Pursuers: Currie, QC, M Hamilton; Pinsent Masons LLP

Defenders: Moynihan QC, Richardson; DWF Biggart Baillie

4 ^th September 2013

[1] This action concerns the impact of an insolvency on an adjudication conducted under the regime imposed by the Housing Grants, Construction & Regeneration Act 1996. The background circumstances are as follows. In 2007 Perth & Kinross Council (the defenders) employed Connaught Partnerships Ltd to supply, install and refurbish bathrooms in 7,500 houses. In September 2010, by court order, Connaught was placed in administration. The administrators (the pursuers) have assessed the amount owed to unsecured creditors at approximately £160m. Each will receive, at best, a small proportion of the prescribed part of £600,000. The administrators have sold certain of the book debts to another company and have entered into an agency agreement, the effect being that it is that other company which has the direct financial interest in the outcome of the present proceedings.

[2] A dispute arose as to the pursuers' entitlement to any further payment following the submission of a revised final account in January 2011. The defenders contended that the pursuers had already been paid more than was due. The dispute was referred to adjudication. The defenders were ordered to pay the pursuers a sum of almost £679,000 plus interest and VAT - giving a total of £835,000 or thereby. The court is now asked to enforce that award. There was no dispute that if decree is granted, in effect, that will be the final resolution of the matter. In the event that the matter were to proceed to a judicial or arbitral determination, and be resolved in favour of the defenders, the maximum which the defenders could hope to receive from the insolvent company is £3,000 or thereby, being a dividend of less than 0.4 pence in the pound. For the defenders, Mr Moynihan QC submitted that this simple fact alone is sufficient to justify refusal of decree enforcing the adjudicator's award. Not only would the defenders be unable to recover the vast bulk of the sum paid over, their counterclaim, which is based on allegedly defective works under the contract, would be next to worthless.

[3] For the pursuers, Mr Currie QC resisted all of this on the basis that the defenders' plea, which is based upon the principle of the balancing of accounts in bankruptcy, was not relevantly placed before the adjudicator. As a result she was not required to address it in her decision and reasoning. Furthermore, it follows that the court should refuse the defenders' request to apply the doctrine now. Mr Currie relied upon the decision in Construction Centre Group Ltd v Highland Council 2003 SC 464. Mr Moynihan countered by asserting that the issue was properly stated in the defenders' submissions to the adjudicator. However, even were that not the case, it can be relied upon and applied now at the enforcement stage, otherwise a gross injustice would be perpetrated.

[4] Both counsel made reference to a number of cases, including Melville Dundas Ltd v George Wimpey UK Ltd (2007) SC (HL) 116; Inveresk Plc v Tullis Russell Papermakers Ltd 2010 SC (UKSC) 106; Integrated Building Services Engineering Consultants Ltd (t/a Operon) v Pihl UK Ltd [2010] BLR 622 ; and Pilon Ltd v Breyer Group Plc [2010] BLR 452 .

[5] At the outset it is worth noticing the jurisprudence on this subject south of the border. In an early case ( Rainford House Ltd v Cadogan Ltd [2001] BLR 416 ) Judge Richard Seymour QC described adjudication as

"a swift mechanism by which a dispute under a construction contract as to who has to pay what to whom while the construction work to which the contract relates is in progress can be resolved on a binding, but interim, basis, leaving the final resolution of disputes, if that proves to be necessary, to follow at leisure, without disrupting the cash-flow of the project".

There was no intention that the adjudication regime under the 1996 Act should transfer the risk of insolvency to one of the parties. The purpose was to decide which party is to hold the fund of money pending a final resolution of the dispute, all on the footing that both parties are solvent. Under reference to observations of Chadwick LJ in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522 , Judge Seymour continued:

"If there is credible evidence that the claimant is insolvent...that is a highly material matter for the court to consider in relation to any application for a stay of execution of the judgment in favour of the claimant".

There was unchallenged evidence that the claimant was insolvent at the date of the hearing, thus a stay was granted unless and until security for repayment was provided.

[6] In Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd [2010] BLR 89 , Coulson J quoted from an earlier decision to the effect that if the claimant is insolvent, a stay will usually be granted, otherwise the defendant may never recoup his money "if the adjudicator turns out to be wrong". Mr Moynihan drew attention to the subsequent decision of Coulson J in Pilon Ltd , where his Lordship reviewed some of the case law, including Wimbledon Construction Company 2000 Ltd v Derek Vago [2005] BLR 374 . The general position in England and Wales is that, unless the claimant's finances were in much the same state at the date of the contract, or have been made parlous because of the defendant's refusal to comply with the award, and if the claimant is insolvent, a stay of execution will usually be granted. (It was not suggested that either qualification applies in the present case.)

