Does an Adjudicator have jurisdiction to decide that a payment under a contract is to be made in a case where the Referring Party is insolvent?

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Does an Adjudicator have jurisdiction to decide that a payment under a contract is to be made in a case where the Referring Party is insolvent?

August, 2018
Peter Barnes

There has been a recent trend of Insolvency Practitioners commencing Adjudication proceedings on behalf of an insolvent company in an attempt to recover the payment of monies against the insolvent company’s account. When this occurs, a query is often raised as to the jurisdiction of the Adjudicator to decide that payment should be made to the insolvent company in such circumstances. This matter has been considered in a number of cases, but the issue is still not completely settled.

The Bouygues (UK) Ltd v Dahl-Jensen (UK) Limited [2000] EWCA Civ 507 case dealt with the enforcementof an Adjudicator’s Decision in the case where the Referring Party (Dahl-Jensen) was insolvent and the Adjudicator decided that Bouygues was to make a payment to Dahl-Jensen. The Court of Appeal considered the question of enforcement against the background of Rule 4.90 of the Insolvency Rules 1986 (now amended by Rule 14.25 of The Insolvency (England and Wales) Rules 2016)).

Rule 4.90 of the Insolvency Rules 1986 provides:

“(1) This Rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and     any creditor of the company proving or claiming to prove for a debt in the liquidation.

(2) An account shall be taken of what is due from each party to the other in respect of         the mutual dealings, and the sums due from one party shall be set off against the sums            due from the other.

(3) … … …

(4) Only the balance (if any) of the account is provable in the liquidation.     Alternatively (as the case may be) the amount shall be paid to the liquidator as part of  the assets."

In respect of Rule 4.90 of the Insolvency Rules 1986, the Court of Appeal made the following comments:

“33      The importance of the rule is illustrated by the circumstances in the present case. If Bouygues is obliged to pay to Dahl-Jensen the amount awarded by the adjudicator, those monies, when received by the liquidator of Dahl-Jensen, will form part of the fund applicable for distribution amongst Dahl-Jensen's creditors. If Bouygues itself has a claim under the construction contract, as it currently asserts, and is required to prove for that claim in the liquidation of Dahl-Jensen, it will receive only a dividend pro rata to the amount of its claim. It will be deprived of the benefit of treating Dahl-Jensen's claim under the adjudicator's determination as security for its own cross-claim.

34        Lord Hoffman pointed out, at page 252 in Stein v Blake that the bankruptcy set-off requires an account to be taken of liabilities which at the time of the bankruptcy may be due but not yet payable, or which may be unascertained in amount or subject to contingency. Nevertheless, the insolvency code requires that the account shall be deemed to have been taken, and the sums due from one party shall be set off against the other, as at the date of insolvency order. Lord Hoffman pointed out also that it was an incident of the rule that claims and cross-claims merge and are extinguished; so that, as between the insolvent and the other party, there is only a single claim - represented by the balance of the account between them. In those circumstances it is difficult to see how a summary judgment can be of any advantage to either party where, as the 1996 Act and paragraph 31 of the Model Adjudication Procedure make clear, the account can be reopened at some stage; and has to be reopened in the insolvency of Dahl-Jensen.

35       Part 24, rule 2 of the Civil Procedure Rules enables the court to give summary judgment on the whole of a claim, or on a particular issue, if it considers that the defendant has no real prospect of successfully defending the claim and there is no other reason why the case or issue should be disposed of at a trial. In circumstances such as the present, where there are latent claims and cross-claims between parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. All claims and cross-claims should be resolved in the liquidation, in which full account can be taken and a balance struck. That is what rule 4.90 of the Insolvency Rules 1986 requires.”

Therefore, largely because of the above points, the Court of Appeal refused to enforce the Adjudicator’s Decision that payment should be made by Bouygues to the insolvent Dahl-Jensen company. 

Despite the above, and significantly, the Court of Appeal did not actually decide that the Adjudicator did not have jurisdiction to reach the Decision that he reached, but rather that (principally because of the implications of Rule 4.90 of the Insolvency Rules 1986) his Decision would not be enforced.

The Wimbledon Construction Company 2000 Limited v Derek Vago [2005] EWHC 1086 (TCC) case again considered the enforcementof an Adjudicator’s decision in a situation where the Referring Party was insolvent. In that case an Adjudicator’s Decision was again not enforced, and some of the relevant and self-explanatory paragraphs from the judgment of that case explain why:

Paragraph 16   “In circumstances such as the present where there are latent claims and cross-claims between parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of adjudication which is necessarily provisional. All claims and cross-claims should be resolved in the liquidation in which full account can be taken and a balance struck. That is what rule 4.90 of the Insolvency Rules 1986 requires."

Paragraph 23  "In general a court must balance (a) the intention of the legislation that adjudication should be enforced summarily; (b) the right of the successful party not to be prejudiced by being kept out of its money; and (c) in cases where there is a serious risk that the party will not be able to recover the money, that the defendant is not being seriously prejudiced in a way not contemplated by the Act which is silent as to the position where a defendant runs more than a nominal risk of being unable to recover money after trial or arbitration award”.

Paragraph 26   “a)       Adjudication (whether pursuant to the 1996 Act or the consequential amendments to the standard forms of building and engineering contracts) is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.

                          b)      In consequence, adjudicators' decisions are intended to be enforced summarily and the claimant (being the successful party in the adjudication) should not generally be kept out of its money.

                         c)     …...

                          d)      The probable inability of the claimant to repay the judgment sum (awarded by the Adjudicator and enforced by way of summary judgment) at the end of the substantive trial, or arbitration hearing, may constitute special circumstances within the meaning of Order 47 rule 1(1)(a) rendering it appropriate to grant stay (see Herschell).

