<i>Bresco v Lonsdale</i> [2020] <scp>UKSC</scp> 25 [case comment]

The Supreme Court in Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020]1 gave its judgement in a case that clarified the relationship between adjudication and insolvency set-off. Shortly afterwards, the Court of Appeal in John Doyle v Erith2 doubted the Supreme Court's reasoning on the main issues. The central issue in Bresco was whether or not an insolvent company could seek adjudication in relation to cross-claims, which would fall subject to the mandatory rules regarding insolvency set-off. The case raised important questions about the compatibility of the statutory adjudication regime for construction disputes with the mandatory operation of insolvency set-off. The Supreme Court's judgement appeared to support the principles of party autonomy and freedom of contract in holding that insolvent companies do enjoy the right to pursue adjudication, even against respondents with a cross-claim. This decision challenged the construction industry's conventional understanding of the matter where, upon bankruptcy, the insolvency rules took precedence over the adjudication regime and hence one could not adjudicate with an insolvent company.3 In Bresco, the court noted that adjudication could provide key practical benefits, which may help liquidators dispose of assets, and hence adjudication was seen as a valid exercise of rights for insolvent companies and not merely a futile exercise. However, in John Doyle v Erith, the Court of Appeal made it more difficult for an insolvent party to successfully adjudicate and appeared to diverge from the Supreme Court's understanding of the link between adjudication and insolvency. The Court of Appeal seemed to dispute Bresco in favour of the conventional understanding of the law where adjudicating with an insolvent party is likely to be an exercise in futility. Arguably, in its ruling, the Court of Appeal failed to consider the practical success of adjudication, where despite its provisional nature in terms of being open to appeal or challenge, decisions have been accepted as final. This may explain why the Court of Appeal deviated from the Supreme Court's ruling in Bresco. The case note focuses on the Supreme Court's decision in Bresco and analyses the implications of the Court of Appeal's ruling in John Doyle v Erith. Adjudication is a type of alternative dispute resolution (‘ADR’) designed to give parties a quick and effective ‘out of contract’ resolution. Statutory adjudication was introduced by the Housing Grants, Construction and Regeneration Act4 to give parties to a construction contract the right to refer a dispute to adjudication ‘at any time’.5 It is a swift process generally concluded in 28 days and is often described as a ‘pay now, argue later’6 mechanism devised to protect cash flow during construction.7 An adjudicator's decisions are interim binding, meaning that parties have the option to challenge the award via arbitration or litigation. However, an award is rarely successfully challenged, and parties tend to accept the adjudicator's decision by way of agreement. The award is usually enforced by the successful party in the Technology and Construction Court (‘TCC’) via summary judgement. An adjudication considers only one issue at a time and, if the creditor is unlikely to be able to pay, the court will not enforce the award. The success of adjudication in the construction industry is undeniable, so much so that adjudication has developed into standard practice where, even if a construction contract fails to provide for adjudication, a clause will be implied into it.8 An underpinning objective of adjudication is to improve cash flow and mitigate the risk of, for example, disputes between subcontractors and sub-subcontractors, which could disrupt the whole project and cease significant works. But solving the cash-flow problem is not the only objective of adjudication, rather, it is viewed as a legitimate dispute resolution mechanism on its own merits. The fact that adjudication can be invoked ‘at any time’, means that, for example, issues of final account could be raised after practical completion.9 Adjudication is a semi-compulsory mechanism where not every dispute has to be referred to it. Rather, each party is given a statutory and contractual right to refer to adjudication.10 In practice, the majority of disputes in the construction contract context are referred to adjudication by way of expressly negotiated contractual terms.11 Referring to data from the Adjudicating Nominating Bodies (‘ANBs’), there were 187 adjudications in the reporting year ending April 1999, which has since increased to 1905 in 2018.12 The swift nature of the proceedings and market practice of accepting decisions as final have made adjudication a popular mechanism to resolve construction disputes. Judicial approval of the regime has highlighted adjudication's benefit to the construction industry,13 and leading authors also appreciate the success of the