A company in liquidation may refer a dispute arising under a construction contract to adjudication even though the other party has cross-claims that engage insolvency set-off. The Supreme Court held that set-off does not remove the adjudicator’s jurisdiction and that the reference is not futile merely because summary enforcement may later be refused. Bresco’s appeal against the injunction was allowed and Lonsdale’s cross-appeal on jurisdiction was dismissed.
The contract, the claims and the courts below
Bresco undertook electrical installation work for Lonsdale under a construction contract. After work stopped, each party claimed that the other had broken the contract. Bresco subsequently went into liquidation.
In late 2017 each party alleged repudiatory breach by the other. Lonsdale’s claim included £325,000 odd for the cost of having the contracted works completed by another contractor. Bresco claimed the value of unpaid work and damages, and said that the completion works went beyond its contract. Both claims and cross-claims arose entirely under the contract, and each party denied the other’s claim in full. On 18 June 2018 Bresco gave notice of adjudication seeking £219,000 odd and damages for loss of profits. Mr Tony Bingham was appointed adjudicator and a referral notice was served.
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Lonsdale asserted that insolvency set-off had deprived the adjudicator of jurisdiction and issued Part 8 proceedings in the Technology and Construction Court for a declaration and an injunction. Fraser J held that there was no jurisdiction. The Court of Appeal held that jurisdiction existed, but continued the injunction on the ground that a decision could not ordinarily be enforced and that the adjudication would therefore be futile.
Why the adjudicator had jurisdiction
Lord Briggs, with whom Lord Reed, Lord Kitchin, Lord Hamblen and Lord Leggatt agreed, treated jurisdiction as a question of construction of section 108 and the contractual adjudication clause. A party may refer a dispute, including any difference, arising under the contract at any time. The right is not excluded merely because the referring party is a company in liquidation. It was common ground that Bresco’s claim would have been within the adjudicator’s jurisdiction had Lonsdale had no cross-claim capable of insolvency set-off.
Insolvency set-off, under what is now rule 14.25 of the Insolvency (England and Wales) Rules 2016, is mandatory and applies to mutual dealings. For some purposes the cross-claims are replaced by a single claim for the net balance, which is ascertained by taking an account. Lord Briggs held that this does not cause the underlying contractual disputes to disappear for every purpose. Disputed claims and cross-claims must still be resolved on their individual merits before the arithmetic of the account can be completed. A liquidator may pursue the company’s claim by litigation, arbitration or other dispute resolution, and the claim remains a claim under the contract. The same is true of the statutory and contractual right to adjudicate.
A cross-claim relied on as a set-off may be determined as a defence to the claim referred. The adjudicator cannot award a sum to the responding party, but may dismiss the referred claim and, as part of the reasons, declare the value of the cross-claim, leaving the creditor to prove in the liquidation. The so-called single-dispute rule did not produce a different result. Neither the 1996 Act nor the Scheme creates a jurisdictional rule that only one dispute may ever be referred. A defence by way of set-off forms part of the dispute referred, and a liquidator is not obliged to resolve every mutual dealing in one proceeding.
Why the adjudication was not futile
The Court of Appeal, in reasoning of Coulson LJ, had treated adjudication and the insolvency regime as incompatible. Adjudication was characterised as a quick and cheap cash-flow device, while insolvency set-off was an accounting exercise; a decision for a company in liquidation would not ordinarily be enforced where there was a cross-claim, so the reference would waste money and burden the Technology and Construction Court. The Court of Appeal relied on the width of the power to grant an injunction where it is just and convenient to do so.
Lord Briggs rejected that conclusion. Once jurisdiction exists, the company has a statutory and contractual right to adjudicate. An injunction may restrain a threatened breach, but it is ordinarily inappropriate to restrain the exercise of such a right. Cash flow, summarised in the industry by “pay now, argue later”, was an important purpose of the 1996 Act, but it was not the only one. Adjudication has become a mainstream dispute-resolution process and, in most cases, produces a resolution that becomes final because it is not later challenged. That utility does not disappear because the referring party is in liquidation.
Set-off does not make the process incompatible with insolvency. Where the mutual dealings arise under the construction contract, the adjudicator is well placed to resolve them, including a cross-claim advanced as a defence. Even where a cross-claim raises matters outside the contract, the adjudicator may still value the construction claim and leave the unrelated matter to another process. Difficulties of summary enforcement, explained in earlier authority, can be managed when enforcement is sought: judgment may be refused as a matter of discretion, or granted subject to a stay. Summary enforcement will not invariably be inappropriate, for example where the cross-claim is undisputed or worthless, or where the adjudicator can determine a net balance due to the company. Undertakings, such as ring-fencing, may also be relevant. Over-valuation is a risk in liquidation generally and is not a reason to treat adjudication as futile.
Costs did not justify the injunction. Parliament made this form of adjudication costs-neutral. A contractual joint and several liability for the adjudicator’s fees may leave the solvent party exposed, but the company’s share is a liquidation expense rather than merely a matter for proof. The speed of adjudication also made a pre-emptive injunction unattractive: the reference could often be completed more quickly and cheaply than an opposed injunction application, after which any enforcement question could be decided on known facts.
Verdict: The Supreme Court unanimously allowed Bresco’s appeal and dismissed Lonsdale’s cross-appeal. The adjudication could proceed. The Court did not decide the contractual claims or whether a future award would be summarily enforceable.
Source: Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25
