UK Supreme Court upholds adjudication for insolvent companies

In the recent decision of Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited, the UK Supreme Court has overturned the Court of Appeal in upholding the practicality of adjudication by insolvent companies.

The appellant (Bresco) entered into liquidation and subsequently sought to refer a dispute under the construction contract to adjudication. At first instance, Fraser J granted Lonsdale (the respondent) an injunction restraining the adjudication. Fraser J relied on the principle of insolvency set off (which acts to extinguish the parties’ claims and counterclaims and replace them with a single claim) to decide that the adjudicator did not have jurisdiction to decide the dispute (see our discussion of the lower court’s decision in our blog).

On appeal, Coulson LJ disagreed with Fraser J, but upheld the injunction. He decided that the adjudicator did in fact have jurisdiction over the dispute. However, the conduct of an adjudication in the context of insolvency set off would not ordinarily lead to an enforceable award and was therefore an “exercise in futility” (see our discussion of the Court of Appeal’s decision in our blog).

Following an appeal to the Supreme Court, Lord Briggs (on behalf of the court) overturned the Court of Appeal’s decision (full judgment available here (PDF)).

Jurisdiction

The Supreme Court agreed with the Court of Appeal that the dispute fell within the jurisdiction of the adjudicator. It was a dispute under the construction contract. The existence of insolvency set-off between Bresco’s claims and Lonsdale’s cross-claims did not mean that the claims ceased to exist, or that they were replaced by a dispute in the insolvency.

Futility

Coulson LJ’s decision in the Court of Appeal was based on his view that there was a basic incompatibility between adjudication and the insolvency rules. 

The Supreme Court rejected that view. They reasoned that Bresco had a statutory and contractual right to adjudication, which it would ordinarily be inappropriate for the court to interfere with. 

Lord Briggs referred to the fact that very few adjudication decisions were challenged in court and most lead to a speedy, cost effective and final resolution of the dispute by a professional construction expert. Adjudication was designed to be a method of alternative dispute resolution (ADR) in its own right. 

It was therefore no answer to the utility of adjudication that the adjudicator’s decision is unlikely to be summarily enforced (and, in fact, Lord Briggs considered that summary enforcement would not be inappropriate in every case). Instead, the proper course was for these issues to be considered at the enforcement stage, if there was one.

Impact on the construction sector

This decision gives insolvency practitioners another bow in their armoury to untangle complex webs of disputed issues arising from mutual dealings between insolvent companies and third parties. It entitles them to pick the most suitable forum for quantification and recovery, be it adjudication, arbitration or litigation. 

The advantage of adjudication is that construction disputes can be resolved expeditiously by construction experts, who will be better placed than many insolvency practitioners to resolve complex construction issues.

This decision is timely in the context of the financial difficulties which are currently being caused in the construction sector by the COVID-19 pandemic.