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Adjudication, construction disputes and the operation of insolvency set-off: Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale [2020] UKSC 25

18th Jun 2020

Yesterday, Lord Briggs delivered a unanimous judgment in the Supreme Court case of Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25. Arthur Graham-Dixon provides a brief description and analysis of that judgment.

The facts can be shortly stated. Bresco left site at the end of 2014; went into liquidation in early 2015; and brought an adjudication against Lonsdale in mid-2018 claiming for unpaid work and loss of profits. Each side claimed that the other was in repudiatory breach. Lonsdale’s cross-claims included the cost of having another contractor finish the work. Lonsdale sought an injunction restraining Bresco from adjudicating on its claim.

Londsale sought an injunction on grounds that the adjudicator lacked jurisdiction and that the adjudication would be an exercise in futility. These arguments have their root in Rule 14.25(2) of the Insolvency Rules 2016 (formerly Rule 4.90), which requires an account to be taken of the claims and cross-claims of the insolvent party and its creditor/debtor, so as to produce a net balance due either to the company from its debtor or from the company to its creditor (referred to in Rules 14.25(3)-(4)).

The jurisdiction argument, which succeeded at first instance but failed in the Court of Appeal, was that the mandatory accounting process under the Insolvency Rules replaces the pre-existing claims and cross-claims with a single claim for the net balance. This was held to be so by Fraser J, who considered the net balance claim to be a claim in the insolvency rather than a claim under a construction contract (and so not falling within an adjudicator’s jurisdiction): [2018] EWHC 2043 (TCC) paras. 67 and 73.

The futility argument, which did succeed in the Court of Appeal, was in essence that the adjudication should not be allowed to proceed because it would not lead to an enforceable award. Coulson LJ broadly agreed with that argument, concluding that adjudications brought by insolvent companies would not be enforceable save for exceptional circumstances. What qualifies as an exceptional circumstance has since been discussed in Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC).

The two matters are neatly disposed of in Lord Briggs’ judgment. The jurisdiction argument was rejected because the claims and cross-claims continue to exist for certain purposes: paras. 29 and 50. There continues to exist, therefore, any pre-existing dispute under a construction contract. This can properly be referred to an adjudicator, just as it could be referred to an arbitrator: para. 52. The futility argument was rejected because adjudication is a valid form of ADR irrespective of whether it will be enforced: paras 60 and 64. If a liquidator has a host of claims and cross-claims to determine and one of them should comprise a dispute under a construction contract, the speedy view of an adjudicator may well assist the liquidator in carrying out the netting-off exercise: paras. 46 and 62.

It is important to note, when considering Lord Briggs’ reasoning, that the Supreme Court has not disagreed with any part of Coulson LJ’s view on enforcement. What the Supreme Court has done is simply reject the suggestion that unenforceability means futility. Lord Briggs in para. 65 adds some examples of where summary enforcement may be appropriate and in para. 67 states: “Where there remains a real risk that the summary enforcement of an adjudication 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”. This is an endorsement of the application of the Court of Appeal’s decision that was adopted in Meadowside: I have discussed the Court’s approach in that case here.

The Supreme Court’s decision invites a number of further comments:

  • Lord Briggs suggests in para. 65 that enforcement may be appropriate where “the disputed cross-claim may be found to be of no substance”. This appears to suggest that if a defendant in adjudication enforcement proceedings raises a cross-claim as a defence, it may be possible for the Court to make a finding that the cross-claim has no substance. That is a challenge. Take the case of Westshield Ltd v Whitehouse & Or. [2013] EWHC 3576 (TCC). There, a company in a CVA obtained an adjudication award against a couple in respect of works done on their residence (the contract provided for adjudication). In the enforcement proceedings, the couple raised a counterclaim for the costs of remedying allegedly defective works, which had not been canvassed in the adjudication. Akenhead J refused summary judgment to enforce the decision, stating at para. 26: “there are undoubtedly gaps in what they have submitted and there is arguably a general lack of hard evidence at the moment. However, the court cannot say that the claims, supported as they are by statements submitted to the court in defence against the application, are so lacking in support as not to be bona fide.” It is unsurprising that a greater level of scrutiny could not realistically be given in circumstances where adjudication enforcement hearings are fast-tracked and, as a starting point, listed for 2 hours. Even if the Court is asked to lengthen the hearing, it is still a summary procedure, so cross-examination of the cross-claiming defendant or relevant witnesses may not be allowed. If the evidential threshold for raising a cross-claim with substance is putting just enough material before the Court to rebut any suggestion of bad faith, that threshold should be quite easy to pass. Significant procedural adjustments might change things. Watch this space.

