Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 – the final chapter

The construction and insolvency sectors welcome the certainty provided in the eagerly awaited Supreme Court decision of Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25, the judgment for which was handed down on 17 June 2020 (available here).

This judgment answered important questions for both construction and insolvency professionals. In particular the question of whether a company in liquidation or administration can commence an adjudication with the decision confirming that a Responding Party opposing an adjudication brought by an insolvent company will no longer be able to obtain an injunction to stop the adjudication on the grounds of jurisdiction or futility. This reverses the first instance and Court of Appeal decisions and paves the way for insolvent companies to once again participate in adjudication.

Background

In 2014 Bresco carried out electrical works for Lonsdale. In 2015 Bresco entered insolvent liquidation. Both parties claimed against the other: Bresco alleged it was due sums for unpaid fees and lost profits, while Lonsdale argued it was owed additional costs to complete the works. In 2018 Bresco’s liquidators took steps to refer its claim to an adjudicator. Lonsdale applied for an injunction to prevent the adjudication continuing, arguing that the parties’ cross-claims cancelled each other out by the process of insolvency set-off meaning (i) there was no longer a dispute to be adjudicated under the construction contract (“the jurisdiction point”), and (ii) in any case, the adjudicator’s decision would not be enforceable until the liquidator calculated the net balance, thereby rendering an adjudication pointless (“the futility point”).

In the TCC, Fraser J acceded to Lonsdale’s case on lack of jurisdiction and granted the injunction. On appeal to the Court of Appeal, Bresco succeeded in reversing the TCC’s decision on jurisdiction; however, the injunction remained on the basis that since there could be no enforcement, it would be an exercise in futility.

What does the Supreme Court’s decision mean?

Giving the leading judgment (which was met with the unanimous approval of the Court), Lord Briggs held that the insolvency and adjudication regimes are not incompatible, confirming at [61] 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 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”.

Insolvency will not act as a hurdle to adjudication, nor will it serve as the killer blow it was once thought to be. Instead, as stipulated at [67] of the judgment, “the proper answer to all these issues about enforcement is that they can be dealt with… at the enforcement stage”. Whether or not an insolvent company is able to subsequently obtain summary judgment on the back of a successful adjudication will very much depend on the facts, but it will be the Court dealing with the summary judgment application that will be best placed to decide. In particular, that Court will be able to consider factors such as the question of the finality of the adjudication and security for any cross-claim the Respondent may wish to bring.

This is a sensible decision and one which will be welcomed by many who work in the insolvency and construction industries. Adjudicators stand to see an increase in work in relation to companies who, because of their insolvency, were hitherto unable to utilise adjudication. Creditors will benefit from the ability of insolvent companies to utilise adjudication and, in some instances, enforce awards.

It is also a particularly timely judgment, given that it has been handed down in the middle of the COVID-19 pandemic, which has severely impacted many industries, and the construction sector is no exception. Many construction companies who face insolvency as a result of the crisis will now no longer have to ignore a potentially good adjudication claim and can be reassured that it can be pursued even after they enter an insolvency process.

On the other hand, contractors that previously dismissed the claims of insolvent sub-contractors due to their dire financial circumstances may now see a revival of claims they had previously thought they had managed to avoid. Accordingly, claims that have been stalled may be reinvigorated by this decision.

Another useful point made by this decision is that it highlights that adjudication has, as was always the intention, become a mainstream form of alternative dispute resolution. Adjudication is often speedy (perhaps not best exemplified by this case!), cost-proportionate and the awards are generally difficult to challenge in Court. This decision will once again ensure adjudication remains a key feature of the construction landscape.

Edwin Coe is able to assist both insolvency and construction professionals. If you have any queries about this topic, please contact any member of the Construction Team or Restructuring & Insolvency Team.

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