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? – Part 2

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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? – Part 2

December, 2018
Rachel Gwilliam

In the Summer 2018 edition of this Newsletter, Peter Barnes of Blue Sky ADR noted that the question of whether or not an Adjudicator has jurisdiction to decide that payment should be made to an insolvent company "has been considered in a number of cases", but "is still not completely settled". 

Having reviewed the relevant authorities, Peter sensibly recommended that Adjudicators "proceed with caution" when dealing with disputes where the referring party is an insolvent company. However, the recent Judgment of Mr Justice Fraser in Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] EWHC 2043 has conclusively resolved this issue in favour of the Adjudicator not proceeding at all.

The case concerned proceedings commenced by the Claimant, Michael J. Lonsdale ("Lonsdale"), under Part 8 of the Civil Procedure Rules against the Defendant, Bresco Electrical Services Limited (in Liquidation) ("Bresco"). 

Lonsdale had engaged Bresco under a sub-sub-contract dated 21 August 2014 to carry out electrical installation works. Bresco left the site of the works in December 2014 in disputed circumstances. Lonsdale engaged a third party (GSV Electrical Limited) to complete Bresco's works. There was a dispute between the parties as to whether Bresco or Lonsdale had, by their conduct, wrongfully terminated the sub-sub-contract. Bresco subsequently became insolvent and entered into voluntary liquidation on 12 March 2015.

In late October 2017, Lonsdale intimated a claim against Bresco for wrongful termination of the sub-sub-contract and the additional costs and losses incurred by Lonsdale in connection with the engagement of GSV Electrical Limited. Bresco maintained that it was Lonsdale who had wrongfully repudiated the contract and on 18 June 2018, Bresco served a Notice of Adjudication on Lonsdale. The Notice of Adjudication sought (inter alia) a decision from the adjudicator that sums were due to Bresco from Lonsdale under the sub-sub-contract for completed work and/or by way of damages for alleged loss of profit. 

Mr Tony Bingham was appointed as adjudicator on 21 June 2018. He was invited to resign by Lonsdale on the basis that he had no jurisdiction as a result of Bresco's insolvency. Mr Bingham declined to do so, issued a "non-binding" decision that he was validly seized of jurisdiction and set a timetable which would have resulted in his decision being issued on 16 August 2018.

Lonsdale issued CPR Part 8 proceedings on 26 June 2018, seeking declarations and a permanent injunction to prevent Bresco from continuing with the adjudication and/or bringing any other claim in adjudication in connection with sums purportedly owed to Bresco by Lonsdale under the sub-sub-contract. 

The parties subsequently agreed the "entirely sensible step"[1]that the Adjudication proceedings be stayed pending the determination of Lonsdale's Part 8 claim.

Mr Justice Fraser confirmed that the issue to be determined by the Court was "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?"[2]

Somewhat surprisingly, the parties agreed that this central issue needed to be resolved by reference to Rule 14.25 of the Insolvency (England and Wales) Rules 2016 ("2016 Rules") which replaced Rule 4.90 of the Insolvency Rules 1986 ("1986 Rules"), notwithstanding the fact that the 2016 Rules came into force on 6 April 2017, after the liquidation had commenced. On this basis, the 1986 Rules were arguably the relevant statutory provisions, rather than the 2016 Rules. However, Mr Justice Fraser confirmed that "the basic arguments relevant to the issue in this case are the same on both versions of the Rules"[3]and that "both the 1986 Rules and the 2016 Rules have the same effect"[4]. The Judgment in Michael J. Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (in Liquidation) [2018] EWHC 2043 will therefore be of relevance whichever version of the Insolvency Rules governs a potential referring party's liquidation.  

Rule 14.25 of the 2016 Rules provides:

"Winding up: mutual dealings and set-off

14.25 

(1)     This rule applies in a winding up where, before the company goes into liquidation, there have been mutual dealings between the company and a creditor of the company proving or claiming to prove for a debt in the liquidation. 

(2)     An account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings and the sums due from the one must be set off against the sums due from the other. 

(3)     If there is a balance owed to the creditor then only that balance is provable in the winding up. 

(4)     If there is a balance owed to the company then that must be paid to the liquidator as part of the assets…..."

The term "mutual dealings" is defined in the 2016 Rules as "mutual credits, mutual debts or other mutual dealings between the company and a creditor proving or claiming to prove for a debt in the winding up"[5]

It was held that the sums claimed to be due from Lonsdale to Bresco and the sums claimed to be due from Bresco to Lonsdale "clearly fall within the definition of 'mutual dealings' and are therefore caught"[6]by the requirement under Rule 14.25 that an account must be taken. That account "includes, and consists of, analysis of the parties 'mutual dealings' with set off of the different sums due in each direction to arrive at a single balance"[7]either due to, or from, the company in liquidation (Bresco).  

