Cases The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 2 of 2019 Kenneth T. Salmon and Katy Ormston
Construction & Engineering
Contents 1. Introduction
Legislation The Act means the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 Pt 8. The ‘new’ provisions apply to contracts entered into on or after 1 October 2011. The main regulations are contained in the Scheme for Construction Contracts (England & Wales) Regulations 1998 (the ‘Principal Regulations’). 1 They have been amended by the Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011 2 (the ‘new Regulations’). The new Regulations apply only to contracts for construction operations in England entered into on or after 1 October 2011. For earlier contracts the Principal Regulations apply. There are separate regulations for contracts for work in Scotland applicable to contracts made on or after 1 November 2011. 3 The new Regulations apply only to contracts for work in Scotland entered into on or after this date. For earlier contracts the Scheme for Construction Contracts (Scotland) Regulations 1998 4 applies. There are new separate regulations for Wales, applicable to contracts for construction operations in Wales entered into on or after 1 October 2011. 5 A reference to “the Scheme” is to the Principal Regulations for England and Wales, or the Scheme for Scotland, as the context so requires.
page 3
2. Insolvency – Effect on Enforcement
page 3
Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd; and Primus Build Ltd v Cannon Corporate Ltd
2
1. Introduction The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 2 of 2019. Kenneth T. Salmon, Consultant Solicitor and Katy Ormston, Trainee Solicitor at Slater Heelis LLP. The law is stated at January 31 2019. This part cover only the recent decision of the Court of Appeal examining thetensionthatexistsbetweenadjudicationandtheinsolvency regime. This part is dedicated to a decision of the Court of Appeal on the inherent incompatibility between insolvency and adjudication. 2. Insolvency – Effect on Enforcement Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd; and Primus Build Ltd v Cannon Corporate Ltd 6 As reported in Part 1 Cases 2019, these two conjoined appeals were heard in the Court of Appeal who upheld in large measure both of the first instance rulings. In Lonsdale v Bresco , the Court held that the adjudicator did have jurisdiction to hear the dispute despite the fact that the referring party was a company in insolvent liquidation. However, to allow the adjudication to continue was neither just nor convenient. It would have been an exercise in futility, as the adjudicator was only asked to deal with one claim out of several and that would have prevented the taking of an account as required by the Insolvency Rules 2016. An injunction had been properly granted. In Primus v Cannon , the Court held that the mere fact that a company was in a Company Voluntary Arrangement (CVA) did not mean that summary judgment should be refused or a stay granted. Each case depended on its own facts. Here the purpose of the CVA was to enable the company to trade out of its difficulties and recovering the monies owed to it was a key part of that objective. It was also held that a “general reservation” to challenge jurisdiction would only be effective if it was made “appropriately and clearly” and that the proper course was to make a specific challenge on every ground which was or should have been apparent. Where there was a mix of specific and general reservations, the express inclusion of the former might undermine or negative the latter.
The rulings in more detail Michael J Lonsdale (Electrical) Ltd v Bresco Electrical Services Ltd; At first instance, Fraser J. had granted an injunction to restrain an adjudication by a company in insolvent liquidation. He did so on several grounds including that the adjudicator had no jurisdiction to hear the dispute because there was no sum due unless and until an account had been taken under the Insolvency Rules 2016. The Court of Appeal overruled Fraser J. on this point but upheld him and the grant of the injunction for other reasons. The appeal raised directly the question whether an adjudicator could ever have jurisdiction to deal with a claim by a company in insolvent liquidation. And if so whether such an adjudication could ever have any utility and if not whether an injunction preventing what would be an exercise in futility, was justified in any event. This involved consideration of the Insolvency Rules 2016 and previous case law and the purpose and utility of adjudication. The facts Bresco served an adjudication notice 3 years after its liquidation claiming that its subcontract had been repudiated and seeking payment for unpaid work and other sums amounting to £220,000 odd. Tony Bingham was appointed adjudicator. Lonsdale asked Mr Bingham to discontinue the adjudication on the basis that he had no jurisdiction because Bresco was insolvent and placed into insolvent liquidation. Mr Bingham made a non-binding ruling that he thought he had jurisdiction. Lonsdale issued Part 8 proceedings seeking an injunction to restrain the continuation of the adjudication. Fraser J granted the application for two reasons: first, on the authorities, the adjudicator did not have jurisdiction; second, it was “inconceivable” that any decision in favour of a company in insolvent liquidation would be enforced so that it would be neither just nor convenient to permit the adjudication to continue 7 (referred to in the judgment of the Court of Appeal as the “utility argument”).
