A right to refer a dispute to adjudication at any time - unless you're in liquidation

The Construction Act 1996 gives a party to a construction contract the right to refer a dispute to adjudication "at any time"; however a recent TCC decision in England has held that this right is not absolute, where the party referring the dispute to adjudication is a company in liquidation and the dispute includes any claim for further sums to be paid to them.

The decision

The case in question is Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd. Bresco Electrical Services Ltd ("Bresco Ltd") was employed by Michael J Lonsdale (Electrical) Ltd ("Michael Ltd") for electrical installation works on a project in London. The contract was a "construction contract". The relationship between the parties broke down, each alleging the other had wrongfully terminated the contract and each claiming they were due sums from the other.

After leaving the project, Bresco Ltd went into liquidation. Once in liquidation Bresco Ltd launched an adjudication against Michael Ltd, claiming they had wrongfully terminated the contract and that payment was due for, amongst other things: (1) the works Bresco Ltd had completed prior to leaving site; and (2) damages for their loss of profit.

Michael Ltd invited the Adjudicator to resign, on the basis that he had no jurisdiction because the Referring Party, Bresco Ltd, was insolvent. The Adjudicator refused to do so and Michael Ltd commenced Court proceedings in England, seeking an injunction to prevent Bresco Ltd bringing a claim to adjudication.

The Court agreed with Michael Ltd and held that a company in liquidation cannot refer a dispute to adjudication, when that dispute includes (whether in whole or in part) determination of any claim for further sums said to be due to the Insolvent Referring Party from the Responding Party.

The rationale behind the decision

The decision applied the Insolvency Rules in England and followed the principle that when there have been mutual dealings between the parties and a liquidator is appointed, account must be taken of the different amounts due between the insolvent company and the creditor, in respect of their mutual dealings, and the sums due from one must be set off against the sums due from the other. The result being that only a single balance then becomes due.

The Court held that the individual claims between the parties cease to be capable of separate enforcement and are instead replaced by one single debt. Therefore whilst the Construction Act 1996 may give a party the right to refer a dispute to adjudication at any time, once the Insolvency Rules apply there is no longer a dispute under a construction contract, but instead a claim for the net balance due under the Insolvency Rules, which an Adjudicator does not have jurisdiction to decide under the Construction Act 1996.

Application in Scotland

The judgment is based on the application of specific Insolvency Rules which apply in England. The rule relied on by the court in Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd is not repeated verbatim in the Scottish Insolvency Rules at present.

The Scottish Insolvency Rules are, however, currently undergoing review with a view to aligning the Scottish position with the position now being adopted under the new rules in England and Wales. The Scottish Courts have also previously applied the principle of balancing of accounts and setting of mutual debts on insolvency of one of the parties.

Impact

This judgment is significant for insolvency practitioners in both Scotland and England, as it not only seems to curtail any ability to refer (or threaten to refer) a dispute to adjudication, it also curtails the prospect of being able to assign claims to third parties, with a view to the third party then referring a dispute to adjudication.

In light of the recent run of insolvencies in the industry, it will also be of interest to those defending adjudications raised by the now insolvent company _ providing what would appear to be a complete jurisdictional challenge, which should be taken at the outset and maintained throughout the adjudication process.