Supreme Court overturns incompatibility of adjudication and insolvency regimes


Our team: Digby Hebbard


The Supreme Court today issued its judgment in Bresco v MJ Lonsdale and in doing so, has resolved the apparent conflict between the statutory adjudication and insolvency regimes.  In short, the Supreme Court decided there was no incompatibility between the two, which paves the way for liquidators to pursue claims through adjudication.

The decision is likely to have far-reaching implications given the anticipated increase of insolvencies amongst the construction sector.  It also appears to have created a new basis for courts to refuse to summarily enforce adjudicator’s decisions.

Broadly, the background is that Lonsdale sub-contracted Bresco to carry out mechanical and electrical works. Bresco abandoned the works and went into liquidation in 2015.  In 2017, Bresco and Lonsdale exchanged details of their respective claims.  In June 2018, Bresco commenced an adjudication against Lonsdale.

Lonsdale immediately referred the matter to the TCC.  In July 2018, Mr Justice Fraser held that the adjudicator did not have jurisdiction to decide the dispute because as Bresco was in liquidation and Lonsdale had asserted cross-claims, the dispute between the parties was not one under the underlying construction contract, but rather under the Insolvency Rules for the net balance.  Fraser J also granted a permanent injunction restraining the adjudication on the basis that it was futile to permit the adjudication to continue where the decision could not be enforced (because of Bresco’s insolvency).

Bresco appealed.  In their decision of January 2019, the Court of Appeal overturned the TCC on jurisdiction and upheld the injunction – their reasoning on the latter was that there was a basic incompatibility between the adjudication and insolvency regimes because an adjudication decision in favour of the company in liquidation where there was a cross-claim was incapable of enforcement by the court (and therefore it was just and convenient to continue the injunction).

Bresco then appealed the injunction point (and Lonsdale cross-appealed on jurisdiction) to the Supreme Court.

Prior to the Supreme Court’s decision, it was evident from two intervening TCC decisions considering the Court of Appeal’s decision that the interplay between insolvency and adjudication was a prevalent issue and that the Courts were prepared to permit adjudications brought by insolvent companies, where there were cross-claims, to continue, subject to the insolvent company effectively providing security for the respondent’s cross claim (Meadowside Building Developments v 12-18 Hill Street Management Company [2019] EWHC 2651 and Balfour Beatty Civil Engineering v Astec Projects Ltd [2020] EWHC 796).

The Supreme Court considered the purposes and particular characteristics of the statutory adjudication and insolvency set-off regimes.  The Supreme Court upheld the Court of Appeal’s finding on jurisdiction but overturned the finding on the injunction.  The underlying reasoning was that the insolvency and adjudication regimes are not incompatible.

As to jurisdiction, the Supreme Court did not accept that companies in liquidation should be excluded from a statutory right to adjudicate where cross-claims had been asserted by the respondent.  The Court decided that the underlying dispute under the construction contract is not replaced by a dispute in the insolvency.

The Supreme Court did appear to accept that the adjudicator’s jurisdiction will extend to everything that may be advanced against it by way of defence and would therefore include every cross-claim, whether or not the same are contemplated in the Notice of Adjudication.

On the injunction point, the Supreme Court acknowledged that it was overturning judgments from two judges with considerable experience in construction disputes.  However, the Court decided that it would be inappropriate for courts to interfere with the statutory right of insolvent companies to adjudicate.

Perhaps the key part of the judgment was that although the Court found that in these circumstances adjudicators will have jurisdiction and injunctions were not appropriate, these factors did not however affect the court’s discretion when it came to deciding whether to enforce the adjudicator’s decision.  The material extract from the judgment is “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”.

The Supreme Court indicated in this regard that enforcement could be subject to the liquidator providing undertakings such as ring-fencing any enforcement proceeds.   So, it would appear that the matters raised in connection with applications for injunctions in the cases post the Court of Appeal could now be relevant to the summary judgment stage.

It will be interesting to see how the lower courts approach enforcement claims in light of this decision.

The implications of this decision should not be under-estimated.  Likely short-term consequences could include:

    • A revival of adjudications put on hold pending this decision;
    • A spike in adjudication claims brought on behalf of companies in liquidation;
    • “Dispute creep” in such adjudications as respondents bring cross-claims;
    • Respondents requesting undertakings and security from liquidators; and
    • Increase in adjudication enforcement challenges.

Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale Ltd v [2020] UKSC 25.

Fladgate LLP were instructed by Michael J Lonsdale Ltd.

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