3
Jurisdiction The relatively narrow issue for decision was based on the right of party to refer a dispute to adjudication “at any time” given by s108 of the Act. Lonsdale said that such right was lost when Bresco went into liquidation as there ceased to be any claim under the contract because it was replaced with a single claim to the balance (if any) arising out of the mutual dealings and set-off between the parties following the taking of the account required by rule 14.25 (2) of the Insolvency Rules 2016. The Court referred to the leading case on the operation of the similarly worded (i.e. identical in all material respects) provision in section 323(2) of the Insolvency Act and rule 4.90 of the Insolvency Rules 1986. 8 The Court also had regard to the judgment of Coulson J (as he then was) in another case considering these rules. 9 Lonsdale relied on Enterprise and the decision in Bouygues 10 as authority for their proposition that the claim ceased to exist at the liquidation and was replaced by the net claim after the taking of the account under the Insolvency Rules. That was the argument accepted by Fraser J. Lonsdale however conceded that Bresco would have been entitled to bring their contractual claim in Court proceedings; and the same claim at arbitration. That begged the question: how was adjudication different? The Court concluded that as a pure matter of jurisdiction there was no reason to treat a reference to adjudication any differently from a reference to arbitration. If the contractual right to refer the claim to arbitration was not extinguished by the liquidation, then the underlying claim must continue to exist for all purposes; choice of forum could not dictate whether or not a claim exists. The temporarily binding nature of adjudication did not somehow deprive the adjudicator of any jurisdiction. And of course the outcome may be final or become final. The Court concluded that HHJ Purle QC was right when he said that technically the adjudicator would have jurisdiction to consider the claim advanced by a company in liquidation. 11 Any suggestion made in Enterprise to the contrary was wrong. Utility There was a basic incompatibility between adjudication and the insolvency regime set out in the Insolvency Rules. The former was a rough and ready regime about improving cash flow and the latter was an abstract accounting exercise designed to assist liquidators in recovering assets. They could lead to very different results. Very often claims referred to adjudication were not ostensibly claims for a net balance of the sort envisaged by 14.25 of the Insolvency Rules 2016 but a part only of the overall claim which the company in liquidation may wish to make i.e. it is the claim that has arisen at that stage of the contract for example for an interim payment. The determination of that sort of claim could only ever be part of the necessary accounting exercise. In the absence of a pay less notice, the payee would then have to pay the claim and any cross claim e.g. for a true valuation, or defects or delay etc., would have to be the subject of subsequent adjudication.
The Court then looked at what might happen if the company in insolvent liquidation was found to be entitled to the sum found due but where the responding party had a cross claim. The latter if found entitled would only receive a dividend and lose the benefit of treating the claim as security for its cross claim. Therefore in the ordinary case, summary judgment to enforce the adjudicator’s decision would not be available; or execution of the judgment would be stayed. The authorities therefore acknowledged that a decision in these circumstances would ordinarily not be enforced by the Court. It might be putting it too high to say such enforcement was “inconceivable” but enforcement would only be available in an exceptional case. Either a refusal of summary judgment or a stay was the most likely outcome. Wider considerations There were wider considerations that pointed to the futility of adjudication when a company was in insolvent liquidation and there were cross claims. (a) A liquidator often has limited assets with which to pursue the claims of an insolvent company and it would be a waste of those assets to make claims which could not be enforced or at best only in exceptional circumstances. (b) There was no benefit to a liquidator in having a decision purely to establish a reduction in a creditor’s proof or to stand as an estimate or some sort of assessment of the value of the claim. A sum found due by an adjudicator at a point in time might be far removed from any final entitlement. (c) It would be wrong in principle that a responding party should incur costs in defending a claim at adjudication, when if even if he was unsuccessful, he would still resist summary judgment or enforcement but only at yet further cost. (d) Suppose a company in insolvent liquidation was to obtain summary judgment, the responding party would then have to bring its own claim in Court to overturn the result, requiring yet more costs to be incurred at the obvious risk of being unable to recover its entitlement. That would also be wrong in principle. (e) Finally the already overstretched Court resources would be put under further strain dealing with contested enforcement applications brought in the hope of seeing how things might turn out, with adverse effects on other Court users. The two regimes were incompatible from the outset and the Court rejected the notion that they could be made to work together by way of the enforcement process.
