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Friday, 8 February 2019

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

[2019] EWCA Civ 27

In Issue 219, we reported on the Bresco case, which deals with the interplay between the adjudication process and the insolvency regime. Here the CA had to consider the issue of whether an adjudicator can ever have the jurisdiction to deal with a claim by a company in insolvent liquidation. But, as LJ Coulson noted, there was also a related issue, concerning whether (assuming that the adjudicator had the necessary jurisdiction) such an adjudication could ever have any utility and, if not, whether an injunction preventing the continuation of what would be a futile exercise was justified in any event. 

Here, over three years after going into liquidation, Bresco started an adjudication, saying that Lonsdale had wrongfully repudiated a sub-sub-contract and made claims for some £220k. Mr Justice Fraser granted a declaration 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 referring party from the respondent party.”

Bresco appealed. Lonsdale had said that the right to refer a dispute to adjudication had been lost when Bresco went into liquidation. At that point, there ceased to be any claim under the contract, because it was replaced with the single right, under Rule 14.25 of the Insolvency Rules, to claim the balance (if any), arising out of the mutual dealings and set-off between the parties. 

Bresco questioned why adjudication should be treated any differently to arbitration? If a party, could refer a claim to arbitration, why not to adjudication? LJ Coulson agreed that he could see no reason why, purely as a matter of jurisdiction (as opposed to utility), a reference to adjudication should be treated any differently to a reference to arbitration. If the contractual right to refer the claim to arbitration is not extinguished by the liquidation, then the underlying claim must continue to exist. That a reference to adjudication may not result in a final, binding decision could not mean that the underlying claim was somehow extinguished. 

The reference to “utility” led to consideration of a second issue. What is the utility (if any) to be derived from the adjudicator’s theoretical jurisdiction, when the claiming company is in insolvent liquidation and the responding party has a cross-claim? LJ Coulson referred to the “basic incompatibility between adjudication and the insolvency regime. Adjudication is a method of obtaining an improved cash flow quickly and cheaply; the insolvency regime is “an abstract accounting exercise, principally designed to assist the liquidators in recovering assets in order to pay a dividend to creditors”. Reviewing the existing authorities, the Judge noted that a decision of an adjudicator in favour of a company in liquidation, like Bresco, would not ordinarily be enforced by the court. Judgment in favour of a company in insolvent liquidation (and no stay), in circumstances where there was a cross-claim, would only be granted in an “exceptional” case: 

“a reference to adjudication of a claim by a contractor in insolvent liquidation, in circumstances where there is a cross-claim, would be incapable of enforcement and therefore “an exercise in futility”. 

It would only be in exceptional circumstances that a company in insolvent liquidation (and facing a cross-claim) could refer a claim to adjudication, succeed in that adjudication, obtain summary judgment and avoid a stay of execution. Thus, in the ordinary case, even though the adjudicator may technically have the necessary jurisdiction, it was not a jurisdiction that could lead to a meaningful result.

There was nothing on the facts of the Bresco case that took the case out of the ordinary, or which demonstrated that it was just or convenient for the underlying adjudication to continue. Bresco had been in insolvent liquidation for over three years before they referred their claim to adjudication. There was no evidence that Bresco would ever be able to trade again. By the time Bresco made their claim, they had already been sent a copy of Lonsdale’s own claim, making this a classic case of claim and cross-claim. Lonsdale had not pursued Bresco, doubtless because of Bresco’s insolvency. There was no good reason to make Lonsdale now incur the costs of defending a claim in adjudication which could not be enforced. Accordingly, although LJ Coulson considered that Mr Justice Fraser was wrong to find that the adjudicator had no jurisdiction to consider this claim, he agreed that Lonsdale were entitled to an injunction to prevent the adjudication continuing. In other words, whilst in theory, it is possible for companies in liquidation to start an adjudication, it may well be the case that there will be good grounds to obtain an injunction to restrain or stop that adjudication. 

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