Adjudication: A ‘new’ tool for liquidators and administrators

Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd

19 June 2020

Author: John Dugdale
Practice Area: Construction Law

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A decision of the Supreme Court (the final court of appeal for civil cases in the United Kingdom) has confirmed that an insolvent company has the right to refer a dispute to adjudication.

Background

The case arose out of electrical installation works in London. Both Bresco Electrical Services Ltd (Bresco) and Michael J Lonsdale (Electrical) Ltd (Lonsdale) were electrical contractors, and Lonsdale engaged Bresco to carry out works under a sub-subcontract in August 2014.

The engagement was evidently not a success. Bresco stopped attending site, alleging much later that it did so following a repudiatory breach of contract by Lonsdale. By March 2015 Bresco had went into creditors’ voluntary liquidation.

Both Bresco and Lonsdale made claims against each other. Lonsdale’s claim included for the cost of having Bresco’s contracted works done by another contractor. Bresco claimed for the value of works which it had carried out, and for which it had not been paid.

In June 2018 Bresco attempted to start an adjudication, seeking payment for work done. An adjudicator was appointed and Bresco referred the dispute to him.

Lonsdale responded by starting court proceedings, alleging that the adjudicator did not have jurisdiction to decide the dispute based on an alleged incompatibility between the statutory adjudication and insolvency regimes.

The High Court in England agreed with Lonsdale, and granted an injunction - a court order preventing any further progress in the adjudication.

An appeal by Bresco was successful in overturning the jurisdiction argument, but the injunction continued on the basis that, since there could be no enforcement, it would be an exercise in futility and a waste of time and money.

By the time the case made it to the Supreme Court, there were two key points for the Court to determine:

  1. Whether, since insolvency set-off replaced former cross-claims with a single claim for the net balance, there was no longer a claim, or therefore a dispute, under the construction contract. That would mean that the adjudicator’s jurisdiction is not engaged and there is only a dispute about the net balance arising under the regime for insolvency set-off.
  2. It was also argued that adjudication in the context of insolvency set-off will, generally speaking, not lead to an enforceable decision, and will therefore be an exercise in futility. That is partly because an adjudicator’s decision is only intended to be temporarily binding, and the courts will consider a stay of execution on enforcement in circumstances in where the successful party will probably be unable to repay the sums awarded to it if the adjudicator’s decision is overturned.

The Law - Adjudication

The Construction Contracts (Northern Ireland) Order 1997 (the 1997 Order) is the legislation that governs adjudication and payment in "construction contracts" in Northern Ireland.

Under the 1997 Order, a party to a "construction contract" has a statutory right to refer a dispute to adjudication at any time.

An independent adjudicator is appointed, and gives a decision within 28 days from referral of the dispute. That decision is then binding on the parties on an interim basis, this is until the dispute is finally resolved through litigation, arbitration or agreement.

The Law – Insolvency Rules

The Insolvency (Northern Ireland) Order 1989 (the 1989 Order) is the legislation that governs insolvency and liquidation in Northern Ireland.

Rules made under the 1989 Order make provision for automatic set-off of cross-claims between a company in liquidation and each of its creditors, giving rise to a single net balance between them, to be ascertained by the taking of an account.

Decision

In a unanimous judgment, the Supreme Court confirmed that an adjudicator does have jurisdiction to deal with a dispute referred by a company in liquidation.

The operation of the insolvency rules and the automatic set-off of cross claims does not mean that there is no longer a dispute under the construction contract. In the Court’s view, those underlying disputes do not “simply melt away so as to render them incapable of adjudication”.

The Court also confirmed that it was not futile to allow an adjudication commenced by an insolvent company to proceed. In this case, Bresco had a statutory and contractual right to adjudicate and it would ordinarily be inappropriate for the Court to interfere with the exercise of that statutory and contractual right.

Carson McDowell View

At a time when the importance of cash flow has been accentuated by the impact of COVID-19, and construction insolvencies may be on the increase, this judgment will be welcome news for insolvency practitioners.

Liquidators and administrators may still face arguments on the enforcement of adjudicator’s decisions, particularly in relation to whether a stay on of execution on enforcement is appropriate.

Adjudication, which was designed to be a speedy and cost effective dispute resolution process, will still provide a useful alternative to court proceedings for administrators and liquidators tasked with recovering debts owed to insolvent companies.

If you have any queries the Construction team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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