4
Summary For all these (above) reasons it was only be in exceptional circumstances that a company in insolvent liquidation (and facing a cross claim) could refer a claim to adjudication, and having succeeded, obtain summary judgment and avoid a stay of execution. Thus even though the adjudicator may technically have jurisdiction, it is something that could lead to a meaningful result. Solution to the incompatibility problem TheCourt held the answer was that adopted in this case namely the grant of an injunction to restrain the further continuation of the adjudication if it would be a futile exercise. Whether the Court will grant an injunction will depend on the facts of the case. Primus Build Ltd v Cannon Corporate Ltd The facts of this case were more complicated but are only set in summary below. Cannon engaged Primus to design and build a new hotel. In July 2016 Primus served a payment notice for £261,222. Cannon served pay less notice putting the amount due at “nil”. Cannon served a notice of termination and ordered Primus to leave site. Each side alleged the other had repudiated the contract. That dispute became the subject of the second adjudication between the parties in which the adjudicator held Cannon were in repudiatory breach. In a third adjudication, the same adjudicator held Cannon liable to pay Primus £222,542. That sum was not paid. Primus issued proceedings in Court claiming damages for breach of contract together with the unpaid sum from the third adjudication and a freezing order to the value of £750,000. An undertaking was given by Cannon not to deal with the hotel in such a way as to reduce its value below £2.7 million. Cannon made its own claims for breach of contract, defects and other matters and that litigation was on going at the date of the appeal. Primus entered into a CVA. Though Primus was insolvent, the directors’ proposal was that Primus would trade out of its difficulties and pay creditors in full, based on a belief that Primus would make a very significant recovery from debtors including Cannon. Primus then referred its claim for damages for repudiatory breach, to adjudication (the fourth adjudication). The adjudicator found a sum of £2.128m due to Primus, plus interest. In arriving at that figure he addressed and rejected almost all of Cannon’s cross claims. In the litigation Cannon made an unsuccessful application for security for costs. In refusing the Order, O’Farrell J. noted Primus had “a very strong case that its financial difficulties have been caused in large part by Cannon’s wrongful termination.”
Primus sought to enforce the fourth adjudication decision by summary judgment. The application was heard before HHJ Waksman. At first Cannon expressly accepted in writing that Primuswas entitled to summary judgment but wouldseek a stay of execution. They later sought to withdraw that concession, then, later still, reinstate it. HHJ Waksman reserved judgment. He referred the parties to a decision of Akenhead J. 12 on which he invited submissions, whereupon Cannon asked and were allowed to withdraw their concession for a second time. HHJ Waksman decided that if Primus was to make all or most of its recovery it would emerge solvent from the CVA. After considering the judgment in Westshield , HHJ Waksman concluded was no procedural bar to summary judgment, merely because that because a company with an adjudication decision was in a CVA and there was a counterclaim; nor did it follow there must be a stay of execution. His Honour then went on to consider the application for a stay on Wimbledon 13 principles. Like O Farrell. J., before him, 14 he concluded that Primus’ financial position was due wholly or in part to Cannon’s repudiation and failure to pay relevant sums. He declined to order a stay. Waiver Cannon’s point that the adjudicator lacked jurisdiction because of the existence of the CVA failed for the reasons given in Bresco (above). But the Court held it was not open to Cannon to take the point in any case. It held in short, that Cannon’s general jurisdictional reservation was insufficiently clear and irrelevant to the specific point. Having distilled the principles from previous cases, and having regard to the facts of the instant appeal, and not least because the point was taken for the first time on appeal, when it was too late for Cannon to do so, the Court ruled: a) That any proper jurisdictional objection was limited to the two points which the adjudicator had already decided against Cannon. b) The general reservation was too vague to be effective; c) It was in any event superseded by the two specific objections; d) Cannon knew or must be taken to have known about the ‘insolvency’ argument as the case law in support was decided in 2010 and they had specialist legal advice and were to be taken as having waived any objections beyond those specifically raised.
