It is common knowledge to many that parties to a construction contract have the right to adjudicate at any time. This is a right implied by statute and a right that cannot be fettered. However, it seems the limits of such a right are now somewhat more nuanced. In the recent case of Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] EWHC 2043 Fraser J has considered how the Insolvency Rules and Adjudication work together and what this means for the right to adjudicate at any time.
The case concerns an adjudication Bresco sought to bring against Lonsdale in relation to payments due under a contract pursuant to which Bresco agreed to perform electrical installation works for Lonsdale. In December 2014, Bresco left the site and both parties alleged the other had wrongfully terminated the contract. Bresco then entered into liquidation in March 2015. Earlier this year, Bresco commenced adjudication against Lonsdale claiming, inter alia, payment for the works completed up to the date of Lonsdale's wrongful termination and lost profits on the balance of the works. Lonsdale objected to the adjudication on the basis that the adjudicator did not have the requisite jurisdiction due to Bresco's insolvency.
The question therefore arises - "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?"
The parties agreed that the Insolvency Rules 2016 applied given Bresco's liquidation. Under these rules, where they have been mutual dealings between the company in liquidation and a creditor of the company "proving or claiming to prove for a debt in the liquidation" an account must be taken of the sums due to each party with the sums due from one party being set off against the sums due from the other. If this process results in a balance being owed to the creditor it is only this balance that is provable in the liquidation. If it results in a balance being owed to the company in liquidation, this must be paid to the liquidator as part of the assets of the company. Fraser J summarised this to mean that that the range of claims and cross-claims between Bresco and Lonsdale were to be replaced by a single debt due in one direction.
In light of the accounting procedure under the Insolvency Rules, Fraser J held that there was no longer a dispute under the Contract to which the statutory right to adjudicate applies but rather a dispute as to the balance due under the Insolvency Rules 2016 (or 1986 as the case may be). In such circumstances, an adjudicator has no jurisdiction to determine such a dispute. Consequently, the answer to the question above was simply no - a company in liquidation cannot refer a dispute to adjudication when the 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.
Whilst Fraser J's response was limited to the above question, it is arguable from his reasoning that a creditor would equally be prevented from bringing an adjudication for the recovery of sums owed by a company in liquidation.
This case serves as a word of warning to many liquidators and indeed, potentially creditors, that the event of insolvency of one of the parties to the contract can have ramifications beyond the pure financial consequence but also as to the options available to enforce legal rights and entitlements.