Mr Justice Fraser enthusiastically endorsed the analysis of Coulson J (as he then was) in Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd[2009] EWHC 3222 (TCC) as "undoubtedly correct"[8]and held that: 

  • "itwould not be in accordance with the Insolvency Rules for the calculation of the net balance under Rule 4.90 to be performed in what might be described as a piecemeal or hobbled fashion"[9]; and
  • the only claim or chose in action now extant between the parties was the claim for the net balance of the account ascertained under Rule 14.25. Any other claim or cross claim ceases "to be capable of separate enforcement"[10]when a liquidator is appointed.

Accordingly, it is not open to one party to seek to refer to adjudication a dispute in respect of only some of the parties "mutual dealings". All such matters properly form part of the ascertainment of the account and the net balance and the only dispute that remains live for determination is which party, following the taking of the account, is owed that net balance? 

However, Mr Justice Fraser held that an adjudicator cannot conduct any such necessary account of the parties mutual dealings under 2016 Rules and cannot determine the net balance[11]: any dispute as to the net balance is not a "dispute arising under the contract"[12], but rather a dispute arising in the liquidation. Paragraph 67 of the Judgment provides:  

"The phrase "a dispute arising under the contract" in the Act, or "any dispute under the contract" in the Scheme both include the important words "under the contract". Upon the appointment of the liquidator, any number of disputes between the parties to a construction contract, becomes a single one, namely a dispute relating to the account under the Insolvency Rules. It becomes a claim for the net balance under Rule 14.25(2) of the 2016 Rules. Before they came into force, it would have been a "claim….. for the net balance under Rule 4.90" of the 1986 Rules as stated in [79] of Enterprise. This analysis makes it clear that this is the only claim that can exist. I do not consider such a dispute in relation to the taking of an Insolvency Rules' account to be "a dispute arising under the contract" to use the wording in the Act, or "any dispute under the contract" to use the wording of the Scheme. It is a dispute arising in the liquidation. I do not consider that Parliament, in enacting both the Housing Grants Construction and Regeneration Act 1996 and its successors, has given adjudicators the power to resolve disputes in the taking of the account required by the Insolvency Rules, either the 1986 Rules or the 2016 Rules. Clear words in the statute would be required to impose such a change on the law of insolvency. Further, the 1996 Act post-dates the Insolvency Act 1986 by a decade. Primary legislation is presumed to be consistent with, and is to be construed in accordance with, existing primary legislation. There is nothing included in any of the statutes that deal with adjudication in construction contracts to suggest such a sweeping change was imposed, or even contemplated."

In view of the foregoing matters, Mr Justice Fraser granted the declarations sought by Lonsdale and confirmed that the adjudication would not be allowed to continue on the grounds that the adjudicator did not have jurisdiction to determine the dispute referred to him:

"The dispute referred to him included both money claims and cross claims, and an analysis of how much was owed to Bresco.…..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 responding party."[13]

Practitioners should note that Mr Justice Fraser took the opportunity to reiterate the Court's unwillingness to entertain inappropriate use of the Part 8 procedure by litigants. He emphasised that, whilst the Court "undoubtedly"[14]has jurisdiction to grant an injunction or "declarations that may have the same effect as the grant of an injunction" in an ongoing adjudication, it "will only do so very rarely and in very clear cut cases"[15], namely circumstances where it would neither be "just or convenient to permit an adjudication to continue in circumstances where the decision of the adjudicator will be incapable of enforcement"[16]. Mr Justice Fraser accepted that this threshold test was met in the particular circumstances of this case. However, parties should heed the Court's stark warning that the Part 8 procedure should be used sparing and only in exceptional circumstances:

"I do not wish parties to adjudications generally to read any element of this judgment and conclude that CPR Part 8 represents a short cut available to them in conventional cases, or as any encouragement to seek injunctions to restrain ongoing adjudications. Such proceedings will only be considered suitable or even arguable in very rare cases."[17]

 

[1]  Judgment, paragraph 20

[2]  Judgment, paragraph 22

[3]  Judgment, paragraph 24

[4]  Judgment, paragraph 75

[5]  Rule 14.25(6), 2016 Rules

[6]  Judgment, paragraph 33

[7]  Judgment, paragraph 31

[8]  Judgment, paragraph 45

[9]  Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd[2009] EWHC 3222 (TCC), at paragraph 69

[10]Judgment, paragraph 48

[11]Judgment, paragraphs 62 and 67

[12]Section 108(1), Housing Grants Construction and Regeneration Act 1996; Paragraph 1(1) of the Scheme for Construction Contracts (England and Wales) Regulations 1998

[13]Judgment, paragraph 76

[14]Judgment, paragraph 13

[15]Judgment, paragraph 14

[16]Twintec Ltd v Volker Fitzpatrick Ltd[2014] EWHC 10 (TCC), at paragraph 63 

[17]Judgment, paragraph 16

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