Construction adjudication is not incompatible with the insolvency process

Published 28 agosto 2020

The highly anticipated Supreme Court decision in Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale [2020] UKSC 25 has endorsed the use of adjudication in the context of insolvency set off, substantially reversing the decision of the Court of Appeal.  

This case is of great relevance to the industry given the position of the economy following Covid 19/Brexit and the general downturn.  During the lockdown there has been an increased number of insolvencies and therefore insolvency practitioners will be heartened that this relatively inexpensive  option (compared to Proceedings or Arbitration) remains open to them as a means of extracting sums owed.

The questions for the Supreme Court

The case comprised an appeal brought by Bresco against the Court of Appeal’s (“CoA”) decision that Lonsdale’s injunction restraining the progress of an adjudication should continue.  The CoA concluded that adjudication in circumstances where the referring party was in insolvent was an exercise in futility.  Lonsdale cross appealed against the CoA’s decision that an adjudicator does have jurisdiction to deal with disputes involving set off and cross claims arising under the Insolvency Act 1996.

To deal with the disputes, the Supreme Court analysed the compatibility of the two statutory regimes, namely the adjudication of construction disputes and the operation of insolvency set-off.

The Supreme Court summarised the objection to the use or availability of adjudication in the context of insolvency set-off, labelling the two grounds of the appeal as “jurisdiction” and “futility”.

Jurisdiction

Lonsdale’s argument for the purposes of jurisdiction was that since automatic operation of insolvency set-off replaces the former cross-claims with a single claim for the net balance, there is no longer a claim (a dispute) under the construction contract, so that the adjudicator’s jurisdiction under section 108 (or the contract) is not engaged.  There is only a dispute about the net balance arising under the regime for insolvency set-off.

The Supreme Court dismissed Lonsdale’s cross appeal (thereby agreeing with the CoA) for the following reasons:

1. The jurisdiction of the adjudicator is defined by the terms of the reference in each particular case.  
2. However narrowly the referring party chooses to confine the reference, a claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a set-off.
3. The existence of a cross-claim operating by way of insolvency set-off does not mean that the underlying disputes about the company’s claim under the construction contract and (if disputed) the cross-claim simply melt away so as to render them incapable of adjudication.  They are not replaced by a dispute in the insolvency.

Futility

The conclusion of the CoA, against which Bresco appealed, was that the conduct of an adjudication in the context of insolvency set-off will, generally speaking, not lead to an enforceable award, and will therefore be an exercise in futility which the court can and ordinarily should restrain by injunction, before costs are thrown away upon a process which serves no useful purpose.

Reversing this decision, the Supreme Court allowed the appeal, in turn, dismissing Lonsdale’s injunction restraining the adjudication.  It was held that construction adjudication, on the application of the liquidator, is not incompatible with the insolvency process for the following reasons:

1. An insolvent company has both a statutory and contractual right to pursue adjudication as a means of resolving a dispute.  Only in exceptional circumstances would it be appropriate for the court to interfere with the exercise of that contractual or statutory right.  There were no exceptional circumstances in this case.
2. The ability of the liquidator to enforce the adjudicator’s decision does not undermine the utility of the adjudication. 
3. The role adjudication plays in dispute resolution is broad and not confined to dealing with interim payment disputes.  Construction adjudication is a mainstream method of ADR and is an end in its own right, even where summary enforcement may not be available.
4. The right to adjudicate mandated by the HGCRA 1996 is a valuable tool available for the administration of an insolvency process.
5. Enforcement of the adjudicator’s decision is a separate and distinct question which ought to be considered on a case by case basis at the time that enforcement proceedings are commenced, and not before.  In such circumstances, there is no need for an injunction, issues relating to enforcement can be dealt with if such an application is made.

Implications

The Supreme Court provided a strong endorsement of adjudication as “a mainstream dispute resolution mechanism” and specifically commented on the usefulness and practical utility of adjudication, with Lord Briggs observing that “adjudication does, in most cases, achieve a resolution of the underlying dispute which becomes final”.

This decision means that insolvency will no longer act as a hurdle to adjudication.  It marks the end of injunctions being threatened or launched to prevent insolvent parties from adjudicating on grounds of their financial position and will no doubt be welcomed by insolvency practitioners.

Overall, and particularly given that this Judgment has been handed down in the middle of the COVID-19 pandemic, it is expected that adjudicators will stand to see an increase in work from companies who, because of their insolvency, were previously unable to utilise adjudication. Creditors too will benefit from the ability of insolvent companies to employ adjudication and, in some instances, enforce awards.

When it comes to enforcement, whether or not an insolvent company is able to subsequently obtain summary judgment off the back of a successful adjudication will very much depend on the facts.  Insolvency practitioners should take note of the Supreme Court’s endorsement of the approach to security for costs as a condition of summary judgment on an adjudicator’s decision as developed in Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC).  It may transpire that liquidators who want enforceable decisions from adjudicators will need to be prepared to ring-fence the proceeds of enforcement, and to provide security in respect of the costs of the adjudication award and any adverse costs order in the enforcement proceedings or subsequent litigation.