5
Was there a compelling reason to refuse summary judgment? Cannon relied on Bouygues where it was said that Dahl- Jensen’s insolvency “was a compelling reason to refuse summary judgment.” They argued there was no distinction between insolvent liquidation and a CVA. They also relied on Westshield . HHJ Waksman had distinguished Westshield on the facts and concluded that summary judgment in favour of Primus would not have interfered with the CVA process as had been the case there. Further, if the existence of a counterclaim was relevant, the adjudicator had considered both the claim and the counterclaim in the adjudication. The Court of Appeal agreed. The Court of Appeal then went on to say this: “In addition, it seems to me that the general proposition relating to a CVA may, depending on the facts, be very different to a situation where the claimant company is in insolvent liquidation. In the latter case, claims being make by the company are part of what might be called a damage limitation exercise, whereby the liquidators endeavour as best they can to pay dividends to creditors. A CVA is, or can be, conceptually different. It is designed to try and allow the company to trade its way out of trouble. The quick and cost-neutral mechanism of adjudication may be an extremely useful tool to permit the CVA to work on. One view is that that is what adjudication is there for: to provide a quick and cheap method of improving cash-flow.” Stay of execution The Court held that on the facts the stay was almost inevitable. Having resolved the issue of the CVA at summary judgment it could not arise again on a stay, or if it could the same answer was appropriate. The stay would have run the risk of preventing the successful conclusion of the CVA. The Court would exercise its discretion against a stay where the party seeking it was responsible wholly or in substantial part, for the claimant’s financial difficulties. Outcome The parties had reached a settlement and by consent the monies paid into Court were paid out to Primus’ solicitors.
Comment It is now clear that in the ordinary case of a company in insolvent liquidation (and even where there is across claim) the adjudicator will have jurisdiction to determine the dispute. But that is only the starting point. If the adjudication would be ‘futile’ an injunction can be granted to restrain the adjudication, and this will be usual outcome where an adjudication is by a claimant in insolvent liquidation and a cross claim exists. Examples of the “exceptional circumstances” where the adjudication would be allowed to continue were not given and are difficult to envisage. We suggest it will not be for the adjudicator to decline to hear the dispute for the reason that it might not lead to “a meaningful result” rather the responding party would be obliged to seek an injunction to restrain the adjudication. As we have seen above this is the occasion when the Court can consider if the adjudication is likely to serve a useful purpose such that it would be just and convenient to allow it to proceed. Thus the saving in Court time and cost envisaged by the Court of Appeal may be offset to some degree on contested injunction applications. In the case of a CVA (or presumably IVA), it will depend on the facts and whether summary judgment is likely to support the IVA process or interfere with it. The comments on waiver emphasis the limited utility of general reservations; they are not redundant in the case of events arising after the making of the reservation but will not cover specific jurisdictional objection one they arise and are known or ought to have been known. And once specific reservations are made earlier general reservation may be taken to have been waived unless renewed. Second, if it needs repeating, reservation must be clear and relevant to be effective.
6
References: 1. Scheme for Construction Contracts (England & Wales) Regulations 1998 (SI 1998/649). 2. Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011 (SI 2011/2333). 3. Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 (SI 2011/371). 4. Scheme for Construction Contracts (Scotland) Regulations 1998 (SI 1998/687) (S.34). 5. Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (Wales) Regulations 2011 (SI 2011/1715) (W.194). 6. Cannon Corporate Ltd v Primus Build Ltd [2019] EWCA Civ 27 (24 January, 2019) 7. Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC) 8. Stein v Blake [1996] 1. A.C. 243 9. Enterprise Managed Services Ltd v Tony McFadden Utilities Ltd [2009] EWHC 3222 (TCC) 10. Bouygues (UK) Ltd v Dahl-Jensen UK Ltd [2000] EWCA Civ 507 11. Philpott & Anor v Lycee Francais Charles De Gaulle School [2015] EWHC 1065 (Ch) 12. Westshield Ltd v Whitehouse [2013] EWHC 3576 (TCC) 13. Wimbledon Construction Company 2000 Ltd v Vago [2005] EWHC 1086 at [26] 14. As referred to above
7
Get in touch with our team for more info: Matthew Grellier Head of Construction & Engineering matthew.grellier@slaterheelis.co.uk
Katy Ormston Trainee Solicitor katy.ormston@slaterheelis.co.uk
Kenneth Salmon Consultant Solicitor kenneth.salmon@slaterheelis.co.uk
intouch@slaterheelis.co.uk 0161 672 1255 slaterheelis.co.uk
exceeding expectations
@SlaterHeelisLaw /slaterheelis
Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8Made with FlippingBook Online document