Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25

Bresco, a company in liquidation, referred a construction dispute to adjudication against Lonsdale, which had cross-claims. The Supreme Court held that adjudication was compatible with insolvency set-off, confirming jurisdiction existed and refusing to restrain the adjudication by injunction as futile.

Facts

Bresco Electrical Services Ltd (“Bresco”) and Michael J Lonsdale (Electrical) Ltd (“Lonsdale”) were electrical contractors party to a sub-sub-contract dated 21 August 2014 for electrical installation works at 6 St James’s Square, London. The contract was a construction contract within the meaning of section 108 of the Housing Grants, Construction and Regeneration Act 1996 and contained compliant adjudication provisions.

In December 2014, Bresco ceased attending the site. In March 2015, Bresco entered creditors’ voluntary liquidation. In late 2017, both parties asserted claims against each other for repudiatory breach: Lonsdale claimed around £325,000 for the cost of completing the works; Bresco claimed around £219,000 for work done plus loss of profits.

On 18 June 2018, Bresco served a notice of intention to refer the dispute to adjudication, with Mr Tony Bingham appointed as adjudicator. Lonsdale issued Part 8 proceedings seeking a declaration that the adjudicator lacked jurisdiction and an injunction restraining the adjudication. Fraser J at first instance acceded to Lonsdale’s case on jurisdiction. The Court of Appeal reversed on jurisdiction but continued the injunction on grounds of futility. Bresco appealed and Lonsdale cross-appealed.

Issues

Two conceptually distinct issues arose:

1. Jurisdiction: Whether the automatic operation of insolvency set-off under rule 14.25 of the Insolvency (England and Wales) Rules 2016 extinguishes the underlying claims under the construction contract, thereby depriving an adjudicator of jurisdiction under section 108 of the 1996 Act.
2. Futility: Whether, even if jurisdiction exists, the court should restrain the adjudication by injunction because it would be an exercise in futility, the adjudicator’s decision being ordinarily unenforceable where insolvency set-off applies.

Arguments

Lonsdale

Lonsdale argued that insolvency set-off on the cut-off date replaced the cross-claims under the construction contract with a single claim for the net balance arising under the insolvency regime, so no dispute arose “under the contract” within section 108. It contended that the Fiona Trust liberal construction approach should not apply given adjudication’s statutory rather than consensual origin. It also relied on the “single dispute” rule, and submitted adjudication was incompatible with insolvency set-off and futile because any decision would not be summarily enforceable, producing wasted costs and burdening the TCC.

Bresco

Bresco argued that the underlying disputes under the contract survived insolvency set-off, that the liquidator had both statutory and contractual rights to adjudicate, and that adjudication served useful purposes beyond cash flow, including final resolution of disputes. Bresco drew analogy with the anti-suit injunction jurisdiction, submitting that only exceptional circumstances could justify restraining an adjudication.

Judgment

Lord Briggs (with whom Lord Reed, Lord Kitchin, Lord Hamblen and Lord Leggatt agreed) allowed the appeal and dismissed the cross-appeal.

Jurisdiction

The Court held that insolvency set-off does not strip an adjudicator of jurisdiction. Lord Briggs rejected an over-literal reading of Lord Hoffmann’s speech in Stein v Blake [1996] AC 243, noting that Lord Hoffmann himself acknowledged the cross-claims “must obviously be considered separately for the purpose of ascertaining the balance” and “are treated as if they continued to exist”. The underlying claims and cross-claims do not simply “melt away”.

Lonsdale’s argument “proves too much”: even a trivial undisputed cross-claim of £25 would, on its analysis, deprive the adjudicator of jurisdiction over a £300,000 disputed claim—a triumph of technicality over substance. The “single dispute” rule, as analysed by Akenhead J in Witney Town Council v Beam Construction (Cheltenham) Ltd [2011] EWHC 2332 (TCC), does not prevent adjudication where a cross-claim is raised as set-off defence, since the claim cannot be decided without consideration of the cross-claim. The law of insolvency set-off does not compel all disputes to be resolved in a single proceeding; liquidators have flexibility to use different resolution procedures for different disputes. By analogy with an undisputed right to arbitrate, the right to adjudicate likewise survives.

Futility

The Court rejected the Court of Appeal’s futility reasoning. Adjudication is not merely about cash flow but has become “a mainstream method of ADR, leading to the speedy, cost effective and final resolution of most of the many disputes that are referred to adjudication”. The process of proof in insolvency shares many features with adjudication, and an expert construction adjudicator may be better placed than a liquidator to resolve construction disputes.

Concerns about enforcement can be dealt with at the enforcement stage, as Chadwick LJ suggested in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2001] 1 All ER (Comm) 1041, by refusing summary judgment or imposing stays or undertakings (such as ring-fencing proceeds, as discussed in Meadowside). Summary enforcement will not always be inappropriate: the adjudicator may find no substance in the cross-claim, or may determine the net balance itself.

Cost-neutrality is built into the adjudication regime by Parliament and cannot justify restraint. The tight time limits mean adjudication would usually be completed before any opposed injunction could be determined. The insolvent company has a statutory and contractual right to adjudicate, and it would be “entirely inappropriate for the court to interfere with the exercise of that statutory and contractual right” save very exceptionally.

Implications

The decision confirms that companies in liquidation or distributing administration retain the right under section 108 of the 1996 Act to refer construction disputes to adjudication, notwithstanding insolvency set-off under the Insolvency Rules. The two statutory regimes are compatible.

The judgment affirms that adjudication has evolved beyond its original cash-flow rationale into a mainstream dispute resolution mechanism capable of delivering de facto final resolution. Issues concerning potential prejudice to the responding party where the liquidator seeks to enforce an adjudication decision are to be addressed at the enforcement stage, where the court may refuse summary judgment, grant a stay of execution, or accept appropriate undertakings such as ring-fencing.

The decision matters to insolvency practitioners, construction contractors, and funders of insolvency litigation, confirming adjudication as a legitimate route for liquidators to pursue construction claims. It also clarifies that injunctive relief restraining adjudication will rarely be appropriate. However, the court recognised limits: cross-claims wholly outside the construction contract may require the adjudicator simply to make a declaration as to the value of the claim, leaving unrelated matters for resolution elsewhere. Enforcement questions remain fact-sensitive and must be assessed on a case-by-case basis.

Verdict: Appeal allowed; cross-appeal dismissed. The Supreme Court held that an adjudicator has jurisdiction to determine a dispute referred by a company in liquidation notwithstanding the operation of insolvency set-off, and the injunction restraining the adjudication was discharged.

Source: Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25