[7] In Straw Realisations (No.1) Ltd (in administration) v Shaftsbury House (Developments) Ltd [2011] BLR 47 , Edwards-Stuart J discussed Lord Hodge's decision in Integrated Building Services , and the different procedural and substantive law on either side of the border. He agreed that

"once there has been some event, such as a court order, that affects the assets of one of the parties or the ability of a party to bring proceedings to challenge a decision of an adjudicator, the position becomes different and the order of priorities between the need to enforce the decision of adjudicators and the need to implement the rules of insolvency, shifts in favour of the latter" (paragraph 84).

[8] Turning to the position in Scotland, neither counsel mounted any challenge to the reasoning of Lord Hodge in Integrated Building Services . Mr Currie sought to distinguish the case by stressing that the insolvency event occurred after the adjudicator's award, thus the point could not have been taken earlier. Lord Hodge described it as a case of "supervening insolvency". In my view counsel were right not to take issue with Lord Hodge's decision. The following can be derived from it:

(1) The solution adopted in England and Wales can be achieved in Scotland by operation of the principle of the balancing of accounts in bankruptcy (at least in practical terms).

(2) As Lord Hodge said at paragraph 16:

"...the provisional nature of the adjudicator's decision and the reservation of a final determination to another decision maker are important characteristics of (adjudication) procedure".

The speed of the adjudication may not allow parties to present their position in full - but that is in the nature of a process designed to achieve a quick interim decision to facilitate cash flow during a continuing contract (paragraph 28).

(3) In passing the 1996 Act, Parliament did not intend to determine priorities between the employer and an insolvent contractor's creditors - see Lord Hoffman in Melville Dundas at paragraph 12, nor prevent the balancing of accounts in bankruptcy (paragraph 28 of Integrated Building Services ).

(4) The obligation to implement an adjudicator's decision does not necessarily supersede an employer's other entitlements on a contractor's insolvency (paragraph 16).

(5) The balancing of accounts in bankruptcy is an equitable principle and can be operated by the court to ensure fairness (paragraph 25). (Reference can also be made in this regard to their Lordships' speeches in Inveresk Plc. ) The defence of balancing of accounts in bankruptcy can be pleaded at the enforcement stage; the entitlement arising from the claimant's insolvency (paragraph 28).

[9] On the face of it, the present would appear to be a case par excellence for the application of the doctrine, thus allowing the defenders to retain the sum awarded by the adjudicator as security for the possibility of their eventual success at a final resolution of the dispute. Otherwise the court would be ordering payment of an interim award which, should it prove to be erroneous, could not be reversed, and the defenders would be out of pocket by over £830,000. The issue is all the more serious if one bears in mind that in adjudication the "need to have the right answer has been subordinated to the need to have the answer quickly" (Chadwick LJ in Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2006] BLR 15 at paragraph 86). However, Mr Currie relies upon the decision in Construction Centre Group Ltd . It is therefore necessary to consider that case in some detail.

[10] In the Outer House (2002 SLT 1274 ), Lord Macfadyen was asked to refuse summary decree in respect of an adjudicator's award on various grounds, including a right of retention or set off based on the employer's liquidate damages claim. This argument was rejected because the employer "chose not to raise the issue in the course of the adjudication". Had the employer done so, it would have been entitled to insist that the adjudicator deal with it; but, having failed to plead the defence before the adjudicator, the employer could not rely upon it to resist enforcement of the award. It was stressed that "the right of retention was not lost". It remained exercisable against any future sum falling due to the pursuers under the contract. It can be noted that in the Outer House there was no question as to the insolvency of the contractor.

[11] The decision was the subject of a reclaiming motion which came before an Extra Division (2003 SLT 464). Shortly before the hearing, amended grounds of appeal were lodged which referred to events which had occurred since the Lord Ordinary's interlocutor. In particular a receiver had been appointed to the contractor, though "it was accepted...this could not of itself found any basis for interfering with the...interlocutor". Another additional ground of appeal drew attention to the employer's determination of the contract, which, in terms of clause 63, meant that the employer was not liable to pay any further money on account to the contractor pending expiry of the period of maintenance and, thereafter, ascertainment of the costs of completion and all other expenses.

