Bresco v Lonsdale in the Supreme Court: Initial Reflections

The resolution of disputes by means of adjudication is a central feature of the construction industry. It has generated a substantial body of case law. However, issues of construction adjudication rarely go to the Supreme Court. Yesterday (17 June) the Supreme Court handed down its much-anticipated judgment in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd.[1] This deals with the inter-relationship between insolvency and adjudication, which is critical to the construction industry as it faces post-Covid-19 lockdown reality. Heard by a panel of commercial and chancery judges (Lords Reed, Briggs, Kitchin, Hamblen and Leggatt), the Supreme Court disagreed in part with the approach adopted by specialist construction judges in both the TCC and the Court of Appeal. The effect of the Supreme Court decision will be to allow more companies in liquidation to adjudicate.

Bresco concerns the relationship between the construction adjudication and payment regime under Part II of the Housing Grants, Construction and Regeneration Act 1996 ("the Construction Act") and the rules on insolvency set-off in liquidation now contained in rule 14.25 of the Insolvency (England and Wales) Rules 2016 ("IR 2016"), where a cross-claim is made either in an adjudication or where the parties have other claims that they could set up against each other. Two key issues arose for resolution in the Supreme Court:

• Jurisdiction: Whether the effect of insolvency set-off is such that there is only a single claim for the net balance, so that there is no longer a claim and therefore a dispute under the construction contract.
• Futility: Whether the conduct of an adjudication in the context of insolvency set-off will in general not lead to an enforceable decision and, therefore, lead to a waste of costs and lack a useful purpose.

In a single judgment given by Lord Briggs, the Supreme Court decided that there was jurisdiction and no futility in such an adjudication. It reversed the Court of Appeal's decision on the futility point and Fraser J's decision at first instance on both points.[2]

(1) Facts and procedural history:

As to the underlying dispute, in 2014, Bresco had carried out installation work for Lonsdale on a construction site at St James's Square in London. This was carried out under a construction contract which expressly incorporated paragraph 1(1) of the Scheme for Construction Contracts ("the Scheme") which provides that any party may give written notice of his intention to refer "any dispute arising under the contract to adjudication". In 2015, Bresco became insolvent and entered into voluntary liquidation. Lonsdale's position was that Bresco had abandoned the project prematurely, resulting in the need to spend £325,000 on replacement contractors. By contrast, Bresco alleged it was owed £219,000 in respect of unpaid fees plus damages for lost profits. In 2018, Bresco referred the latter claim to an adjudicator. Lonsdale objected on the basis that any such claim was cancelled out by Lonsdale's cross-claim by operation of insolvency set-off.

Fraser J in the TCC granted an injunction halting the adjudication (accepting both Lonsdale's jurisdiction and futility arguments). On appeal, the Court of Appeal (Coulson LJ, with whom Sir Andrew McFarlane P and King LJ agreed) continued the injunction restraining the further conduct of the adjudication on the futility ground only. Bresco appealed against the continuation of the injunction, while Lonsdale cross-appealed on the jurisdiction issue. Having heard this case remotely over 2 days on 22 and 23 April, the Supreme Court delivered a unanimous and speedy judgment.

(2) Nature of construction adjudication and insolvency regimes:

Two observations are important to the Supreme Court's approach and are relevant to both the jurisdiction and futility issues in this appeal.

First, Lord Briggs provided an account of the process of adjudication and its parallels and differences with arbitration and the insolvency set-off process. He provided a list of key features of construction adjudication.[3] It was described as (1) semi-compulsory; (2) not subject to exclusions of particular types of persons; (3) wide in jurisdictional terms (focussing on whether any dispute arises under a qualifying contract); (4) speedy given strict time limits; (5) often cheaper than litigation and arbitration; (6) reliant on independent and often expert adjudicators; and (7) as a corollary, less reliable than litigation and arbitration, but subject to de novo determination. Lord Briggs considered that "[t]he process of proof of debt in the insolvency regime shares a number of the essential features of adjudication", in terms of speed, cost and professional experience on the part of the liquidator, and stressed that the proof process is "relatively light-touch and inquisitorial, and the outcome is only provisionally binding".[4]

Second, another significant proposition which permeates Lord Brigg's entire judgment is that adjudication has finality in practice. He referred  to a "chorus of observations, from experienced TCC judges and textbook writers to the effect that adjudication does, in most cases, achieve a resolution of the underlying dispute which becomes final because it is not thereafter challenged."[5]

(3) Jurisdiction issue:

Lonsdale's argument was in summary that, upon the operation of insolvency set-off, all claims and cross-claims under the contract between the parties "ceased to exist, and were replaced by a single claim to the balance". As such, any dispute was one under the insolvency, not one arising under the contract within the meaning of section 108(1) of the Construction Act.[6]

Lonsdale's subordinate arguments in support of this were that (1) the liberal construction given to similar provisions in arbitration agreements set out in Fiona Trust and Holding Corpn v Privalov was inappropriate as adjudication was imposed by the Construction Act and arbitration was different in kind from adjudication,[7] (2) a narrow construction of the jurisdiction gateway was warranted to avoid the various respects in which adjudication was said to be incompatible with the accounting process required by insolvency set-off, and (3)  even if the disputes survived insolvency set-off, the requirement to resolve them all together in a single account could not be accommodated in an adjudication because of the "single dispute" rule, and the limited scope within adjudication for the determination of cross-claims.

