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Adjudication v Insolvency: Who Wins?

Date: 01/07/2020 | Dispute Resolution, Construction

Greg Flett and Kieran Buxton consider a recent UK Supreme Court decision looking at the interplay between adjudications and insolvencies.

Introduction

Adjudication is a well-known means of dispute resolution in the construction industry. One question which has recently been answered by the courts is: Does an adjudicator have the power to proceed with a claim where one party claims they have a significant debt due from the referring party and the referring party is in liquidation (an insolvency set-off)? In Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25, the UK Supreme Court has held that the adjudicator does have jurisdiction in such a case.

Summary:

  • Bresco carried out work for Lonsdale;
  • Bresco went into liquidation;
  • Bresco claimed Lonsdale owed them money and Lonsdale claimed the opposite;
  • Bresco’s liquidator could proceed with a claim, despite Lonsdale’s claim outweighing that of Bresco; and
  • The court also found that an adjudicator may consider anything advanced against a claim in an adjudication, including cross-claims.

Background

Bresco’s liquidators brought a claim against Lonsdale to adjudication, as they were entitled to under the construction contract.  Lonsdale objected to the adjudication on the basis that insolvency set off operated i.e. the mutual debts between the parties cancel each other out automatically, leaving a net balance owed to one of the parties. 

Lonsdale’s position was that, if there was a cancelling out of the value of the claims under insolvency set-off, there was no longer any claim or dispute under the contract; rather, the claim was for a single claim to the balance and that was a claim under Bresco’s insolvency.  This meant that there was no dispute for the adjudicator to adjudicate under the contract, so the adjudicator did not have jurisdiction.

Decision

The UK Supreme Court held that there was no conflict between adjudication and insolvency set-off.  This meant that the adjudication could proceed. The operation of insolvency set off did not mean that the underlying dispute and Bresco’s claim and the cross-claim “melt away” to “render them incapable of adjudication”.  The only restriction on the adjudicator’s jurisdiction where the cross-claim’s value exceeded the claim was that an adjudicator could not award the balance of any prospective set-off to the cross-claimant (Lonsdale).

Another reason for this conclusion was that Bresco’s liquidators were entitled to refer the dispute to arbitration (and that entitlement was not disputed by Lonsdale).  The Supreme Court could not see any reason why these two forms of dispute resolution should be treated differently from each other.

Comment

It must be noted that this dispute arose in connection with the English rules on insolvency set-off.  These are of a different nature to the comparable rule in Scots law: the English law rules are contained in insolvency regulations whereas the Scottish equivalent is a common law rule.  We would, however, expect the same outcome to any such challenge here.

This decision will be welcomed by liquidators of companies who may have claims referred to adjudication.  There is also confirmation in the judgment that a claim submitted to adjudication will confer jurisdiction to determine everything which may be advanced against it by way of defence and this will include every cross-claim which amounts to or can be pleaded as a set off.  That should allow for resolution of disputes between parties in one adjudication.

Davidson Chalmers Stewart’s Dispute Resolution team is regularly instructed in adjudications and other construction related disputes.  If you are in a dispute under a building contract and need legal advice, please contact Greg Flett


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