process.14 Further, the fact that less than 2% of adjudication awards are successfully challenged is another testimony to the regime's widespread acceptance and success.15 As a direct corollary of speed and strict time constraints, adjudication is usually significantly cheaper than either arbitration or litigation. With its cost and time-efficient results, the success and popularity of adjudication in construction disputes are well founded. Insolvency usually occurs when a company is unable to pay debts owed to its creditors. Insolvency law enforces a stay on proceedings and restricts access to the insolvent's estate to ensure the orderly realisation of assets or to pursue a potential rescue.16 Restrictions enforced by insolvency law attempt to stop a free-for-all race to collect in favour of a collective regime where the insolvent's assets are used to achieve an outcome, which is in the best interests of creditors in general. Insolvency set-off is a specific feature of a raft of insolvency-related provisions. To ease administrative costs and streamline procedures,17 it stipulates that where there are mutual debts between a debtor and creditor, such claims cease to exist as independent claims, with only a balance either owed to the insolvent company or provable against it.18 Set-off is automatic and mandatory, meaning that parties do not need to take any steps for it to apply, and parties cannot contract out of its operation.19 When dealing with disputed cross-claims, a strict application of insolvency set-off would mean that such claims effectively cancel each other out. Yet, the normal practice of the construction industry is to refer disputes to adjudication. The issue is that adjudication represents a ‘pay now, argue later’ model but during insolvency, the scope to ‘argue later’ is understandably severely limited. The issue the Supreme Court had to consider in Bresco was whether the ability of the parties to take a dispute to adjudication was compatible with the self-executing nature of insolvency set-off. The appellant, Bresco Electrical Services (‘Bresco’), and the respondent, Michael J Lonsdale (‘Lonsdale’), were both electrical works contractors. Through a sub-subcontract dated August 2014, Bresco agreed to perform electrical installations for Lonsdale at a site in London. The contract was a construction contract subject to section 108 of the Construction Act20 and included an express provision for the adjudication of disputes. In December 2014, Bresco ceased to attend the site, alleging later that it did so because of acceptance of repudiatory breach21 of the contract by Lonsdale. In March 2015, Bresco entered liquidation. By late 2017, both Bresco and Lonsdale had claimed that the other had committed a repudiatory breach of contract, and both claimed sums against the other. Bresco sought GBP 219,000 from Lonsdale for the work it had done, and Lonsdale sought GBP 325,000 from Bresco for the cost of having the work completed by another contractor. Both claims and cross-claims arose entirely from the contract, and each party rejected outright the other's claim. In June 2018, Bresco served its notice for adjudication regarding the payment of GBP 219,000. Lonsdale's response was to argue that the adjudication lacked jurisdiction given the mandatory nature of insolvency set-off. Lonsdale also sought an injunction at the TCC to restrict the further pursuit of adjudication.22 Lonsdale's arguments were accepted by the TCC in July 2018. The adjudicator's jurisdiction was seen to be invalid, and Lonsdale was granted the requested injunction. On appeal, the Court of Appeal ruled that the adjudicator had jurisdiction but the injunction on the adjudication was maintained because, since the award could not be enforced, adjudication would be a waste of time and money. Bresco appealed to the Supreme Court against the injunction, while Lonsdale cross-appealed on the point of jurisdiction.23 Despite finding that adjudicators could have jurisdiction, the Court of Appeal ruled that there was a basic incompatibility between adjudication and the insolvency regime. The Court of Appeal maintained that if the adjudicator found in favour of Bresco, the court would refuse to enforce the award as it would interfere with the insolvency process. Hence, the court argued that the adjudication would not uphold the ‘pay now, argue later’ mechanism and as such would be an exercise in futility. The Supreme Court principally had two issues to consider—the jurisdiction point and the futility argument. These are the two novel points of law concerning adjudication and insolvency set-off analysed below.24 Lonsdale argued that the mandatory nature of insolvency set-off meant that all claims and cross-claims cease to exist. The Supreme Court held that the function of insolvency set-off between Lonsdale and Bresco did not mean that any claims under the contract ‘simply melt away’ as a result rendering them incapable of adjudication.25 Lord Briggs also relied on the Court of Appeal's