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An Exercise in Utility: Liquidators Adjudicating Construction Disputes

Introduction

In its decision in the case of Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd[1], the Supreme Court has decided that a company in liquidation (acting by its liquidator) has a statutory and contractual right to refer a dispute under a construction contract to adjudication and that it will ordinarily be inappropriate for the court to interfere with the exercise of that statutory and contractual right.

Background

At first instance, the Claimant, Lonsdale, sought a permanent injunction and declarations prohibiting the defendant, Bresco, which was in insolvent liquidation, from bringing a claim to adjudication.  Lonsdale argued that there was no claim to adjudicate because the process of insolvency set-off imposed by Rule 14.25 of the Insolvency Rules 2016 operated to cancel out both Bresco’s claim and Lonsdale’s cross-claim under the contract.  It also argued that any decision in favour of the liquidated company would not be enforced by the court anyway and therefore it would be futile to permit the adjudication to go ahead.

Fraser J accepted both arguments and granted an injunction. The Court of Appeal allowed Bresco’s appeal in relation to the jurisdiction point but upheld the decision to grant the injunction on the futility point. Bresco appealed to the Supreme Court on the futility point and Lonsdale cross-appealed on the jurisdiction point.

The Supreme Court

The Supreme Court unanimously allowed Bresco’s appeal and dismissed the cross appeal. Lord Briggs gave the leading judgment with which Lord Reed, Lord Kitchin, Lord Hamblen and Lord Leggatt agreed.

In relation to the jurisdiction point, Lord Briggs said that ‘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’ [47]. There was no dispute that Bresco could have brought court proceedings or gone to arbitration to determine the value of its claim and, that being so, it followed that it could also refer its claim to adjudication.

Lord Briggs was also unimpressed by the argument that it would be futile to allow the adjudication to proceed in circumstances where it was unlikely that any decision would be enforced. He said that the starting point was that the insolvent company has both a statutory and a contractual right to pursue adjudication as a means of achieving resolution of any dispute arising under a construction contract to which it is a party, even though that dispute relates to a claim which is affected by insolvency set-off. That being so, it would ‘ordinarily be inappropriate’ for the court to interfere with the exercise of that statutory and contractual right [59]. He said that:

“Injunctive relief may restrain a threatened breach of contract but not, save very exceptionally, an attempt to enforce a contractual right, still less a statutory right.”

Having noted that adjudication provided a speedy, cost effective and often final resolution of many disputes, Lord Briggs went on to say that there was no basis for the conclusion that this beneficial means of dispute resolution was incompatible with the insolvency process or with the requirement to deal with cross-claims in insolvency by set-off, ‘still less an exercise in futility’ [61]. Lord Briggs cited a number of situations in which the adjudicator’s resolution of a construction dispute may in fact be of very real utility to the conduct of the process of set-off within the insolvency process as a whole.

Lord Briggs said that any issue about enforcement could be dealt with at the enforcement stage, if there is one. In those circumstances, there is no need for an injunction, still less a need to prevent the adjudication from running its speedy course as a potentially useful means of ADR in its own right [64].

Comment

This is the result for which we have long contended. In our recent paper for the SCL, we argued that, even though it might be unlikely that the adjudicator’s decision will be enforced, that does not necessarily render the decision futile[2].

What is important to note is what Lord Briggs said about summary judgment not being inappropriate in every case. He gave a number of examples, including the case where there is no dispute about the cross-claim, and the claim is found to exist in a larger amount, so that there would be no reason not to give summary judgment to the company for the balance in its favour. Similarly, where the cross-claim is found to be of no substance or where, even if it is of some substance, the adjudicator is able to determine both the claim and cross-claim and therefore the amount due as the net balance.

Ultimately, however, the Supreme Court recognised that the appropriateness of enforcement will depend upon the circumstances in each case. It recognised, for example, that, in many cases, the liquidator will not seek to enforce the decision summarily, presumably because enforcement is not necessary to establish the net balance due to the company.

The Supreme Court also suggested that, in other cases, the liquidator might offer ‘appropriate undertakings’, such as to ring-fence any enforcement proceeds, along the lines discussed in Meadowside Building Developments Ltd v 12-18 Hill Street Management Co Ltd [2019] EWHC 2651 (TCC). The Supreme Court also observed that ‘where there remains a real risk that the summary enforcement of an adjudication decision 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 judgement’ [67].

As a result of this decision, it seems likely that there will be both a significant increase in the number of adjudication claims made by liquidators and also a corresponding increase in the number of contested enforcement hearings, with a number of respondents no doubt trying to persuade the court that enforcement will deprive them of their right to have recourse to the company’s claim as security. It remains to be seen in what circumstances the court may be persuaded that summary judgment is appropriate and/or to what extent it will either insist on undertakings or impose conditions consistent with the decision in Meadowside.

David Sears QC

Crispin Winser

Joshua Brown

 

[1]              [2020] UKSC 25

[2]              ‘When Insolvency Trumps Rough Justice’ January 2020



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