[12] When delivering the opinion of the court, Lord Hamilton stated that the purpose of the 1996 Act was to allow for a speedy and enforceable decision, albeit provisional, pending final determination by litigation, arbitration or agreement. The court should interpret construction contracts consistently with that objective, and lend their assistance to prompt enforcement of adjudicators' awards. To construe clause 63 as embracing sums ordered by the adjudicator would defeat the purposes of the statute.

[13] Turning to other matters, Lord Hamilton observed that it was not argued that the Lord Ordinary was wrong to hold that the employer could have relied before the adjudicator on a claim of retention founded on an illiquid debt arising out of the same contract. At the date of the adjudicator's decision, the liquidated damages claim exceeded the amount of the award. A fortiori the employer could have relied to the same effect on an illiquid debt arising on the same basis under the same contract. His Lordship continued at page 473:

"It is sufficient to hold, as we do, that, the contra-debt for liquidated damages for delay, whether illiquid or liquid in character, not having been relied on, as it might have been, before the adjudicator, the employer cannot, consistently with its contractual obligations to give effect forthwith to the adjudicator's award, now plead compensation in this action on the basis of that contra-debt. To allow it would be to fail to recognise, first, the nature of the adjudicator's order as being a resolution, albeit provisional, of a dispute between the parties and, second, the nature of the present action as being an enforcement mechanism for that order rather than proceedings concerned with any underlying question of the true and ultimate indebtedness (if any) of the employer to the contractor. ... In Scotland a party who has allowed judicial decree to pass against it when it might have put forward a plea of compensation, must pay upon the decree. Similarly, the employer having allowed the adjudicator's order to pass against it when it might have pled an admissible contra-debt in answer, is, by virtue of its contractual obligation to give effect forthwith to that decision, precluded from pleading in the judicial action of enforcement compensation on the basis of that contra-debt".

[14] Mr Currie submitted that the defence of balancing of accounts or set off was not the subject of relevant submissions before the adjudicator, thus the same should apply in the present case, otherwise the purpose of the adjudication regime would be thwarted. He submitted that this court was bound to follow the decision in Construction Centre Group . Mr Moynihan responded that the issue of balancing of accounts was properly placed before the adjudicator, however she did not address it. It followed that she failed to exhaust her jurisdiction - this being a further ground for resisting enforcement of the award. If he was wrong about that, in any event, any absence of such pleading before the adjudicator was no bar to the doctrine being applied now.

[15] For reasons to be elaborated upon later, I consider that Mr Moynihan's submissions as to the content of the defences before the adjudicator are well founded. If I am wrong on that, in my opinion the present case can be distinguished from the decision of the Inner House in Construction Centre Group . No issue of insolvency or the balancing of accounts in bankruptcy arose in that case. The point was expressly disavowed. The Inner House proceeded upon the basis, as per the statutory scheme, that the provisional nature of the adjudicator's decision could, if necessary, be unwound in due course when the true and ultimate indebtedness (if any) of the employer to the contractor was determined. For the reasons explained earlier, that cannot happen in the present case. As case law has demonstrated, much of it subsequent to the Construction Centre Group case, a stay of execution, or in Scotland, the balancing of accounts in bankruptcy, can operate in appropriate circumstances to prevent the statutory scheme from being undermined. In particular the court can prevent what was intended to be a provisional solution from becoming, for all practical purposes, the final outcome. In such circumstances, it is not clear to me that any failure to take the point before the adjudicator prevents it from being raised at the enforcement stage. The equitable doctrine is designed to prevent injustice and, in my view, there is nothing in the adjudication regime which disallows its application unless it is raised at the earliest opportunity. I do not consider that the decision in Construction Centre Group is authority for, or compels such a result. It is true that Integrated Building Services was said by Lord Hodge to be a case of supervening insolvency, but, having regard to the rest of his reasoning, I am not convinced that, had it been otherwise, and the point required to be specifically addressed, the ultimate outcome would have been different.

[16] Substantial guidance can be obtained from the decision of the House of Lords in the Scottish case of Melville Dundas Ltd , which came after Construction Centre Group . In a somewhat different context, a majority of their Lordships took the view that an insolvency justified placing limits upon the apparently unqualified wording of the 1996 Act, not least to avoid a windfall for an insolvent contractor's creditors. As Lord Hoffman observed (at paragraph 13), in insolvency the security for an illiquid debt arises from the law of bankruptcy set off. It is instructive to note that the view expressed by Lord Neuberger of Abbotsbury at paragraphs 78-79 was not shared by the majority of the court. That the case concerned sections 109 and 111 of the Act, not section 108, does not render it irrelevant to the present context.

[17] I accept the defenders' submission that the principle of balancing of accounts in bankruptcy can and should be applied. The result is that I shall refuse the pursuers' motion for summary decree or decree de plano .