reasoning, which maintained that if a is able to pursue the by also be able to do so via adjudication. the Supreme Court rejected Lonsdale's on Lord Briggs held that, while it that the court would not enforce the adjudicator's award by way of summary to the insolvency did not mean that adjudication would be The Court why the of such cross-claims can a for to the company the right to disputes to adjudication which has to Lord Briggs that be and to restrict a right to adjudication as parties have both a contractual and statutory to regarding Lord Briggs that issues be with and proceedings that will but in where the dispute the the party in could provide by any to give the a to challenge the Hence, the Supreme Court rejected Lonsdale's and accepted The judgement an insolvent's right to seek adjudication and ruled that the adjudicator has jurisdiction even given the function of mandatory insolvency set-off. Bresco made in the relationship between the statutory of adjudication and insolvency. The judgement to the construction industry and to the of adjudication in and during insolvency. in the of adjudication even in the of mandatory insolvency the Supreme Court appeared to that negotiated may even when mandatory of the insolvency regime. However, since Bresco, the Court of Appeal in John Doyle v to diverge from the Supreme Court's The the of Bresco and the implications of John Doyle v Erith. of Lord judgement was to the key of adjudication and the it can be during the insolvency process. These where insolvency could on adjudication's process to resolve disputes and such as debts to the insolvent company and provable claims against it. Lord Briggs also the of adjudication as a dispute resolution mechanism and not merely a to cash-flow during The decision in Bresco appeared to that the court the of adjudication, it as a legitimate of dispute and was unlikely to restrict access to With self-executing the and cross-claims are against each other at the of In a strict would mean that the insolvency with the as the cross-claims are To Lord Briggs Lord in v that cross-claims over set-off will need to be for the balance and that is merely of the process of with in Lord decision and the that adjudication could be legitimate for the of a balance Lord Briggs also and to support the fact that cross-claims can during a set-off and as such there could be a stay on the self-executing nature of the where disputes are of Bresco is that Lord Briggs did not into the issues of to such questions for when and if an adjudication during insolvency that However, by not the of and the issues in the Supreme Court the to a key with adjudication during insolvency and could have more to explain the compatibility of the two It could be argued that the Supreme Court in Bresco for of the which is in John Doyle v Erith. of awards is the objective of adjudication. Yet, the judgement in Bresco means that an adjudication may be and and only would the potential issues of be to the In normal an adjudicator's award could be open to challenge by arbitration or litigation. insolvency, the of an award is as the company would cease to exist. even if an adjudication is in terms of a the nature of adjudication is that it is open to challenge and may be as This questions the of Bresco and the of adjudication with an insolvent by nature an adjudication is it is it can be during insolvency when parties would the to a to the is that the construction industry has been to accept the adjudicator's award as final. the would adjudication with an insolvent could be even if it is to a balance or achieve other such As only less than 2% of adjudication awards are successfully challenged, it could be argued that even when dealing with an insolvent the adjudicator's award is likely to be as any normal of an insolvency is open to challenge by creditors meaning that by it could be as the decisions are accepted as final despite being open to challenge, the could be to adjudication in terms of accepting the award in Insolvency enjoy given the nature of and the could be to adjudicators to the of adjudication, during The Supreme Court did not refer to the but it can be from Lord of the of Lord Briggs was in ruling that adjudication can in fact be of and the will be to each The award is merely a of the of adjudication and such as a may be or more than the of the award. the potential of will likely be an However, the may adjudication for in a is and the Supreme Court in Bresco took a regarding the of adjudication. because the adjudication process may be futile for one not mean that it It is that the of the adjudication process are it given the time and cost even if the parties do not the Hence, the of the potential of adjudication, during insolvency, is as it is unlikely that the process will be futile and more often than not benefit will as a result of the adjudication. The Supreme Court's was a decision for insolvency could to adjudication as a quick and way to disputed claims in In an and insolvency Bresco with to and means