Lonsdale's argument failed. In this short note we concentrate on two of the issues.

(i) Relevance of the arbitration analogy:

Lord Briggs considered that there is "little agreement" on whether the wide approach to construing arbitration agreements confirmed in Fiona Trust applies equally to adjudication. He stressed that in his view there was little to be gained by an extensive analysis of the closeness of the analogy between arbitration and adjudication for the purposes of applying or not applying Fiona Trust.[8] He therefore did not have to resolve this debate. He considered that the compulsory nature of adjudication in construction contracts was based on Parliament's assessment, following the Latham Report recommendations in 1993, that "construction adjudication was such a good thing that all parties to such contracts should have the right to go to adjudication", which pointed towards giving the phrase "a dispute arising under the contract" a broad meaning.[9] The fact that the right to adjudicate was statutorily guaranteed was a powerful consideration indicating the caution which the court ought to employ before preventing its exercise by injunction.

(ii) Incompatibility with insolvency set-off:

Instead, Lord Briggs decided the issue on the broader question of whether adjudication was compatible with the insolvency set-off regime, holding that it was.[10] The law of insolvency set-off does not compel the liquidator "to bring all disputes about the claims and cross-claims qualifying for set-off for resolution in a single proceeding".[11] Instead, it was perfectly appropriate to "untangle a complex web of disputed issues arising from mutual dealings between the company and a third party", including by adjudication.[12] Cross-claims could be resolved by the adjudicator, but a decision may have to be crafted with care if the cross-claim exhausts the value of the claim.[13] Moreover, as a matter of insolvency law, Stein v Blake was not authority for the proposition that cross-claims which fall within insolvency set-off cease to exist for all purposes after the commencement of the insolvency.[14] A party could still retain its rights as to dispute resolution, including arbitration and, importantly, adjudication.[15] He did accept that the Court of Appeal was correct to hold that if a liquidator was entitled to refer a dispute to arbitration, it would also be referable to adjudication.[16]

(4) Futility issue:

This second issue was dealt with more briefly.[17] That does not undermine its importance. Coulson LJ in the Court of Appeal had concluded that:[18]

"there is a basic incompatibility between adjudication and the regime set out in the Rules. The former is a method of obtaining an improved cashflow quickly and cheaply. The latter is an abstract accounting exercise, principally designed to assist the liquidators in recovering assets in order to pay a dividend to creditors…"

Coulson LJ further added that "a decision of an adjudicator in favour of a company in liquidation, like Bresco, would not ordinarily be enforced by the court".[19] The spectre of wasted expense on the adjudication and the burden on the TCC also weighed with the Court of Appeal.

Both the cashflow-based analysis of the purpose of adjudication and the views expressed on enforcement in the TCC and the associated costs and burden were rejected by Lord Briggs.

(i) Adjudication as a valuable dispute resolution method:

A dominant theme of Lord Briggs's judgment on the futility issue was his strong endorsement of the value of adjudication as a dispute resolution method in its own right. He acknowledged  how strongly Coulson LJ, and Edwards-Stuart J in Twintec Ltd v Volkerfitzpatrick Ltd, had endorsed this futility objection.[20] However, having found that there is jurisdiction, he held that "it would ordinarily be entirely inappropriate for the court to interfere with the exercise of that statutory and contractual right".[21] He accepted that cashflow is "one important purpose", but said "it is simply wrong to suggest that the only purpose of construction adjudication" is securing prompt interim payment.[22]

Building on his analysis of the features of adjudication, he concluded construction adjudication has come of age as "a mainstream method of ADR".[23] Earlier in the judgment, he had said it is a "conspicuously successful addition to the range of dispute resolution mechanisms available for use in what used to be an over-adversarial, litigious environment".[24] The short point, central to this decision, is that adjudication is believed to serve a real purpose in achieving de facto resolution of most disputes quickly and cheaply.[25] Having dealt with that key point, Lord Briggs dispensed with more technical submissions based on the nature of the insolvency proof process.[26]

(ii) Relationship with TCC summary enforcement regime:

