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Big news for construction insolvencies – you CAN adjudicate

19 Jun 2020

 

On 11 September 2018, I wrote about the High Court decision in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd [2018] EWHC 2043 (TCC), in which it was held that a company in liquidation cannot refer a dispute to adjudication when that dispute includes determination of any claim for further sums said to be due to the referring party from the responding party.

The full article can be found here, however in brief, Bresco, the subcontractor, left the construction project in controversial circumstances with both parties alleging the other was in breach.  Bresco went into liquidation, and its liquidator commenced an adjudication for payment of works completed and damages for loss of profit.  Lonsdale argued that the adjudicator has no jurisdiction because Bresco was insolvent.

 

Lonsdale won, with the main reasoning being that, on liquidation, claims and cross claims cease to be capable of separate enforcement and are replaced by a single debt.  Essentially, the Insolvency Rules take precedence and the only claim to be determined is what the single debt is.  A further reason was that starting an adjudication would be futile because a court would inevitably grant an injunction to prevent it.

 

Not anymore.

 

Fast-forward two years and the Supreme Court has now handed down its decision under case number [2020] UKSC 25.  The court gave its complete support to the liquidator.  The two main points to note from the decision are:

 

1. The insolvency set-off process does not mean there is no longer a dispute under the contract, and as such, adjudication remains available as a statutory and contractual right.  The example given by the court explains this superbly: “It is common ground that a disputed claim by the company in liquidation for (say) £300,000 under a construction contract can be referred by the liquidator to adjudication. But suppose there is an undisputed crossclaim for £25. This would trigger insolvency set-off and on Lonsdale’s argument (as Ms Sinclair QC ruefully admitted) deprive the adjudicator of jurisdiction. True it is that the liquidator would have to give credit for £25 against the company’s claim, but in reality the only dispute would be as to the merits of that claim under the construction contract. To treat the existence of the undisputed cross-claim for £25 as a basis for depriving the company of its right to adjudication of its disputed claim would be a triumph of technicality over substance.”

 

2. Adjudication is not necessarily futile simply because of concerns about enforcement.  It is true that an adjudication  decision can be overturned by the court on a party seeking enforcement, but that is the case in any adjudication, and the court will make its decision having regard to the arguments made and the usual factors.  There is, for example, the possibility of providing security by way of ring-fencing the award, the provision of a third-party guarantee, or After The Event insurance.

Clearly this landmark decision will have an enormous impact – especially in current times – on insolvencies of construction companies.  Adjudication is a well-established, swift and cost-effective process that is now at the disposal of office holders.

 

For more information, please do not hesitate to contact Alexandra Withers.

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Short Richardson & Forth, 4 Mosley Street, Newcastle upon Tyne, NE1 1DE

Tel: +44 (0)191 232 0283  ·  Email: info@srflegal.co.uk

 

Short Richardson and Forth Solicitors Limited is a private limited company registered in England and Wales under company number 10572065, authorised and regulated by the Solicitors Regulation Authority No 637150.

Short Richardson and Forth Solicitors Limited is a private limited company constituted and run in accordance with the provisions of the Companies Act 2006. The term “partner” has been used to denote individual senior solicitors employed by Short Richardson and Forth Solicitors Limited.