The Supreme Court decision in Bresco v Lonsdale (2020) – insolvency no bar to adjudication

This significant case addresses what was previously seen as a somewhat uneasy relationship between the adjudication regime for building disputes and the rule of insolvency law called insolvency set-off.

Background

Bresco and Lonsdale are electrical contractors. In 2014, Bresco carried out installation work for Lonsdale, and later that year Bresco ceased to attend the site. Subsequently, Bresco entered into liquidation. Each party claimed that they were owed money by the other. Lonsdale claimed that it was owed £325,000 from Bresco as Bresco had abandoned the project prematurely meaning Lonsdale had to pay for replacement contractors. Bresco, however, claimed that Lonsdale had never paid for some of the work Bresco had done, and that Lonsdale owed it £219,000 in unpaid fees plus damages for lost profits.

In 2018 Bresco’s liquidators took their claim of £219,000 to adjudication. Lonsdale objected to the adjudication and said that Bresco’s claim (if any) and Lonsdale’s cross-claim had cancelled each other out by the process of insolvency set-off.

What is the right to adjudicate?

The Housing Grants, Construction and Regeneration Act 1996 as amended in 2011, gives parties to a construction contract the right to refer contractual dispute for adjudication, at any time.

What is insolvency set-off?

The principle of insolvency set-off is that when a company enters into liquidation and there are mutual debts between the company and one of its creditors, the debts in each direction automatically cancel each other out. This ultimately leaves a single net balance owed to one of the parties. The liquidator of the company will calculate the balance and decide how much the company owes or is owed overall.

The tension between the two principles

Lonsdale argued that insolvency set-off applied here such that there was no longer any claim, or any dispute under the contract, and so adjudication was unavailable (“the jurisdiction point”).

In any case, the adjudicator’s decision would not be enforced until the liquidator calculated the net balance. Lonsdale therefore argued that this rendered the adjudication pointless. This argument was referred to as “the futility point”.

Mr Justice Fraser accepted Lonsdale’s argument on the jurisdiction point and granted an injunction to stop the adjudication. Following an appeal by Bresco, the Court of Appeal rejected the jurisdiction point but upheld the injunction on the basis of the futility point. Bresco appealed again to the Supreme Court. Lonsdale cross-appealed on the jurisdiction point.

The Appeal to the Supreme Court

The Supreme Court unanimously voted to allow Bresco’s appeal and dismissed Lonsdale’s cross-appeal meaning that the adjudication could happen.

The Supreme Court held that:

1. The ‘jurisdiction point’

The insolvency set-off between Bresco’s claim and Lonsdale’s cross-claim did not mean that any claims under the contract “simply melt away” so as to render them incapable of adjudication.

2. The ‘futility point’

While it remained possible that the courts would not permit summary enforcement of the adjudicator’s decision due to an insolvency process, that did not automatically mean that the adjudication would be futile.  For example, an adjudicator’s decision might provide a simple method for Bresco’s liquidators to determine the net balance due between the parties.

As Lord Briggs put it at paragraph 71 of the judgment:

“71. I have therefore reached the opposite conclusion from that of the Court of Appeal on the issue of futility. Construction adjudication, on the application of the liquidator, is not incompatible with the insolvency process. It is not an exercise in futility, either generally or merely because there are cross-claims falling within insolvency set-off, and there is no reason why the existence of such cross-claims can constitute a basis for denying to the company the right to submit disputes to adjudication which Parliament has chosen to confer.”

Lord Briggs also commented obiter that:

“consideration of costs and of burdens on the court militate against…admitting applications for injunctions to restrain adjudications before they have run their course.”

Implications

A great deal of attention has focused on this decision, given the view once held that a company in liquidation would be hard pressed to successfully bring an adjudication against its solvent contractual partner. This decision of the Supreme Court will undoubtably be welcomed by insolvent parties and practitioners, while parties responding to claims by insolvent parties should always be prepared to address and defend such claims in accordance with the contract (e.g. by pay less notices), rather than assume that these claims.

Juli Lau is a Senior Associate in the infrastructure department with a particular expertise in procurement and public infrastructure projects.

Francesca Gallagher is a paralegal currently supporting the construction and commercial contracts department.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any of the issues raised in this article, please contact us today by telephone or email  enquiries@sharpepritchard.co.uk.

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