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

A company in liquidation retains its statutory and contractual right to refer a dispute arising under a construction contract to adjudication. Insolvency set-off does not extinguish the underlying claims or convert them exclusively into an insolvency dispute.

An adjudicator may determine set-offs and cross-claims raised as defences, although the adjudicator cannot make an affirmative monetary award to the respondent. Adjudication is a useful dispute-resolution process in its own right. Its utility does not depend upon immediate enforcement.

The court should not restrain adjudication merely because insolvency set-off applies or summary enforcement may be unavailable. Any risk to the respondent should ordinarily be addressed at the enforcement stage, through refusal of summary judgment, a stay of execution or suitable safeguards.

Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd concerned cross-claims arising from an electrical works sub-sub-contract. Bresco entered creditors’ voluntary liquidation and later referred its claims for unpaid work and damages to adjudication. Lonsdale asserted substantial contractual cross-claims and sought a declaration that the adjudicator lacked jurisdiction and an injunction restraining the adjudication.

Fraser J granted relief on jurisdictional grounds. The Court of Appeal, in [2019] EWCA Civ 27, held that the adjudicator had jurisdiction but continued the injunction because an award in favour of an insolvent company would ordinarily be unenforceable and the adjudication would therefore be futile.

Bresco appealed against the injunction. Lonsdale cross-appealed on jurisdiction. The central issues were whether insolvency set-off extinguished the underlying contractual disputes for adjudication purposes and whether anticipated enforcement difficulties justified restraining the adjudication.

1. The appeal was allowed and the cross-appeal dismissed. Lord Briggs delivered the judgment, with which Lord Reed, Lord Kitchin, Lord Hamblen and Lord Leggatt agreed. The injunction restraining the adjudication could not stand.

2. Section 108 of the Housing Grants, Construction and Regeneration Act 1996 gives every party to a construction contract the right to refer a dispute arising under the contract to adjudication at any time. The provision contains no exclusion for a company in liquidation. Its statutory character favours recognition of the right and requires caution before the court interferes by injunction.

3. Insolvency set-off under rule 14.25 of the Insolvency (England and Wales) Rules 2016 does not cause the underlying claims and cross-claims to disappear for all purposes. Although set-off produces a single net balance, the individual claims must be resolved on their merits before that balance can be calculated. Contractual rights concerning dispute resolution therefore survive. The adjudicator had jurisdiction, and the cross-appeal was dismissed.

4. A reference of a contractual claim gives the adjudicator jurisdiction to decide every defence to it, including a cross-claim relied upon as a set-off. A clear link exists where the referred claim cannot be determined without deciding the cross-claim. In that situation they may constitute one dispute. The adjudicator may dismiss the company’s claim or declare the value of the cross-claim, but cannot make an affirmative monetary award to the respondent, which must prove for any balance in the liquidation.

5. Adjudication is not confined to maintaining cash flow through immediate payment. It is a mainstream, speedy and economical form of alternative dispute resolution which frequently achieves the practical final resolution of construction disputes. It may therefore serve a valuable purpose even where its outcome cannot immediately be enforced.

6. The reasoning in Twintec v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC) did not justify restraining an adjudication merely because an insolvent company brought it and cross-claims engaged insolvency set-off. Interference with the exercise of a statutory and contractual right requires exceptional justification, which was absent.

7. Enforcement difficulties should ordinarily be addressed if and when enforcement is sought. Following the approach in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd, the court may refuse summary judgment, grant judgment with a stay, or consider undertakings which ring-fence the proceeds. Enforcement may nevertheless be proper where the adjudicator determines a net balance for the company and the respondent’s set-off rights are adequately protected.

1. United Kingdom Supreme Court: In Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25, unanimously allowed Bresco’s appeal against the injunction and dismissed Lonsdale’s cross-appeal on jurisdiction.
2. Court of Appeal: In [2019] EWCA Civ 27, held that the adjudicator had jurisdiction but continued the injunction because the adjudication was considered futile in view of anticipated enforcement difficulties.
3. Technology and Construction Court: Fraser J held that the adjudicator lacked jurisdiction and granted declaratory and injunctive relief restraining the adjudication.