Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd

Factual and Procedural Background

This opinion concerns two conjoined appeals involving the interaction between the construction adjudication process and the insolvency regime. The first appeal arises from an injunction preventing continuation of an adjudication initiated by a company in insolvent liquidation ("Appellant A") against another party ("Respondent A"). The injunction was granted on the basis of Appellant A's insolvency and the Respondent A's cross-claim. The second appeal involves a company ("Appellant B") subject to a Company Voluntary Arrangement (CVA) seeking to set aside an order granting summary judgment in favour of the opposing party ("Respondent B") and refusing a stay of execution. The appeals raise questions about the jurisdiction of adjudicators over claims by insolvent companies, the practical utility of such adjudications, waiver of jurisdictional objections, and the exercise of judicial discretion in granting summary judgment and stays of execution.

In the first appeal, Appellant A had entered insolvent liquidation over three years before serving an adjudication notice claiming wrongful repudiation and unpaid sums under a sub-sub-contract with Respondent A. Respondent A challenged the adjudicator's jurisdiction, leading to an injunction granted by the High Court preventing the adjudication's continuation. The second appeal concerns a construction contract where Appellant B, despite being in a CVA, had adjudications leading to a summary judgment in favour of Respondent B for over £2 million, with refusal of a stay of execution. The appeals were heard together, with judgments addressing both.

Legal Issues Presented

1. Whether an adjudicator has jurisdiction to decide claims made by a company in insolvent liquidation.
2. Whether, assuming jurisdiction exists, an adjudication involving an insolvent company has practical utility or is a futile exercise.
3. Whether a party can waive jurisdictional objections by failing to raise them before the adjudicator or court.
4. The proper exercise of judicial discretion in granting summary judgment and refusing stay of execution in the context of insolvency and CVAs.

Arguments of the Parties

Respondent A's Arguments

• The right to refer disputes to adjudication under the construction contract is lost upon liquidation, replaced by a single right to claim a net balance under the insolvency set-off rules (Rule 14.25 of the Insolvency Rules 2016).
• Following established case law, the adjudicator lacks jurisdiction to deal with claims by insolvent companies because the underlying contractual claims cease to exist and are replaced by a net balance claim.
• Even if jurisdiction exists, adjudications involving insolvent companies are futile because any decision would be temporarily binding and unenforceable due to insolvency rules and cross-claims.
• An injunction to prevent continuation of the adjudication was justified as the process was incompatible with insolvency law and would impose unnecessary costs on the responding party.

Appellant A's Arguments

• Although the company is in liquidation, the underlying contractual claims continue to exist and can be pursued through court proceedings or arbitration.
• The adjudicator should have jurisdiction because the nature of adjudication does not extinguish the claim; the forum chosen should not affect the existence of the claim.
• The temporary and non-final nature of adjudication decisions does not negate jurisdiction.
• The adjudication should be permitted to proceed, with any enforcement or summary judgment challenges handled through stays or refusals at a later stage.

Appellant B's Arguments

• Summary judgment was appropriate despite the CVA, as the adjudicator had jurisdiction and the CVA expressly referred to the insolvency set-off rules.
• The financial difficulties of Appellant B were significantly caused by Respondent B’s repudiatory breach and failure to pay sums found due by adjudication.
• The refusal of a stay of execution was correct given the circumstances and the CVA’s purpose to allow the company to trade out of insolvency.
• The jurisdictional challenge based on insolvency was not raised before the adjudicator or the court and thus waived.

Respondent B's Arguments

• The jurisdictional challenge was waived because Appellant B failed to raise it during adjudication or at trial.
• Summary judgment and refusal of stay were appropriate based on the facts, including the CVA’s structure and the cause of financial difficulties.
• The CVA did not preclude summary judgment or enforcement of the adjudicator’s decision.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by examining the jurisdictional issue, concluding that the adjudicator does have jurisdiction to consider claims made by a company in insolvent liquidation. This conclusion diverged from earlier authorities that suggested no jurisdiction existed. The court reasoned that the underlying contractual claim continues to exist post-liquidation, as evidenced by the ability to pursue arbitration or court proceedings, and that the choice of adjudication as the forum should not extinguish the claim.

However, the court identified a fundamental incompatibility between the adjudication process and the insolvency regime. Adjudication is designed as a quick, cost-neutral mechanism for provisional cashflow, whereas insolvency involves a detailed accounting exercise to determine a net balance for creditor distribution. The temporary and non-final nature of adjudication decisions conflicts with the final accounting and enforcement mechanisms in insolvency law.

Given this incompatibility, the court held that adjudications brought by insolvent companies facing cross-claims are generally futile because any adjudicator’s decision would not be enforceable. This futility justifies the grant of injunctions to prevent continuation of such adjudications, as was done in the first appeal.

Regarding waiver, the court analyzed the principles governing general reservations of position on jurisdiction. It found that vague general reservations, such as those made by Appellant B in the second appeal, were insufficient to preserve jurisdictional challenges not specifically raised during adjudication. Participation without clear reservation results in waiver, barring the raising of new jurisdiction points at enforcement.

On the exercise of discretion, the court upheld the grant of summary judgment in the second appeal, distinguishing it from cases involving insolvent liquidation because the claimant company was under a CVA with a realistic prospect of trading out of insolvency. The court reasoned that the CVA’s purpose and the evidence that the respondent’s breach caused the claimant’s financial difficulties justified summary judgment and refusal of a stay of execution.

Holding and Implications

Holding:

The court dismissed the appeal by the company in insolvent liquidation (Appellant A), upholding the injunction preventing continuation of the adjudication on grounds of futility and incompatibility with insolvency law. Regarding the company in a CVA (Appellant B), the court made no further order, effectively affirming the summary judgment in favour of Respondent B and refusal of stay of execution.

Implications:

The decision clarifies that while adjudicators have jurisdiction to decide claims by insolvent companies, the practical utility of adjudication in such cases is limited due to insolvency set-off and enforcement issues. Courts will generally prevent continuation of adjudications involving insolvent companies facing cross-claims to avoid futile and costly processes.

Conversely, adjudication remains a viable and useful mechanism for companies under CVAs, where the process can assist in improving cashflow and facilitating the company’s recovery. The court emphasized the importance of raising jurisdictional challenges clearly and promptly during adjudication to avoid waiver.

This ruling provides important guidance on the interplay between construction adjudication and insolvency law, balancing the need for swift dispute resolution with the realities of insolvency proceedings.