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

The Supreme Court held that a company in liquidation does not lose the statutory and contractual right to refer disputes arising under a construction contract to adjudication simply because cross-claims between the parties trigger insolvency set-off under rule 14.25 of the Insolvency (England and Wales) Rules 2016. The court construed section 108 of the Housing Grants, Construction and Regeneration Act 1996 and the Scheme for Construction Contracts to confer jurisdiction on an adjudicator to determine disputes that arise under the contract, including matters relied upon by a respondent as set-off in defence. The existence of insolvency set-off does not render adjudication inherently futile and therefore is not ordinarily a ground for an injunction restraining the adjudication; enforcement and related interlocutory concerns are to be dealt with at the judgment/enforcement stage.

Background and facts

Bresco (in liquidation) and Lonsdale were parties to a sub‑sub‑contract for electrical works. Bresco stopped work in December 2014 and entered liquidation March 2015. Both parties later asserted repudiatory breaches and made rival contractual claims arising from the Contract. In June 2018 Bresco (acting by its liquidator/agent) referred disputes to adjudication seeking payment and damages. Lonsdale contended that insolvency set-off replaced the separate contractual claims with a single claim in the liquidation and that this either deprived the adjudicator of jurisdiction or rendered the adjudication futile; it issued Part 8 proceedings in the TCC seeking a declaration that the adjudicator lacked jurisdiction and an injunction restraining the adjudication.

Procedural posture

• First instance: Fraser J (TCC) found lack of jurisdiction.
• Court of Appeal: [2019] EWCA Civ 27 held the adjudicator had jurisdiction but continued an injunction on grounds of futility.
• Supreme Court: this appeal against continuation of the injunction and cross‑appeal on jurisdiction.

Nature of the claim/application

Bresco sought to proceed with adjudication of contractual disputes; Lonsdale sought declaratory relief that the adjudicator lacked jurisdiction and an injunction to restrain the adjudication.

Issues framed by the court

1. Whether insolvency set‑off (IR 14.25) meant that disputes under the construction contract no longer existed for the purposes of an adjudicator's jurisdiction under section 108 of the 1996 Act.
2. Whether, even if jurisdiction existed, an adjudication in that context would be futile and thus justifying injunctive restraint.

Reasoning and resolution

The court analysed the purposes and mechanics of both statutory adjudication and insolvency set‑off. On jurisdiction, the court concluded that disputes which arise under the construction contract remain capable of adjudication even where cross‑claims fall within the insolvency set‑off regime; set‑off operates to produce a net balance for the liquidation but does not obliterate the underlying contractual claims for all purposes, and a valid adjudicator may determine claims and consider cross‑claims pleaded as defences. The court rejected a narrow construction of section 108 and the idea that adjudication and insolvency set‑off are inherently incompatible.

On futility, the court held that perceived enforcement difficulties, costs issues or burdens on the court are not generally sufficient to justify an injunction preventing adjudication. Practical concerns about summary enforcement can and should be addressed at the enforcement stage (for example by refusal of summary judgment, stays, undertakings or other directions). Adjudication remains a useful and permissible form of dispute resolution in the insolvency context and is not, as a rule, an exercise in futility.

The court therefore dismissed the cross‑appeal on jurisdiction and allowed the appeal against the injunction, restoring the availability of adjudication subject to ordinary enforcement controls.

Appeal allowed and cross‑appeal dismissed. The Supreme Court held that (1) an adjudicator has jurisdiction under section 108 to determine disputes arising under a construction contract even where cross‑claims engage insolvency set‑off under IR 14.25, and (2) adjudication in that context is not inherently futile so as to justify injunctive restraint; enforcement and interlocutory concerns should be addressed at the enforcement stage.

First instance: Fraser J (TCC) – judgment 31 July 2018 (trial 11 July 2018) finding lack of jurisdiction. Court of Appeal: [2019] EWCA Civ 27 – allowed jurisdiction point but continued injunction on futility grounds. Supreme Court: [2020] UKSC 25 – appeal allowed; cross‑appeal dismissed.