to resolve disputes in a may argue that Bresco a risk of adjudicators on the of insolvency or for parties to for adjudication to the insolvency process. However, there was in the case that an where adjudicators interfere with the of insolvency Rather, the adjudication regime was seen as a mechanism to the insolvency of realisation of assets and of It could be whether the Supreme Court was merely to the popularity of adjudication as to the when finding of the process and its during insolvency. given the adjudication's success in the construction the of the regime with the insolvency process was a Bresco, an insolvent party from adjudication were viewed as However, the Supreme Court was in that insolvent companies could seek adjudication and that the adjudicator enjoy The fact that parties the right to adjudicate meant that it cannot be because two statutory may be was for one over the other. example, and insolvency set-off are both Yet, set-off to on the and of creditors by Despite it is that both rules are in the insolvency process. by way of adjudication and insolvency set-off also be able to exist in the An where Lord regarding the jurisdiction of adjudicators may be is when payment notice disputes. It is such where the party failed to refer to any in a payment would be by an adjudicator if of the Construction is not for in the the would be to a However, a party would be to pay an insolvent company and a it can to do This could be one where the Supreme Court's understanding of jurisdiction may to However, it may be that Lord of the and jurisdiction principles may result in adjudicators having the to consider claims and cross-claims to a Through such an the adjudicator's are seen as and hence the ruling in Bresco adjudicators to resolve disputes. To Bresco the compatibility of adjudication in the insolvency process and as such took key steps to the two The case of v to Bresco where the court held that contractual of dispute resolution be from court With the of and disputes given the the Supreme Court's ruling parties to issues By the of adjudication, Bresco v Lonsdale to ease the on and a of will not with adjudication or arbitration the option to on such would have the and The of adjudication and the insolvency process hence was a which would not only ease on and but would also resolution of disputes and realisation of However, as the Court of Appeal in John Doyle v to from the Supreme Court's ruling in Bresco. In one of the since Bresco, the Court of Appeal its judgement in John Doyle v which the to the of an adjudication award by an insolvent The Court of Appeal that an insolvent company will not be able to enjoy summary of an adjudication award where there is a potential set-off via a that has not been Further, given the interim adjudication of claims will not to the final to are in the of Bresco and John Doyle v Erith. John Doyle Construction entered insolvency subcontractors to the John Doyle claimed GBP on the final while claimed John Doyle had been GBP adjudication, the award was for GBP in favour of John The Court of Appeal held that the award could not be enforced as the by John Doyle was The in that to enforce an an insolvent which is and decision on the parties need to provide over awards and the costs of further to enforce an adjudicator's The judgement in Lord ruling that of would be to enforce an award to give the other party to challenge the Yet, the case given the Court of Appeal's where and whether the award could have been enforced had the been and an on the of In John Doyle v Erith, the Court of Appeal v to that a by or against an insolvent estate can only be for the balance given the function of insolvency set-off. parties have a statutory and contractual right to the Court of Appeal clarified that the Insolvency to the Supreme Court's ruling that be in a right to adjudication, was a Further, the Court of Appeal held that since adjudication is a provisional the adjudicator's award cannot the final balance even where all claims and cross-claims have been This finding implications for the link between adjudication and insolvency and on the of adjudicating with an insolvent In Bresco, the Supreme Court ruled that adjudication could be of and not an exercise in futility as it can at the help insolvency the However, John Doyle v found that the of adjudication means that the adjudicator's and award can be An adjudicator's award may be final where there are in and there are disputed where there is the potential for further it will be difficult for an insolvent party to judgement on an adjudication award. could be two to at the Court of Appeal's It could be argued that the court the provisional nature of adjudication, was to that the ability to challenge an adjudicator's decision is severely during insolvency and hence was in finding that an award could only be under strict This is not as during insolvency exist that parties to challenge an adjudicator's award or even the decisions of a be to the fact that if a party to challenge an