[18] Earlier I indicated my view that, in any event, the defence of balancing of accounts in bankruptcy was laid before the adjudicator. I consider this tolerably clear from various passages in the defenders' submissions, though I would comment that the system of lengthy claims, responses, replies, and responses to replies, etc, does little to focus the issues in dispute. Mr Currie submitted that the defenders raised the issue of balancing of accounts in bankruptcy or retention of monies only in the context of, or on the condition that, the adjudicator made a payment award in favour of the defenders against the pursuers, all in respect of one or more of their contra-claims. Mr Currie observed that such an award would be outwith the jurisdiction of the adjudicator, in that it was beyond the scope of the dispute remitted to her, thus she was entitled to leave the issue of balancing of accounts to one side. While it is true that the defenders did inform the adjudicator of their claims against the pursuers and request an award, I do not consider that the plea of balancing of accounts or set off was restricted in the manner suggested by Mr Currie. For example, reference can be made to the final two documents presented to the adjudicator (productions 6/8 and 6/9). In the former, the pursuers asserted that the defenders sought to advance a contra-claim rather than rely on the defence of balancing of accounts in bankruptcy. The defenders response began as follows:

"(The defenders) would refer to their reply of Friday 19 October 2012 and the fact that they do set out a 'set of' defence in the event that the adjudicator considers a sum is otherwise due to Connaught and/or in the event that the adjudicator is of the view that she cannot make any award of payment etc. In other words, that the adjudicator may 'balance' (the defenders') claim against the sums the adjudicator would otherwise find as being due to Connaught. Reference is made to paragraphs 4.8.1 to 4.8.7 of the reply of 19 October 2012" (production 7/10).

I accept Mr Moynihan's submission that the defenders' overall position is made clear both in that document and in the reply of 19 October 2012 in the specified passages, and in others, for example at paragraphs 1.1.3, 5.4 and 5.5. On any view, and with reference to Lord Macfadyen's opinion in Construction Centre Group , it cannot be said that the defenders "chose not to raise the issue in the course of the adjudication". According to Mr Moynihan, the adjudicator having declined to address the matter focused in the passage quoted above, the award is invalid and should be reduced.

[19] Recognising that the defenders had made mention of the subject in their submissions to the adjudicator, Mr Currie submitted that the defence was not raised in a relevant manner, thus the adjudicator was correct to decide not to deal with it. He suggested that the matter was "not relevantly before the adjudicator". In this regard he relied upon the following passage in the judgment of Lord Macfadyen in the Outer House decision in Construction Centre Group:

"...it seems to me to be axiomatic that the adjudicator must entertain any relevant defence on which the responding party wishes to rely in arguing that that sum is not due. (paragraph 19)".

In my view, in context, this was intended to mean no more than that, if a party raises a line of defence which could be a defence to the claim, the adjudicator requires to deal with it. I do not consider that his Lordship intended to inject the notions of relevancy and specification, which are common currency in court pleadings, into the less sophisticated adjudication process, which has been judicially described as "rough and ready". In particular, I do not subscribe to any view that, if an adjudicator considers that there are difficulties or problems in the way in which a matter has been raised, this entitles her to ignore it. At the very least she would require to consider the matter and communicate her reasons for failing to uphold the contention.

[20] In my opinion, Lord Macfadyen used the term "relevant" in the everyday sense of something pertinent to the issue or issues at hand, as opposed to a collateral matter which cannot alter the outcome. Mr Currie acknowledged that it was open to the defenders to raise the issue of balancing of accounts in the circumstances of the present case, and that it could amount to a defence to the pursuers' claim for payment. In any event, having read the various submissions made by the parties, I consider that the line of defence was sufficiently stated and was, to use Mr Moynihan's phrase, "properly before the adjudicator".

[21] The result is that I shall also reduce the adjudicator's award ope exceptionis , in that she failed to deal with a relevant defence which was placed before her. There is Inner House authority to the effect that an adjudicator must deal with the remitted issues, and set out conclusions on each in a manner which makes sense to a reasonable reader ( Gillies Ramsay Diamond and Others v PJW Enterprises Ltd 2004 SC 430 ). It is at least possible to interpret the adjudicator's reasons on the basis that she left over these matters for the enforcement stage, but, even if that is correct, it is of no assistance to the pursuers. There was no discussion as to the proper form of interlocutor if the pursuers' motion is refused for the reasons given in this opinion. There is at least room for a difference of view on the issue, thus, in the meantime, I shall put the case out by order.