06 Aug 2018

From time to time the statutory rights available to parties to construction contracts appears to come into conflict with other sets of provisions that also claim to govern the same areas of dispute. Perhaps the best known such clash, between adjudication and the effect of insolvency, was that explored in the Scottish case of Melville Dundas Limited (in Receivership) v George Wimpey UK Limited[1] in 2007. The recent decision in Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation)[2] provides another example.

The issue in Lonsdale was succinctly put by the judge as follows: "…whether a company in liquidation can refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of a claim for further sums said to be due to the Referring Party from the Responding Party".

Lonsdale brought proceedings in the Technology and Construction Court seeking declarations and a permanent injunction to prevent Bresco from bringing a claim in adjudication on the basis that the liquidation of Bresco extinguished Bresco's claim in that adjudication. By the time the case was heard by the Court on 11 July 2018 (judgment being handed down on 31 July) the adjudication had already commenced but had, by agreement, been halted pending the Court's determination. In a lengthy and detailed judgment, the Court looked at the relevant Insolvency Rules and examined the case law which deals with the interaction between parties' statutory rights under the Housing Grants, Construction and Regeneration Act 1996 (as amended) and the Insolvency Rules, both the 1986 Rules and as subsequently revised in 2016.

Lonsdale and Bresco had potential claims against each other which had been ongoing for some time. These arose out of the contract they had entered into in August 2014. Bresco left site in December 2014 and subsequently went into liquidation in March 2015. Each side accused the other of wrongfully terminating the contract and claimed costs and damages arising as a result. Bresco then commenced its adjudication against Lonsdale in June 2018. It sought declarations in relation to the termination of the contract and damages for loss of profits together with payment for works completed before the termination.

The main issue for the Court to consider was the effect of Bresco's liquidation in the context of the statutory rules governing adjudication. The relevant Insolvency Rules clearly state that where, before a company goes into liquidation, there have been mutual dealings between the company and a creditor proving or claiming to prove a debt in the liquidation, an account shall be taken of what is due from each party to the other in respect of those mutual dealings and the sums due from one party shall be set off against the sums due from the other (paragraph 14.25, Insolvency Rules 2016). Only the balance (if any) of the account is provable in the liquidation.

The Court found that Lonsdale and Bresco's competing claims clearly fell within the definition of "mutual dealings" in the Insolvency Rules. The Court reviewed the extensive case law as it applied in construction cases including the decision in Bouygues (UK) Limited v Dahl-Jensen (UK) Limited[3], which also considered adjudication in the context of the Insolvency Rules. In that case, it was pointed out, by reference to an earlier decision in Stein v Blake[4], that the application of the Insolvency Rules fundamentally alters the nature of the claims between the parties in that their mutual claims become one single amount owed either one way or the other depending upon the exercise undertaken to balance out the contesting monetary claims.

This single balance, even if it fell in Bresco's favour, was not the same as the claim that it was advancing in the adjudication. That claim had ceased to exist, as had any claims which Lonsdale might seek to advance against Bresco. Furthermore, the identification of this net balance under the Insolvency Rules was not a task that the adjudicator had the power to undertake as part of the adjudication. Nowhere in the legislation dealing with adjudication were adjudicators given the power to carry out an account exercise of this nature under the Insolvency Rules. Clear words in the statute would be required to impose such a change.

In summary, it is not open to a company that is in liquidation to commence an adjudication for any monetary claims that it has when that dispute includes (whether in whole or in part) determination of any claim for further sums said to be due to the Referring Party from the Responding Party. In many ways the apparent clash between the adjudication provisions and the Insolvency Rules which is highlighted by Lonsdale v Bresco is illusory. One simply supersedes the other upon the change in status brought about by the insolvency event.

[1] (Scotland) [2007] UKHL 18

[2] [2018]EWHC 2043 (TCC)

[3] [2000] EWCA Civ 507

[4] [1996] 1 AC 243