 

  • It is worth reiterating that Lord Briggs dismissed the argument that an injunction would be appropriate purely because of the engagement of the Insolvency Rules (paras. 1 and 71), since in his view adjudication could still be a potentially useful means of ADR (paras. 60 and 64). Clearly, that does not give liquidators carte blanche to commence adjudications that would be of no assistance in the netting-off exercise. For example, a smash-and-grab adjudication claiming automatic entitlement to an interim payment in the absence of a pay less notice would typically not assist the liquidator. Interim payments (save for the rare example where they represent what would be due as a matter of final account) have been held to be broadly incompatible with the netting-off exercise under the Insolvency Rules. See Indigo Projects London Ltd v Razin & Anor [2019] EWHC 1205 (TCC), discussed here, where Sir Edwards-Stuart said in para. 54: “since the adjudicator’s decision was not a decision that determined the value of Indigo’s claims or the value of any particular claim, but was in effect an order for an interim payment, it would have had no effect on the… setting-off exercise”. Nevertheless, an award of that nature may be enforceable where the respondent fails to raise any cross-claim at all (i.e. fails to argue that enforcing the interim payment would lead to a “true value” overpayment): see Fresh Lime Construction Ltd v Seymour Realty Ltd [2020] 6 WLUK 47.

 

  • A discrete, interesting aspect of the judgment is the doubt that Lord Briggs appears to cast on the so-called ‘single dispute’ rule, that adjudicators can only adjudicate on more than one dispute if the parties consent. At para. 43 we read: “The starting point is that nothing in the 1996 Act or in the Scheme expressly creates a single dispute rule, as a matter of jurisdiction. The jurisdiction of the adjudicator is, subject to the overriding requirement that the dispute or disputes referred arise under the contract, mainly defined by the terms of the reference in each particular case. The only guidance from the Scheme is, in paragraph 8, that the adjudicator may determine more than one dispute, or disputes under more than one contract, if the parties so agree.” Following this hint of skepticism, no clear further comment on the merits of the rule appears in the judgment.

 

  • One point that could have been explored further is the question of what decisions an adjudicator can and cannot validly make in this context and what the consequences of an invalid decision will be. In para. 63, Lord Briggs comments that if a respondent to an adjudication raises cross-claims which do not arise under a construction contract, “the adjudicator will need to have regard to them, if they amount to a defence to the disputed construction claim being referred, but may have simply to make a declaration as to the value of the claim, leaving the unrelated cross-claim to be resolved by some other means. That is a remedy well within the adjudicator’s powers.” Firstly, it is not entirely clear what is meant by the words “if they amount to a defence to the disputed construction claim”: if the adjudication notice seeks an order for payment rather than a declaration of the value of a claim, then the Insolvency Rules mean that any cross-claim, however unrelated, is a defence to the claim for that relief. Secondly, the result may be that if in those circumstances an adjudicator nevertheless orders payment of a sum without deducting the full amount of the cross-claim, that will arguably be in excess of jurisdiction. That is because it would be purporting to decide the balance of the account, in circumstances where that involves a dispute beyond the adjudicator’s jurisdiction. That might then provide the respondent to an enforcement action with another defence – one that, importantly, cannot be circumvented by the Meadowside exceptions. Again, watch this space.
Legal disclaimer: The content and the opinions expressed have been provided for information purposes only. It should not be relied on as a substitute for specific legal advice on any particular topic. Legal comment is from an English law perspective, unless otherwise stated.

18 June 2020





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