The recent decision in Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] (TCC) has caused a plethora of discussions surrounding companies in liquidation and their ability to refer disputes to an adjudicator. There are many articles claiming the use of adjudication in liquidations is now dead – is that really the case?

Piet van Gelder, head of Construction & Engineering at Spearing Waite solicitors in Leicester, explains that the case of Lonsdale v Bresco does not create a blanket ban on all adjudications relating to insolvency and parties who have gone into liquidation.

In this case, Mr Justice Fraser QC held that:

“A company in liquidation cannot refer a dispute to adjudication when that dispute included (whether in whole or in part) determination of any claim or further sums said to be due to the referring party from the responding party.”

In other words, adjudication is not an option for monetary claims by liquidators.

Many commentators have seen this as a decision that removes a party in liquidation’s contractual right to adjudicate, but the case has a narrower scope. It deals with a claim for payment and the adjudication clause limits disputes to those “arising under the contract”.

It should be remembered that parties can use adjudication to resolve any dispute, for example it could be used to clarify the parties’ rights which may then have a “knock-on” effect on entitlement, but is not a claim for payment.

Similarly, many standard form contracts contain adjudication provisions that allow reference to adjudication in a wider scope of disputes such as disputes “arising out of or in connection with the Contract”.

The background to the Lonsdale v Bresco case

Bresco Electrical Services Limited (in Liquidation) (“Bresco”) agreed under a sub-contract dated 21 August 2014 to perform electrical installation works for Michael J Lonsdale (Electrical) Limited (“Lonsdale”).

This sub-contract was governed by the Housing Grants Constriction and Regeneration Act 1996. Accordingly, the adjudication provisions and terms of The Scheme for Construction Contracts (England and Wales) Regulations 1998 were either expressly or statutorily imposed upon the parties.

The relationship broke down and Bresco left the site in December 2014 under “controversial circumstances”. Both parties alleged this was wrongful termination for differing reasons.

In March 2015 Bresco went into liquidation.

In October 2017 Lonsdale brought a claim against Bresco for the costs of completing the works and, in June 2018, Bresco commenced adjudication proceedings for wrongful termination.

Interestingly, Mr Justice Fraser QC notes that the Notice of Adjudication attempts to refer numerous disputes. However, as neither parties raised this as an issue, he decided to proceed on the basis that at least one dispute have been referred. Ordinarily, under the Scheme, the referring party can only refer a single dispute.

Lonsdale invited the adjudicator to resign and Bresco to discontinue the adjudication on the grounds that the adjudicator had no jurisdiction. The adjudicator issued a “non-binding decision” declaring that he had jurisdiction and continued.

Consequently, Lonsdale issued Part 8 proceedings on 26 June 2018 and the adjudication was stayed pending the determination of the claim for a declaration and injunction.

The decision in the Lonsdale v Bresco case

 Mr Justice Fraser QC found that the claims made by both parties constituted ‘Mutual Dealings’ under the Insolvency Rules 2016, and that a single balance due to or from the company in liquidation should be calculated.

He considered in detail the cases of Bouygues v Dahl – Jenson [2000] EWCA Civ 507 and Enterprise Managed Services Limited v Tony McFadden Utilities Limited [2009] EWHC 3222 (TCC).

It was concluded that the adjudicator did not have jurisdiction to determine the dispute referred to him. It had become a single dispute under the Insolvency Rules, which therefore did not fall “under the contract” and should have been resolved purely by application of the Insolvency Rules.

Analysis – what does this mean for future disputes?

A distinction should be drawn between:

  1. An adjudicator’s lack of jurisdiction regarding disputes that include both money claims and cross claims involving a party in liquidation and;
  2. An adjudicator’s jurisdiction to give a decision where it involves a party who has gone into liquidation, but the decision is not relating to a money claim.

The latter can be utilised to obtain a favourable declaration regarding the terms or scope of a contract, which can then unlock financial entitlement later, by application of the Insolvency Rules.

It is clear from this case that, where the contract restricts the scope of the dispute to one arising under the contract, parties cannot pursue a financial claim where that money claim is covered under the Insolvency Rules 2016.

However, they can refer a dispute to an adjudicator to quickly obtain a declaration in their favour to clarify the parties’ respective rights and obligations under the contract. This scenario would not involve money claims or cross claims and thus fall outside the realms of this decision.

For example, if there is an argument of principle over the scope of works or the applicability of a rate to certain works, an adjudicator could still be asked to clarify and decide on that issue. This clarification could then be used by the parties to assess their respective financial positions which could then be resolved by application of the Insolvency Rules.

Further, close attention should be paid to the contract provisions under which an adjudication is being referred. The standard provisions of Part I of the Scheme and JCT contracts limited references of disputes to those “arising under the contract”.

However, other standard construction contracts such as an NEC form have wider provisions. For example, option W2 in the NEC4 states that a dispute arising ‘under or in connection with the contract’ can be referred to an adjudicator.

This is a much wider scope for disputes that can be referred, and it broadens the adjudicator’s jurisdiction. It is arguable in that context that a dispute over entitlement through application of the Insolvency Rules is a dispute in connection with the contract – and therefore the parties are still entitled to adjudicate it.

Adjudications can also be a helpful bargaining tool in discussions surrounding claims which fall under the Insolvency Rules.

The solvent party is likely to pick up the tab of the adjudicator’s fees even if the adjudication is not enforceable, because the parties involved have joint and several liability for the fees of the adjudicator and this will be difficult in a liquidation.

The effect of this decision is wide in scope; however, it is not a blanket ban on all adjudications relating to insolvency and parties who have gone into liquidation.

It is important to utilise the fast, effective tool that is a 28-day decision from an adjudicator. Disputes surrounding legal entitlement and not money claims still fall within an adjudicator’s jurisdiction.

The question of whether a dispute involving insolvency proceedings should be referred to an adjudicator is a question of fact for each referral.

Claims for money owed must be dealt with under the Insolvency Rules if the adjudication provisions have a narrow scope but this does not rule out the ability to adjudicate to determine a party’s legal entitlement.

For expert legal advice on any construction & engineering matter, please contact Piet van Gelder.

 

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