency set off.
• The insolvent company has a statutory and contractual right to pursue adjudication as a means of resolving a dispute under a construction contract. Injunctive relief will only very exceptionally be available to restrain an attempt to enforce a contractual, or still less, statutory right.
• The process of adjudication is not necessarily incompatible with the insolvency set-off process or an exercise in futility. The adjudicator’s resolution of a construction dispute may be of real utility to the liquidator in conducting the set-off process (even if it leaves some unrelated cross-claim to be determined by other means).
• The issue of whether it is appropriate to enforce the adjudicator’s award in favour of an underfunded insolvent estate can be dealt with at the enforcement stage. Where there remains a real risk that the summary enforcement will deprive the respondent of its right to have recourse, then the court will be astute to refuse summary judgment. However, those risks could be appropriately mitigated by the liquidator offering appropriate undertakings, as discussed in Meadowside v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651.

In reaching the conclusion that there was no jurisdictional bar to referring a dispute to adjudication, the court considered that the submission that, as a result of insolvency set-off, the parties underlying claims and cross-claims under the contract fell away in favour of a single claim to the taking of an account of their mutual dealings in the insolvency was ‘an over-literal reading’ of the passage of Lord Hoffman’s speech in Stein v Blake. Whilst it was true that the claim and cross-claim lost their separate identity at the cut-off date for the sake of assignment, Lord Hoffman acknowledged that claims and cross-claims continued to exist separately for the purpose of ascertaining the balance.

The Supreme Court departed significantly from the reasoning of Coulson LJ in the Court of Appeal in relation to his analysis of the futility of adjudication in the insolvency context.

First, the starting point for considering whether to restrain the referral was not whether it is ‘just and convenient’ to do so but whether the high threshold for restraining a party from pursuing a contractual right could be met; that steep hurdle is not surmounted by insolvency set-off.

Second, the Supreme Court took a different view of the practical utility of allowing a construction dispute to be referred to adjudication, noting the following:

• Adjudication shares many of the attractive features of the proof of debt process in terms of its speed and simplicity with the added advantage that the dispute may be more amenable to resolution by a professional construction expert than by a liquidator.
• The adjudicator can take account of cross-claims which amount to a defence to the dispute referred. In many cases, disputed cross-claims need to be resolved as a prelude to the arithmetical set-off.
• Even where unrelated cross-claims falls to be resolved by other means, the resolution of the construction dispute may be of real utility to the liquidator within the set-off process.
• Summary enforcement will not be inappropriate in every case; the adjudicator may be able to determine the net balance.

The Supreme Court’s assessment of the utility of the adjudication process in this context appears, in no small part, to flow from its observations that ‘there is a chorus of observations, from experienced TCC judges and book writers to the effect that adjudication does, in most cases, achieve a resolution of the underlying dispute which becomes final because it is not thereafter challenged.’

Comment:

Bresco v Lonsdale not only puts it beyond doubt that there is jurisdiction for an insolvent company to refer a dispute to adjudication but has sanctioned its use in that context as useful tool for determining disputes.

It is a decision likely to be welcomed by insolvency professionals as a quick and convenient route to determine the value of claims and cross-claims in the liquidation of construction companies (notwithstanding that the adjudicator’s award has only temporary finality).  However, 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 its utility as a method of recovery remains up for debate.

Aileen McErlean and Helena White

If you would like to discuss the wider implications of the decision for insolvency practitioners and all those dealing with insolvent construction companies, then please sign up for our #Hardwicke Brew on 23^rd June at 11.30am.