It’s official – liquidators can adjudicate construction disputes

The Supreme Court has settled once and for all – in the liquidator’s favour - whether a company in liquidation can ever use adjudication to resolve construction disputes.

Bresco carried out some electrical works but left site claiming Lonsdale were in repudiatory breach. It went into liquidation and the liquidator later commenced an adjudication under the construction contract for £219,000 for the value unpaid work. The benefit of the statutory adjudication is a relatively cheap and quick decision, on the papers, without the risk of having to pay anything other than its own costs, and those of the adjudicator, if it lost. Compare that with the potential for lengthy court proceedings and the adverse costs risk, adjudication looks very attractive for the liquidator, but less so for the other party. It was perhaps not surprising therefore that Lonsdale argued that as it had a cross claim of its own for £325,000 for the costs of getting someone else to compete the work that an adjudicator had no jurisdiction. This was underpinned by Lonsdale’s argument that once the mandatory set off rules apply under the Insolvency Act, individual claims and cross-claims lose their identity so there was no “claim” to refer to an adjudicator.

Did the existence of a cross-claim mean adjudication was no longer available? No it didn’t – in fact far from it. Claims and cross-claims under a contract did not “melt away” simply because the company was in liquidation – they still existed for the purposes of ascertaining a balance and an adjudicator could determine what that balance was.

Furthermore, the Supreme Court also rejected what became known as the “futility” argument – that it was pointless to allow an adjudication to proceed when an award would in all but exceptional cases be unenforceable. The Court of Appeal had accepted that adjudicator did have jurisdiction, but held that the futility argument generally weighed in favour of not permitting adjudications to proceed. The Supreme Court took a different view. The right to refer a dispute under a construction contract to adjudication is enshrined in statute and whilst the procedure was designed to aid cash flow, that did not mean it should unavailable to a company in liquidation where cash flow was no longer the primary issue. It is another form of ADR, and the speed, cost and flexibility of adjudication offered a cost effective way of resolving the claim - if anything, that should weigh in favour of allow it to proceed. Lord Briggs himself referred to the “chorus of opinion” that adjudication does, in most cases, achieve a resolution. If the outcome was then disputed, a Court could deal with that at the enforcement stage. That was not a reason to prevent the adjudication proceeding in the first place.

The decision is a welcome one for liquidators of companies with construction contracts, particularly those whose attempts to collect in retentions or other unpaid sums have been frustrated by cross claims being alleged. Adjudication has proved to be a very cost effective way of resolving construction disputes since it was introduced.

Even where an adjudicator’s award may not be the end of the matter, Court still has all of the tools available at the enforcement stage to balance matters up - including ordering a stay on enforcement and that security for the enforcement proceedings is provided – although of course by that stage, someone independent of the parties has already reached a view on the merits. That is a much better position for a liquidator to find themselves in compared to one where they face an obstacle getting the claim off the ground at all.

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

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