08/07/2020
On 17 June 2020, the Supreme Court handed down judgment in the case of Bresco Electrical Services Limited v Michael J Lonsdale (Electrical) Limited reversing the Court of Appeal’s decision and holding that the two regimes of insolvency and adjudication are compatible.
This decision follows a series of cases over the past two years grappling with the issue of compatibility between (a) the adjudication regime for building disputes and (b) a rule of insolvency law called insolvency set-off, namely:
Bresco had carried out works for Lonsdale. Bresco entered into creditors’ voluntary liquidation, and later served an adjudication notice on Lonsdale. Lonsdale claimed that the adjudicator did not have jurisdiction to hear the dispute, as Bresco’s claim had been extinguished and replaced by the process of “net balancing” under the Insolvency Rules (i.e. where the liquidator considers all claims and cross-claims between the company and each creditor, and decides a single net balance payable from one to the other). Lonsdale applied for an injunction to stop the adjudication on this basis. The judge in the Technology and Construction Court (TCC) granted the injunction to stop the adjudication, agreeing that the adjudicator had no jurisdiction.
The Court of Appeal disagreed with the TCC on the jurisdiction point, holding that claims between the parties are not extinguished and could play their part in the underlying calculation of any net balance. However, it considered that although adjudication was technically possible, it could only ever proceed in “exceptional circumstances”. The Court of Appeal considered that the two regimes of insolvency and adjudication were “fundamentally incompatible”, because an adjudication would not generally provide the ultimate mutual account between the parties. In particular, in circumstances where there are cross-claims, it would be unjust to enforce any adjudication decision against the solvent party, because any money passing to the insolvent party would likely be irrecoverable even if the solvent party did later succeed in its cross-claim. The adjudication was therefore “an exercise in futility”.
The Court of Appeal held therefore that the TCC had been right to grant the injunction preventing the adjudication on the basis of the futility point. It would only be in exceptional circumstances that a company in insolvent liquidation (and facing a cross-claim) could refer a claim to adjudication, succeed in that adjudication, obtain summary judgment and avoid a stay of execution. Bresco appealed to the Supreme Court.
In the meantime, the court in Meadowside gave some guidance on what the “exceptional circumstances” referred to in Bresco might be. Broadly, these are: (1) where the adjudication determines the final net position between the parties under the relevant contract and (2) where satisfactory security is provided, both in respect of sums awarded in the adjudication and the solvent party’s costs.
In Balfour Beatty, the court considered the Meadowside exceptions, and confirmed that multiple adjudications on different contracts between the parties can proceed, providing those adjudications would altogether tie up all mutual dealings between the parties (thereby satisfying the first Meadowside exception). The court also set a number of conditions upon which the adjudications would be allowed to proceed, including provisions for security.
Just when we thought the position was clear, the Supreme Court has now reversed the Court of Appeal’s decision in Bresco. The position as it now stands is as follows:
The Supreme Court judgment in Bresco may come as a surprise for construction practitioners given the recent case law. However, it is perhaps not as surprising for insolvency practitioners who had been prevented from utilising a useful mechanism for quickly and cheaply resolving disputes otherwise afforded to solvent companies. As Lord Briggs noted in the judgment “adjudication has the advantage that a construction dispute arising during an insolvency will be more amenable to resolution by a professional construction expert than by many liquidators”.
We anticipate that the impact of this judgment will be felt by the industry fairly quickly in the current climate. As more construction companies face insolvency, those further up the chain are likely to be engaged in a greater number of adjudications. Whether those decisions are enforced, however, will remain to be seen.
Read others items in Construction and Engineering Brief - July 2020
Related items:
