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Adjudications & insolvency – the Supreme Court’s view

This matter considers the impact of insolvency set-off on the process of adjudication within the construction industry.

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

Background information

This matter considers the impact of insolvency set-off on the process of adjudication within the construction industry. Insolvency set-off is a rule of insolvency law that applies when a company enters into liquidation and mutual debts exist between the company and one of its creditors. The rule entails that the debts are automatically cancelled out, leaving a single net balance owed in one direction. The liquidator is responsible for calculating the overall amount that the company owes or is owed.

The judgment, supporting adjudication jurisdiction in insolvency situations, comes at an important time when contractor insolvencies are likely to increase as a result of the current economic climate. The construction industry is likely to welcome the decision, given the adjudication frequently provides a cheaper and quicker alternative to full scale litigation.

Facts of case

This case involves Bresco Electrical Services Ltd (“Bresco”) and Michael J Lonsdale (Electrical) Ltd (“Lonsdale”), with both parties being electrical contractors. Bresco completed installation works for Lonsdale on a construction site in 2014, with Bresco entering into insolvent liquidation two years later. Both companies claimed that they were owed money by the other. Lonsdale claimed that Bresco had left the project unfinished and had been required to pay £325,000 for replacement contractors. Bresco argued that Lonsdale had not paid them for a certain amount of work that they had completed and that they were owed £219,000 in unpaid fees and damages for lost profits.

In 2018, Bresco presented their claim to an adjudicator. However, Lonsdale objected to the adjudication process and argued that a claim no longer existed, as they believed that their claims had cancelled each other out due to the insolvency set-off process (“the jurisdiction point”). They argued that the liquidator had to calculate the net balance in order for a decision by an adjudicator to be enforced and, therefore, there were no grounds for the adjudication to proceed (“the futility point”).

At first instance, Mr Justice Fraser accepted both of the points put forward by Lonsdale and granted an injunction to stop the adjudication. Bresco appealed this decision, which led to the Court of Appeal rejecting Lonsdale’s jurisdiction point but accepting the futility point and hence supporting the injunction. Bresco made another appeal to the Supreme Court and Lonsdale cross-appealed on the jurisdiction point.

Judgment

The Supreme Court provided their judgment on 17 June 2020. The justices unanimously allowed the appeal by Bresco and dismissed the cross-appeal by Lonsdale, allowing the adjudication to proceed.

In terms of the jurisdiction point, the Supreme Court held that the insolvency set-off did not mean that the claim or dispute under the construction contract no longer existed. Bresco could have still brought court proceedings in order to identify the value of the claim or have exercised a contractual right to pursue arbitration, so also was permitted to refer its claim to adjudication.

With regard to the futility point, the Court of Appeal had believed that adjudication and the insolvency set-off were incompatible as, if the adjudicator found in favour of Bresco, the award could not be enforced as it would interfere with the insolvency rule. However, the Supreme Court disagreed. Its reasoning was that as Bresco has a statutory and contractual right to adjudication it would be inappropriate for the court to interfere with this. Adjudication would provide a simple and proportionate method for Bresco’s liquidators to determine the net balance. Although it was possible that the courts may oppose the summary enforcement of the adjudicator’s decision, the adjudication would still prove of use to the liquidators.

Significance

This decision of the Supreme Court is highly significant for those in the construction industry, who are concerned with disputes involving an insolvent company. It is clear from this decision that adjudication remains a viable option even when the insolvency set-off rule applies. The decision comes at an important time as the impact of COVID-19 may likely result in certain construction companies facing insolvency and adjudication will provide a relatively quicker and cheaper method of resolving disputes involving insolvencies.

If this content raises any issues for you or you wish to discuss further please liaise with Paul Lowe, Partner at paul.lowe@weightmans.com or Camelia Nesari, Paralegal at camelia.nesari@weightmans.com.

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