Enterprise Managed Services v Tony McFadden Utilities [2009] EWHC 3222

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes


In this case the Court held that an adjudicator appointed under the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”) did not have jurisdiction to determine the net balance due between a company in liquidation and a creditor pursuant to Rule 4.90 of the Insolvency Rules 1986.   The Court also provided guidance on the approach that an adjudicator should take in relation to time limits for the making of his award where a dispute concerns a complex final account claim.   

Technology and Construction Court, Mr Justice Coulson


In September 2002 Thames Water Services Ltd, trading as Subterra (“Subterra”), engaged Tony McFadden Ltd (“TML”) to carry out repairs of mains, service pipes and other fittings in the North London area.  This contract was known as the NLSDA Sub-Contract.  This was a construction contract within the meaning of the Construction Act.  In August 2003 Enterprise Managed Services Ltd (“Enterprise”) agreed to buy the business of and the assets owned by Subterra pursuant to an Asset Purchase Agreement under the terms of which Enterprise agreed to accept a novation of all Subterra’s rights and obligation sunder numerous contracts, including the NLDSA Sub-Contract.  From September 2003 onwards Enterprise made payments to TML.  In 2005 and 2006 Enterprise employed TML on three other sub-contracts, including a sub-contract referred to as “the Lot 8 Sub-Contract”.  In May 2006 TML went into administration.  In September 2007 TML’s administrators submitted a Final Account to Enterprise seeking an alleged balance due of £2.5m in relation to the NLSDA Sub-Contract.  No sums were paid.  Liquidators were subsequently appointed with regard to TML.  Following their appointment they sent a document to Enterprise setting out their detailed claim in respect of the NLSDA Sub-Contract.  This was followed by a claim for £2.6 million in relation to the Lot 8 Sub-Contract.  Enterprise responded by serving its own claim against TML, claiming that it had overpaid TML £3m in relation to the Lot 8 Sub-Contract.  In June 2009 the liquidators assigned the balance of the monies allegedly owed by Enterprise to TML to Tony McFadden Utilities Limited (“Utilities”) by way of a Deed of Assignment (“the Deed of Assignment”).  Utilities then referred the claims under the NLSDA Sub-Contract to adjudication.  While the adjudication was still ongoing Enterprise issued court proceedings in which it sought a number of declarations against Utilities related to the jurisdiction of the adjudicator.  Utilities themselves sought a number of mirroring declarations.         


The Court was asked to decide the following issues:

  • Was the NSDLA Sub-Contract novated in favour of Enterprise?
  • What rights and liabilities were the subject of the Deed of Assignment?
  • Was the Deed a valid assignment?
  • Could Utilities as assignees adjudicate the NLSDA claim against Enterprise?
  • Did the adjudicator have the necessary jurisdiction to undertake the adjudication?


The Court found:

  • As a matter of construction of the Asset Purchase Agreement, the NLSDA Sub-Contract was novated in favour of Enterprise.  In any event, there was a strong case for novation by conduct.
  • Rule 4.90 of the Insolvency Rules 1986 requires that where prior to a company entering liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company, 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.  Stein v Blake [1995] UKHL 11 was House of Lord’s authority for the proposition that a liquidator could assign the net balance due after the mandatory account was taken pursuant to Rule 4.90.  On a proper construction of the Deed of Assignment in this case, what was assigned to Utilities was the net balance arising out of the mutual dealings between Enterprise and TML. It was not necessary for the amount of the net balance to have been agreed or established before seeing whether the assignment was effective at all.
  • Under the rule in Stein v Blake, the sub-contracts themselves and the various claims made under them could not be assigned by the liquidators; only the right to an account and a payment of the net balance (if any) could be assigned. There was a specific prohibition of assignment set out in the Lot 8 Sub-Contract, but this did not apply to or prohibit the assignment of the net balance resulting from the mandatory application of Rule 4.90.

