CM September 2020

LEGAL MATTERS
SPARK OUT
A landmark case may have far-reaching
consequences for liquidators and creditors.
AUTHORS – Jackie Ray FCICM and Jennifer Guthrie
THIS case of Bresco
Electrical Services Ltd (in
liquidation) v Michael J
Lonsdale (Electrical) Ltd
concerned the right of a
company in liquidation to
have its claim relating to a construction
contract referred to an independent
adjudicator under the Construction
Adjudication Regime set up in 1996.
In 2014 Bresco had been contracted to
carry out electrical works for Lonsdale.
Lonsdale later claimed more than £300,000
from Bresco as compensation for failing
to complete work due under the terms of
the contract. Bresco claimed it was owed
some £219,000 by Lonsdale for services it
had provided under the contract. Bresco
had since gone into liquidation.
The liquidator referred the matter to
an Adjudicator, but Lonsdale claimed
that cross-claims could not be referred
to Adjudication where one company is
in liquidation, as insolvency legislation
(principally the 1986 Insolvency Act)
provides for cross claims in these
circumstances to be set-off between the
company in liquidation and its creditors,
resulting in a simple net balance owed.
Effectively, they argued, insolvency
set-off rendered the claims under the
contract void, so it could not be referred
to Adjudication.
PERCEIVED CONFLICT
Essentially, therefore, the case concerns
a perceived conflict between the
construction Adjudication regime and
the set-off provisions of the insolvency
legislation. Lonsdale applied to the
Technology and Construction Court for an
injunction stopping the adjudication on
that the basis that the set-off requirement
rendered the cross-claims replaced by a
single net balance, so there were no longer
any claims to be referred to an adjudicator,
and the adjudicator accordingly had no
jurisdiction (the ‘Jurisdiction’ point).
The Court accepted that argument and
granted Lonsdale’s injunction. Bresco
considered that the decision was wrong as
a matter of insolvency law and appealed.
In the Court of Appeal, the Jurisdiction
argument was overturned, but the Court
of Appeal introduced a new argument,
on the basis of ‘futility’. Effectively,
Court of Appeal said that Adjudications
by insolvent companies would be
futile since it is highly unlikely that any
award in favour of an insolvent company
would be enforced by a Court. Bresco then
appealed to the Supreme Court. Lonsdale
cross-appealed on the Jurisdiction point.
The Supreme Court decision was
unanimous. Lord Briggs delivered the
judgment that found in favour of Bresco
on both points. He emphasised that the
Construction Adjudication Scheme has
been highly successful as a means of
alternative dispute resolution, saving
huge sums in legal fees and valuable
time that would otherwise have been
spent in litigation through the Courts.
It is also evident that Adjudication
decisions are rarely challenged, as the
parties are generally prepared to treat
the Adjudication as binding. Or, as Lord
Briggs phrased it during the hearing,
the parties are generally not ‘sufficiently
unhappy’ to pursue matters further after
an Adjudication decision.
In upholding the Court of Appeal
judgment on the Jurisdiction point, Lord
Briggs said that the insolvency set-off does
not mean there is no longer any dispute
under the terms of the construction
contract, or that the respective claims
are invalidated. Bresco would still
have had the right to have the value
of its claim determined in Court or
through arbitration. It followed that the
claim could also be referred to
Adjudication.
In allowing Bresco’s appeal on the
Futility point, Lord Briggs made clear
that the starting point is that it would
ordinarily be inappropriate for a Court
to interfere with the exercise of a
statutory and contractual right. Indeed,
Adjudication in the circumstances was
an effective means for the liquidator to
determine the value of the net balance.
Enforcement of an Adjudication decision
by way of summary judgment, rather than
affecting the utility of the Adjudication
process, is properly to be addressed
at the enforcement stage, if there
is one.
Advancing the credit profession / www.cicm.com / September 2020 / PAGE 22