                          e)      If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted (see Bouygues and Rainford House)”.

Despite the above cases, it is not always the position that Adjudicator’s Decisions where the Referring Party is insolvent will not be enforced. For example, in the Wilson and Sharp Investments Ltd v Harbour View Developments Ltd [2015] EWCA Civ 130 case, it was found that “… there is no absolute rule that the TCC will necessarily decline to give summary judgment or restrain presentation of a winding up petition based on an adjudication, merely because the contractor is insolvent.  Whether or not the court will adopt such a course will be dependent on the facts of the particular case”. 

Therefore, it is clear that the enforcement or otherwise of an Adjudicator’s Decision in a case where the Referring Party is insolvent is fact sensitive.

Of course, none of the above cases address the issue as to whether an Adjudicator had jurisdiction to decide the dispute in the first place in circumstances where the Referring Party was insolvent. 

A case that does specifically deal with the question of an Adjudicator’s jurisdiction in such a situation is the Enterprise Managed Services Limited Services Limited v Tony McFadden Utilities Limited  [2009] EWHC 3222 (TCC) case.

In that case there were particular circumstances that applied that would not apply to most other cases. These circumstances included for the fact that there were four subcontracts between Enterprise and Tony McFadden Ltd., and that the ‘net balance’ due under those subcontracts had been assigned from Tony McFadden Ltd (the insolvent company) to Tony McFadden Utilities Ltd (“Utilities”). Because of these factors, the Court considered that Adjudication would not be appropriate. The Court concluded that as four sub-contracts existed, an Adjudicator could not deal with the combined ‘net balance’ dispute as an Adjudicator can only deal with one dispute under one subcontract at any one time. Also, the Court decided that as an assignment had taken place, it would be necessary to join the assignors who were the liquidators of McFadden, and that could not happen because it is not possible to have a tripartite Adjudication.

However, and despite the above special circumstances, the Enterprise case raised some further issues of potentially more general application. For example, Mr Justice Coulson (as he then was) said that the ‘net balance’ due pursuant to Rule 4.90 of the Insolvency Rules 1986, is intended to be a single process resulting in a final and binding decision, whereas Adjudication would create subcontract by subcontract Decisions that would only be temporarily binding. Also, Mr Justice Coulson found that Adjudication could only give a temporarily binding (quick fix) decision, rather than giving the “certainty and finality envisaged by the full Rule 4.90 process” which Mr Justice Coulson said was essential. 

MrJustice Coulson also decided that, in any event, following the 1995 House of Lords decision in Stein v Blake,an isolated claim or cross-claim would cease to exist, and, in the words of Mr Justice Coulson, the “only chose in action which continues to exist … … is the claim to a net balance" (under Rule 14.25 (Rule 4.90)).

At paragraph 72 of his judgment Mr Justice Coulson (referring to the earlier Bougues v Dahl-Jensen Court of Appeal case) said “In my judgment Bouygues highlights the fundamental discrepancy between the pursuit of the only dispute that can now arise between the parties, namely, in respect of the balance of the account between them to be identified as part of the final and certain process under Rule 4.90, and the purported reference to adjudication of a dispute in respect of one element only of that balance, pursuant to a process which can, in any event, be opened up as of right thereafter”. 

At paragraphs 78 and 79 of his judgment, Mr Justice Coulson concluded by saying

“For all these reasons I have concluded that Utilities cannot adjudicate the claim under the NLSDA Sub-Contract. … … Even if they could adjudicate such a claim, it would have no practical value or purpose for the reasons that I have given. It seems to me that Utilities can pursue their right to a balance under Rule 4.90 but, in all the circumstances set out above … … the only appropriate forum for such a claim is the High Court.It follows from my analysis in Section 7 above that the adjudicator does not have the necessary jurisdiction to deal with this dispute. The only claim now extant between the parties is the claim by Utilities as assignees for the net balance under Rule 4.90. That is not a claim which could be referred to adjudication and it is not the claim that has been purportedly referred to this adjudicator. The claim which has been purportedly referred to the adjudicator no longer exists. Further, for the reasons noted above, Rule 4.90 does not contemplate that the account process would be taken in a piecemeal or slice-by-slice fashion, by reference to potentially different tribunals, including adjudicators who could, at most, make a decision that is only of temporary effect”.

Therefore, based upon the above comments, and based upon the circumstances of the Enterprise case, an isolated claim, ceased to exist, being a claim that was extant between the parties and being a claim that had been supplanted by the ‘net balance due under Rule 4.90’. 

The above conclusion followed Lord Hoffman’s dicta in the Stein v Blake [1995] UKHL 11 case, referred to above, where he said:

“In my judgment the conclusion must be that the original chose in action ceases to exist and is replaced by a claim to a net balance. If the set-off is mandatory and self-executing and results, as of the bankruptcy date, in only a net balance being owing, I find it impossible to understand how the cross-claims can, as choses in action, each continue to exist” .

It is clear from the above that Rule 4.90 of the Insolvency Rules 1986 (updated as Rule 14.25 of the Insolvency (England and Wales) Rules 2016) envisages that the account will be taken and the balance decided in one set of proceedings where the results would be final and binding; and this is the conclusion reached in the cases referred to above.

Therefore, although the Enterprise case is often cited as being a case with special circumstances, which is true, there are many parts of the judgment that indicate that an Adjudicator would not have jurisdiction to make an award of payment to the Referring Party (a declaration as to value may be different) in the case where the Referring Party was Insolvent, and it is therefore at the very least arguable that the Enterprise case has much wider application rather than only where several subcontracts are applicable and/or where there has been an assignment of the ‘net balance’ due. 

Therefore, when faced with the situation that the Referring Party is an insolvent company, Adjudicators need to proceed with caution.

By Peter Barnes, Blue Sky ADR 

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