  • Although Utilities were entitled in principle to pursue their claim against Enterprise for an account and the payment of what it said was the net balance under Rule 4.90, this could not be by way of this (or any) adjudication for the following reasons:

      • In the case at hand there were four sub-contracts between TML and Enterprise.  Under the Construction Act an adjudicator can only deal with one dispute under one contract: Fastrack Contractors Ltd v Morrison Construction Ltd [2000] EWHC 177.

      • If the responding party has a cross-claim and considers that it would be entitled to the net balance from the claiming party (the assignees), then it would be necessary for them to join the assignors (in this case the liquidators of TML) in the proceedings.  This could never happen in adjudication because it is not possible to have a tripartite adjudication.
      • Rule 4.90 envisages that the account will be taken and the balance will be decided in one set of proceedings where the result would be final and binding.  This rules out adjudication, because the results are only ever temporarily binding.   
  • Utilities had not sought to refer to adjudication the dispute as to their right to an account and a balance due under Rule 4.90, but had rather referred TML’s disputed claim against Enterprise under the novated NLSDA Sub-Contract.  Utilities did not have the right to refer to adjudication the dispute under the NLSDA Sub-Contract for the following reasons:

      • Pursuant to the decision in Stein v Blake, the effect of the mandatory account required to be taken pursuant to Rule 4.90 was that the claims for the sums due under the NSDLA Sub-Contract had ceased to exist, and could no longer be (and had not been) assigned.  Following the liquidation of TML and the assignment of the right under Rule 4.90, the only potential action which continued to exist was a claim on the net balance of the sums between the parties. 
      • In the absence of agreement between the parties it would not be in accordance with the Insolvency Rules for the calculation of the balance between the parties to be undertaken in a piecemeal fashion by means of a number of adjudications under the various sub-contracts.
      • There is a fundamental clash between the certainty and finality envisaged by the process under Rule 4.90 and the temporary quick-fix solution offered by adjudication under the Construction Act.    
  • Even if (contrary to the findings of the Court) the adjudicator did have the necessary jurisdiction, then Utilities would still not be entitled to payment of any amount the adjudicator might award under the NSDLA Sub-Contract because:

      • Money could only be paid to the successful party in the adjudication once an account had been taken based on all the mutual dealings under Rule 4.90.  Payment could not be made part-way through the process:  see Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd; and 
      • Enterprise would have a cross-claim under the Lot 8 Sub-Contract which would on the face of things over-top the sum found due by the adjudicator under the NSDLA Sub-Contract.  That would entitle Enterprise to a complete set-off: see JPA Design & Build v Sentosa [2009] EWHC 2312 (TCC).
  • In any event, the adjudicator did not have jurisdiction because the dispute had not crystallised.  Utilities notified Enterprise of the Deed of Assignment and its claim as assignee on the same date that it purported to refer the dispute to adjudication.  Enterprise had had no time to consider Utilities’ claim.  The Court rejected the submission that Utilities was merely standing in Utilities shoes for the purposes of the adjudication.
  • Accordingly, the adjudicator did not have the requisite jurisdiction and the adjudication must be aborted.  Utilities could pursue its claim under Rule 4.90, but the only appropriate forum for this was in the High Court.
  • Although immaterial to the analysis of the legal arguments set out above, the Court also considered the course of the adjudication.  The Final Account claim was based on a series of detailed schedules, the supporting material for which filled more than 40 lever arch files.  A similar amount of material accompanied the Lot 8 cross-claim.  The sheer size of the claim meant that the adjudicator was under a duty to ask himself at the outset whether he could discharge his duty impartially and fairly under the Construction Act.  The adjudicator had failed to do this.  The size of the claim meant that time was extended by agreement of the parties on a piecemeal basis, resulting in a process that was three times as long as the original period set down in the Construction Act.  The adjudicator had also refused to grapple at all with the jurisdiction arguments raised.  If the adjudicator had acted firmly, and also reached an early view as to his jurisdiction, then time and money would have been saved.  (The cost of the legal proceedings alone was said to be £240k).  

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

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