Bresco latest | Supreme Court rules that adjudication can be used to recover debts owed to an insolvent construction company

Bresco latest | Supreme Court rules that adjudication can be used to recover debts owed to an insolvent construction company

In what is likely to be a landmark case, the Supreme Court has handed down a highly anticipated judgment confirming that adjudication can be used as a dispute resolution mechanism to recover debts owed to an insolvent construction company.

What is adjudication?

In simple terms, adjudication is a fast-paced and efficient form of dispute resolution, with the process generally taking just 28 days from start to finish to secure an adjudicator’s decision.

In comparison to more traditional dispute resolution routes such as court proceedings or arbitration that can take a significant amount of time and resources to conclude, adjudication is a far more time and cost effective approach.

Bresco v Lonsdale

Over the past two years, there’s been significant development in the case law and much discussion around whether adjudication is a viable option where one of the parties to a dispute under a construction contract is insolvent.

The recent decision in Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd [202] UKSC 25 provides some long awaited clarity on the matter.

Background to the case

In 2014, Lonsdale engaged Bresco under a sub-sub contract to carry out electrical installation works.  The sub-sub contract was a construction contract to which section 108 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) applied.  This meant that the parties had a statutory right to refer any dispute under the contract to adjudication in addition to an express contractual right to do so as provided in the terms the sub-sub contract.

Bresco stopped attending site to carry out works in December 2014 on the basis that it had accepted an earlier repudiatory breach of contract by Lonsdale.  Bresco then went into creditors’ voluntary liquidation in March 2015.

Throughout 2017, both parties made claims against each other for damages due to the other’s breach of contract (including repudiatory breach of contract).  Both of the parties’ claims arose out of the sub-sub contract and both parties denied the other’s claims in their entirety.

In June 2018, Bresco served a notice of intention to refer a dispute to adjudication seeking payment of circa £219,000 for the value of the works carried out and loss of profit.  An adjudicator was appointed and the notice of referral served within the required timeframe.

Lonsdale argued that the adjudicator was “without jurisdiction” on the basis that the claim related to [or was seeking to frustrate?] the insolvency set-off.  Lonsdale went on to seek an injunction from the court restraining any further adjudication together with a declaration that the adjudicator lacked jurisdiction.

At first instance, the judge agreed with Lonsdale and an injunction was granted.  On appeal to the Court of Appeal, Bresco succeeded in its argument that the adjudicator did have jurisdiction.  However, the injunction remained in place on the basis that the adjudicator’s decision could not be enforced due to the insolvency status of Bresco and therefore the adjudication would be an “exercise in futility” and a waste of time and costs.

The claims didn’t end there, as Bresco appealed against the continued injunction whilst Lonsdale cross-appealed Bresco’s successful challenge on jurisdiction.

What does the Supreme Court ruling say?

The Supreme Court has allowed Bresco’s appeal (overturning the decision of the Court of Appeal) and dismissed Lonsdale’s cross-appeal.  This means that Bresco’s adjudication can now continue.

The Supreme Court has confirmed that an insolvent company has a statutory right (and, depending upon the terms of the contract, most likely a contractual right also) to pursue adjudication as a means of resolving a dispute arising at any time under a construction contract.  As such, it is recognised that it would be inappropriate for the court to interfere with the exercise of these rights and that injunctive relief will not generally be permitted to restrain an attempt to enforce such rights.

An insolvency event giving rise to insolvency set-off does not mean that the claims between the parties ‘simply melt away’ so that they cannot be the subject matter of an adjudication. The Supreme Court acknowledged that an insolvent company may still pursue claims by a contractual clause to arbitrate and it follows that an insolvent company may likewise pursue a claim by either a contractual or statutory right to adjudicate.  There is no reason why the two forms of dispute resolution should be treated differently.

The purpose and benefits of adjudication as a dispute resolution mechanism were considered and championed in some detail in this decision.  Importantly, the Supreme Court determined that the adjudication and the insolvency regimes are not incompatible as previously thought and that:

‘the process of proof of debt in insolvency shares many of the attractive features of adjudication, in terms of speed, simplicity, proportionality and economy, but adjudication has the added advantage that a construction dispute arising during an insolvency will be more amenable to resolution by a professional construction expert than by many liquidators.’

Furthermore, an adjudicator’s decision may be of real utility to a liquidator in the conduct of the liquidation and the process of set-off within the insolvency process as a whole.

On a final note, the Supreme Court confirmed that any issues surrounding the enforcement of an adjudicator’s decision (such as whether a liquidator should offer undertakings or ring-fence enforcement proceeds, as discussed in the earlier case of Meadowside) should properly be dealt with at the enforcement stage and should not hinder the commencement of an adjudication.

Read more about the ruling here.

Can we expect to see a flurry of adjudications?

This is a landmark decision, which makes it clear that an insolvent party may exercise its rights to commence an adjudication to resolve a dispute under a construction contract at any time.

We anticipate that there will be a flurry of adjudications commenced by insolvency practitioners on behalf of insolvent construction companies seeking to recover outstanding debts owed under construction contracts.  Solvent counterparties to such contracts should be alive to this fact and mindful of how they negotiate and engage with insolvency practitioners on post-insolvency matters.

It will be interesting to see the extent to which proceedings are commenced to either enforce or challenge an adjudicator’s decision where one of the parties is insolvent.

If and where enforcement proceedings become necessary, then the matter of whether an insolvent company can provide sufficient security will need to be considered but this should not impact upon the adjudication proceedings.

What are my next steps?

If you’re an insolvency practitioner

Adjudication can provide a quicker and more cost-effective route to recover debt. If you’re considering going down the adjudication route then our construction disputes team can help guide you through the process and help you to secure the best possible outcome.

Our adjudication experts are offering a free, no obligation, consultation session, to review your case and assess whether adjudication is the right way forward for you. We’re also offering a shared risk approach, so if you don’t win your case, we share the costs with you.

If you’re on the receiving end of a claim

If you’re on the receiving end of an insolvent contractor pursuing a claim then we can advise you on how best to protect your commercial position.

Contact us
If you’d like to discuss what the Supreme Court ruling means for helping you recover debt, or have concerns around the implications it may have, then contact Kate Onions or Laura Taylor in our construction disputes team.

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