The analysis of Lord Briggs on this aspect is quite cursory. He acknowledges the guidance by Chadwick LJ in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd as to why summary enforcement will often be unavailable, but did not rule out such relief in some cross-claim cases.[27] He also brushed aside concerns about the adjudicator over-valuing the net balance in favour of the insolvent company on the basis that this problem "may arise in any liquidation context".[28] He was content to conclude that these matters are properly resolved at the enforcement stage "if there is one", referring also to restraint on the part of the liquidator in seeking summary enforcement and the discussion of the role of undertakings in Meadowside Building Developments Ltd v. 12-18 Hill Street Management Co Ltd.[29]

In practice, therefore, Lord Briggs' speech might represent the difference between 'nearly never' (as was the result in the Court of Appeal and as discussed in Meadowside) and 'hardly ever' when it comes to enforcement of any resulting order for payment. There are still considerable hurdles for an insolvent company to overcome if it wants to refer a dispute to adjudication with the end goal of recovering a payment that is not vulnerable to a stay application pursuant to the principles set out in Wimbledon Construction Co 2000 Ltd v Vago as opposed to simply obtaining a declaration.[30]

Regarding the burden on the TCC, Lord Briggs highlighted that the speed and limited documents in an adjudication meant that if left to proceed it could usually be determined before an opposed injunction application. It was also preferable to deal with objections at the enforcement stage with the benefit of knowing the outcome of the adjudication.[31] The battleground will therefore be firmly at the enforcement stage and, in particular, in an application for stay of a summary judgment.[32] There is a well-stocked body of jurisprudence in the TCC on the circumstances in which a stay will be granted, with sharp distinctions between drawn between formal and informal insolvency, and between the various formal insolvency procedures.

(5) Initial comment:

There are a number of important points that arise from Lord Briggs' judgment.

• The scope of any dispute referred by an insolvent company will be open to challenge in a number of ways. It is not immediately clear how an adjudicator will be asked to deal with a payment notice dispute, where the responding party failed to refer to any defence in a payment notice or pay less notice, if section 110A of the Construction Act is not provided for in the contract. For solvent parties, the answer would be to bring a 'true value' adjudication, following payment: Grove Developments Ltd v S&T (UK) Ltd .[33] A paying party would be unenthusiastic to pay the insolvent company, and then bring a fresh claim (even if it could obtain permission to do so). This is one example of where Lord Briggs' optimistic approach to the jurisdiction of the adjudicator might lead to satellite disputes.
• As for the futility argument, postponing the futility debate from the interim injunction stage to the enforcement stage could mean that adjudication decisions could be properly rendered but be wholly unenforceable. In between, the costs of the adjudication for the resisting party would be irrecoverable. While it was surprising in theory that a contractual and statutory right to adjudication could be stifled by an interim injunction, as a matter of practice it meant that any concerns as to whether the adjudication itself would be an expensive waste of time were dealt with immediately.
• The approach taken in Meadowside and subsequent related cases will come under increasing scrutiny. One likely evolving issue will be the availability of funding for adjudications by funders. Arguments as to champerty were raised successfully in Meadowside. These points might well become even more familiar to practitioners in the future.

This post may not be relied upon as legal advice. 39 Essex Chambers' barristers are able to assist with any queries.

 

[1] [2020] UKSC 25. The most notable recent example is Aspect Contracts (Asbestos) Ltd v Higgins Construction plc [2015] UKSC 38; [2015] 1 WLR 2961. Another relevant decision about the interface between the payment mechanism in the Construction Act was Melville Dundas Ltd (In Receivership) v George Wimpey UK Ltd [2007] UKHL 18; [2007] 1 WLR 1136, where Lord Hoffmann made a number of comments about the law of insolvency set off insofar as it related to interim payments.

[2] The Court of Appeal's decision is reported at [2019] EWCA Civ 27; [2019] BCC 490. Fraser J's decision is reported at [2018] EWHC 2043 (TCC).

[3] At [20] – [26].

[4] At [32].

[5] At [15].

[6] See Lord Brigg's summary at [37].

[7] [2007] UKHL 40; [2007] 4 All ER 951 at [39].

[8] At [41].

[9] At [39] - [41].

[10] At [42] – [51].

[11] At [45] – [46].

[12] At [46].

[13] At [46] and [49].

[14] [1996] AC 243.

[15] At [51].

[16] At [52].

[17] At [54] – [70].

[18] At [37].

[19] At [45].

[20] [2014] EWHC 10 (TCC); [2014] BLR 150. At [58].

[21] At [59].

[22] At [60].

[23] At [20] – [26] and [60].

[24] At [10].

[25] At [13] and [60].

[26] At [61] and [62].

[27] [2001] 1 All ER (Comm) 1041 at [29]-[35]. At [64] – [65].

[28] At [66].

[29] [2019] EWHC 2651 (TCC). At [67].

[30] EWHC 1086 (TCC); 101 ConLR 99.

[31] At [70].

[32] At [64].

[33] [2018] EWCA Civ 2448, [2019] Bus LR 1847.