BRESCO ELECTRICAL SERVICES LTD V MICHAEL J LONSDALE (ELECTRICAL) LTD [2020] UKSC 25
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This is a short update on the important decision by the United Kingdom Supreme Court (“UKSC”) in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 (“Bresco v Lonsdale”). We will not be focusing on the facts, but more on some of the key statements made by Lord Briggs (delivering the judgment of the UKSC) in Bresco v Lonsdale.
Importance of Bresco v Lonsdale. Bresco v Lonsdale concerns the issue of the interaction between two statutory regimes, the adjudication of construction disputes and the operation of insolvency set-off.
The main issue is (in gist) whether “… if there are cross-claims between parties to a construction contract and one of them is in liquidation, then there can be no adjudication of any dispute between them about those cross-claims even if, but for the liquidation and the existence of cross-claims, one or more of those disputes would fall within the right to refer to adjudication…” ([1] Bresco v Lonsdale).
Construction adjudication not incompatible with the operation of insolvency set-off. In this regard, the UKSC held at [42] Bresco v Lonsdale that construction adjudication is not incompatible with either the operation of the insolvency code nor with insolvency set-off.
Finding that there is no “single dispute rule” at [43] Bresco v Lonsdale, the UKSC held that the jurisdiction of the adjudicator is “subject to the overriding requirement that the dispute or disputes referred arise under the contract, mainly defined by the terms of the reference in each particular case” and highlighted that the adjudicator may determine more than one disputes or disputes under more than one contract if the parties agree.
Parties familiar with Singapore’s regime of construction adjudication will no doubt note that this position differs from that in Singapore, where the adjudicator cannot determine disputes under more than one construction contract.
In addition, the UKSC held at [44] Bresco v Lonsdale that a “claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a set-off.”
The UKSC then held at [56] Bresco v Lonsdale that, and this is important, the “… the single dispute rule would only assist Lonsdale’s argument on jurisdiction if the law of insolvency set-off compelled the liquidator to bring all disputes about the claims and cross-claims qualifying for set-off for resolution in a single proceeding. But the law and practice of insolvency set-off does no such thing. The liquidator may, if it appears economical and proportionate to do so, untangle a complex web of disputed issues arising from mutual dealings between the company and a third party by picking some as suitable for adjudication, others for arbitration and others for disposal by an application to the court for directions, or by ordinary action. At the same time the liquidator may seek to deploy ADR and negotiation to narrow the issues in the meantime.”
The UKSC also rejected the submission that the existence of a disputed cross-claim operating by way of an insolvency set-off would render the underlying dispute under the construction contract incapable of adjudication as they would be replace by a dispute in insolvency at [47] – [50], and held at [51] that the existence of insolvency set-off does not “… deprive the owner of the original claim of ancillary rights under the transaction which created it…”
Futility of adjudication? The UKSC also rejected the submission that the pursuit of adjudication by a company in an insolvency process should be restrained merely because there are cross-claims between that company and the respondent, which would trigger insolvency set-off ([58] Bresco v Lonsdale).
The UKSC held that the insolvent company has “both a statutory and a contractual right to pursue adjudication”, and therefore it would “ordinarily be entirely inappropriate for the court to interfere with the exercise of that statutory and contractual right” ([59] Bresco v Lonsdale).
In addition, the UKSC observed at [60] Bresco v Lonsdale that the purpose of construction adjudication is not only to enable a party to “obtain summary enforcement of a right to interim payment for the protection of its cashflow”, and at [61] Bresco v Lonsdale that there is no basis to conclude that construction adjudication is “incompatible with the insolvency process, or with the requirement to deal with cross-claims in insolvency by set-off, still less an exercise in futility.”
Claims beyond construction contract? However, [63] Bresco v Lonsdale is important as the UKSC held that “the effect of insolvency set-off may mean that cross-claims raise issues wholly outwith the purview of one or more construction contracts”, and stated that “In such a case the adjudicator will need to have regard to them, if they amount to a defence to the disputed construction claim being referred, but may have simply to make a declaration as to the value of the claim, leaving the unrelated cross-claim to be resolved by some other means.”
In other words, the UKSC has taken the view that an adjudicator can consider non-construction contracts disputes as part of the adjudication before him.
Would Bresco v Lonsdale apply to Singapore? It therefore remains to be seen if Bresco v Lonsdale would apply in the context of Singapore’s Building and Construction Industry Security of Payments Act.
During the Second Reading of the Building and Construction Industry Security of Payment Bill in 2004, then Minister of State for National Development Mr Cedric Foo Chee Keng stated that “Payment disputes involving insolvency are not covered under the Bill. If any one of the parties involved is insolvent, the provisions allowing direct payment and lien on unfixed materials will not be applicable. This is to avoid upsetting creditor priorities under existing insolvency laws”.
The Minister also stated that “… in the area of insolvency, there is a higher justice that must be served. There is an established priority of payments that have to be made to different parties who have suffered as a result of a party going insolvent. So this priority should not be upset just because of the payment woes in the construction industry. So we have therefore left insolvent cases alone so as not to disrupt a process which is working well”.
The above excerpts appear to suggest that unlike the situation in Bresco v Lonsdale, the statutory regime in Singapore does not contemplate that adjudication proceedings can take place when one of the parties is insolvent.
This is especially since the Singapore Courts have held that only one payment claim in respect of one construction contract may be submitted for adjudication. This is unlike the situation in Bresco v Lonsdale, where the UKSC found that an adjudicator not only could have jurisdiction to consider multiple construction contracts, but also jurisdiction to consider claims outside construction contracts.
Finality of adjudications. Lastly, we end off by observing that at [14] Bresco v Lonsdale, the UKSC stated that “There is a chorus of observations, from experienced TCC judges and textbook writers to the effect that adjudication does, in most cases, achieve a resolution of the underlying dispute which becomes final because it is not thereafter challenged. ”
Subsequently, at [60] Bresco v Lonsdale, the UKSC stated that “In the context of construction disputes adjudication has, as was always intended, become a mainstream method of ADR, leading to the speedy, cost effective and final resolution of most of the many disputes that are referred to adjudication”.
This is important as even in Singapore, there is anecdotal evidence to suggest that at least for smaller disputes, adjudications tend to lead to a final resolution as the determinations are either not challenged or they lead to a full and final settlement of the dispute between the Parties.
In this regard, members of the construction industry would do well to note that currently, under the COVID-19 (Temporary Measures) Act 2020, while a party may be able to obtain relief against the enforcement of an adjudicator’s determination, the commencement of adjudication proceedings is not barred.
Given that the “temporary finality” of adjudication determinations can well become “final”, it is all the more important for respondents during this period to ensure that proper payment responses are served, lest they be caught in a situation where the claimant can spring a “no payment response” adjudication.
Tags: Construction Adjudication; Insolvency; Insolvent set-off
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