adjudicator's there is why the court could not give under section of the Insolvency for proceedings to be if an insolvent party to challenge the the insolvency can pursue litigation. Further, creditors can challenge to or This right to challenge is as is by the or decision of a can a court to or the in a any of the could be as decision is enforced even it is open to challenge during insolvency where the to appeal is limited. much is the Court of Appeal could have the to adjudication to on the and support of awards by them as final in This would have been more in with the decision in Bresco, which highlighted the of adjudication. It is that upon insolvency, the provisional nature of adjudication to a more final as the insolvent would cease to exist after Yet, a party the award would do so against the adjudicator and not the The is hence to the assets of the insolvent which the party would access This to the ability of creditors to challenge a decisions despite the fact that the insolvent's estate may exist. In both parties can challenge the award but may the ability to enforce it. the nature of adjudication may not be a issue because it is to when creditors challenge a it could be argued that the Court of Appeal took an understanding of adjudication and did not to the provisional nature of a on John Doyle v could be that the Court of Appeal took a understanding of adjudication and the fact that despite its provisional industry practice has been to accept an adjudicator's decision as final. Adjudication has been but parties have accepted awards as final to ensure of cost and It is why upon insolvency, parties would not to accept the adjudicator's decision as final. and cost are legitimate for all during an insolvency process and even a party would to an adjudication with in the has that less than 2% of adjudications are successfully challenged and the would of the insolvency of a consider standard practice as to parties may in the majority of adjudications parties are likely to accept the adjudicator's decision as final. much is an adjudication can have during an insolvency if only to the As argued in Bresco, would not only to the quick of claims but would also the insolvency with a that can effectively resolve disputes. Hence, the Court of Appeal in John Doyle v the of adjudication during insolvency, which were highlighted by the Supreme Court in Bresco. The of John Doyle v Erith, as it is that it may a by of the of adjudicating claims during insolvency. or not liquidators will adjudication as a to claims is to be The Court of Appeal's decision may parties in the construction industry are to adjudication claims, as upon insolvency the process may John Doyle v may to a where parties to right of adjudication where one party is insolvent and to claims via arbitration or of the of adjudication during insolvency by way of the Court of Appeal could have ruled that accept the adjudication decision as final The Court could have to adjudication during insolvency, given the construction industry's standard practice of the process to resolve disputes. a would have Lord in Bresco of adjudication's during insolvency, it would have than parties to adjudicate and it would have a understanding of the link between adjudication and insolvency. there to be a between the Court of Appeal's and the Supreme Court's understanding of the John Doyle v is appealed the decision may well But for the time John Doyle v Bresco, and of the law and the scope for the successful application of adjudication during insolvency. The Supreme Court in Bresco v Lonsdale be for a decision that the compatibility of adjudication with insolvency, relied on a and the contractual and statutory right to By a understanding of jurisdiction, the court not only to the of adjudication in disputes but also gave liquidators a valid option to resolve issues Bresco could have more to the of In ruling that issues of be with at the time of the Supreme Court for of the Arguably, the Court of Appeal to its judgement in John Doyle v Erith. The Court of Appeal to the link between adjudication and insolvency and made it difficult for adjudication with an insolvent party to be The Court of Appeal's decision more a challenge to Bresco than a of the John Doyle v found that in adjudicating with an insolvent is a futile exercise given the provisional nature of the award. However, it could be argued that the Court of Appeal took an of adjudication by not in that a decision can also be challenged and by not that adjudication awards are as final where less than 2% of awards are successfully the Court of Appeal did provide on the of and the of ruling that adjudicating with an insolvent will be futile is open to It is if John Doyle v will be appealed it the judgement may to further the Supreme Court's ruling in Bresco but it is to for Bresco, the Supreme Court be for of adjudication and with John Doyle v Erith, the Court of Appeal to the Supreme Court's judgement in Bresco.

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