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England and Wales High Court (Technology and Construction Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Enterprise Managed Services Ltd v McFadden Utilities Ltd [2009] EWHC 3222 (TCC) (02 December 2009)
URL: http://www.bailii.org/ew/cases/EWHC/TCC/2009/3222.html
Cite as: [2010] BLR 89, [2009] EWHC 3222 (TCC), (2010) 26 Const LJ 204
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QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
133-137 Fleet Street London EC4A 1HD |
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B e f o r e :
____________________
| ENTERPRISE MANAGED SERVICES LIMITED |
Claimant |
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| - and - |
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| TONY McFADDEN UTILITIES LIMITED |
Defendant |
____________________
MISS STEPHANIE BARWISE QC and MR. MARK CHENNELLS (instructed by Messrs. Mishcon de Reya) for the Defendant
Hearing Dates: 26th and 27th November 2009
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Crown Copyright ©
- By proceedings issued under CPR Part 8 on 27th October 2009, the claimant, Enterprise Managed Services Limited ("Enterprise"), seek a series of 12 declarations against the defendant, Tony McFadden Utilities Limited ("Utilities"), in connection with ongoing adjudication proceedings which were commenced by Utilities as the referring party in September of this year. Enterprise contend that, for a variety of reasons, the adjudicator had no jurisdiction and that therefore the adjudication, which is due to be completed on 23rd December 2009, should be aborted forthwith.
- Although there are a variety of issues between the parties (more fully summarised in Section 3 of this judgment) there is one dispute of potentially wide application. It is this: to what extent, if at all, does an adjudicator appointed under the Housing Grants (Construction and Regeneration) Act 1996 ("the Act") have the jurisdiction to take an account and identify a net balance due arising out of mutual dealings between the parties pursuant to Rule 4.90 of the Insolvency Rules 1986? I am very grateful to all counsel and solicitors for their assistance in dealing with this and the other issues, a process that has been coloured by the urgency of resolving the jurisdiction issues well in advance of the extended date on which the adjudicator is to provide his decision.
- By Main Contract dated 5th May 1998 Thames Water Utilities Limited ("TWUL") engaged Thames Water Services Limited, trading as Subterra ("Subterra"), to carry out the repair and maintenance of mains, service pipes, and other fittings. By a Sub-Contract dated 13th November 2002 Subterra engaged Tony McFadden Limited ("TML") to carry out this work in the North London area. This was known as the NLSDA Sub-Contract. This was a construction contract within the meaning of the Act.
- On 31st August 2003 Enterprise agreed to buy the business of and the assets owned by Subterra. The Asset Purchase Agreement contained the following terms:
- Also on 31st August 2003 there was a Deed of Novation pursuant to which it was noted in the recitals that Enterprise "wishes to assume all rights and obligation previously enjoyed or incurred by [Subterra] in respect of the Agreements and the Contracts" listed in the Schedule. The Schedule included the NLSDA Main Contract.
- It appears that, from September 2003 onwards, Enterprise made payments to TML pursuant to the NLSDA Sub-Contract including a large payment, some £250,000, just a few days after the purchase and novation documents noted above were completed. On 26th March 2004, TML sent Enterprise their Final Account in respect of the NLSDA works, which Account was the subject of comment and criticism in a letter from Enterprise dated 1st April 2004. On 21st April 2004, Enterprise wrote again to TML, saying that their engagement under the Main Contract was being terminated and that
- Subsequently in 2005 and 2006 Enterprise engaged TML on another Sub-Contract referred to in the papers as "The Lot 8 Sub-Contract". At the same time two other smaller Sub-Contracts were agreed between Enterprise and TML. One was called the Three Valleys Sub-Contract and the other was a rather more informal van hire Sub-Contract.
- In May 2006 TML went into administration and, in consequence, the Lot 8 Sub-Contract was terminated. In September 2007, TML's administrators submitted a Final Account to Enterprise in relation to the NLSDA Sub-Contract seeking an alleged balance due of about £2.5 million. No sums were paid. On 19th November 2007 joint liquidators of TML were appointed.
- On 11th August 2008, TML's liquidators served what was called a 'Pre Action Adjudication Statement' on Enterprise, which set out their detailed claim in respect of the NLSDA Sub-Contract. This document included a lengthy Scott Schedule, which was itself based on a document originally served by Enterprise. On 29th August 2008, the liquidators gave Enterprise until 12th September 2008 to respond to these documents. No response was forthcoming.
- On 1st September 2008, TML's liquidators served similar claim documents in relation to the Lot 8 Sub-Contract. TML's claim was for some £2.6 million. On 10th October 2008, Enterprise responded, serving their own claim against TML in relation to the Lot 8 Sub-Contract, based on alleged overpayments. On the basis of Enterprise's detailed analysis, a sum in excess of £3 million was then said to have been overpaid to TML in respect of the Lot 8 works.
- Thereafter, between October and December 2008, the TML liquidators and Enterprise exchanged various letters concerning the disputes between them. On 29th December 2008 Enterprise confirmed their intention to prove in the liquidation.
- However, nothing then happened between the parties for some nine months. In June 2009 (although Enterprise were not aware of it) the liquidators assigned to Utilities what was called "the Net EMSL Balance", "EMSL" being the shorthand description of Enterprise. That Deed of Assignment lies at the heart of the disputes before the court and is set out and analysed in detail in Section 5 below.
- On 21st September 2009, Utilities' solicitors wrote to Enterprise in the following terms:
- On 24th September 2009, Utilities served the Referral Notice in the adjudication. This included, for the first time, a copy of the Deed of Assignment. The statutory 28-day period for the adjudication commenced on 24th September and a decision was therefore due on 22nd October 2009. In fact, for reasons which I analyse in Section 9 of this Judgment, the anticipated date of the adjudicator's decision is now 23rd December 2009, so that it appears that the adjudication is going to take three times as long as the period prescribed by the Act.
- On the basis of the most recent information, the respective positions of the parties in relation to the four Sub-Contracts between them is as follows:
- As I have indicated, Enterprise seek a total of 12 declarations against Utilities who themselves seek a number of mirroring declarations. I am not entirely sure that the proposed declarations comprise a particularly digestible menu of the issues that have arisen between the parties. Instead, I have taken the liberty of re-shaping those issues in a slightly different way as follows:
- For the reasons which will become apparent below, I am troubled by the course and conduct of the underlying adjudication. Furthermore, my concerns do have some bearing on my answers to some of the issues noted above. Accordingly, I address the course and conduct of the adjudication in Section 9 below. There is a short summary of my conclusions at Section 10 below.
- On behalf of Utilities, Miss Barwise QC submitted that the NLSDA Sub-Contract originally agreed between Subterra and TML was novated in favour of Enterprise when Enterprise purchased the business and assets of Subterra. She puts this primarily as a matter of construction of the Asset Purchase Agreement, the relevant terms of which I have set out at paragraph 4 above. Her alternative case is that, as a matter of conduct, the Sub-Contract was novated in favour of Enterprise.
- On behalf of Enterprise, Mr. Lofthouse QC disputed that there had been any such novation either as a matter of construction or by conduct. It appears from their recent response document in the adjudication that it is Enterprise's case (which has not been put in such terms before) that there was an "unwritten contractual relationship" between themselves and TML in relation to the NLSDA work scope, but only from the 3rd September 2003 onwards. Prior to that date it is Enterprise's case that the relevant contractual relationship was between Subterra and TML with a clear inference that they (Enterprise) had no liability for the pre-September 2003 works.
- I have concluded that Miss Barwise is right to say that, as a matter of construction of the Asset Purchase Agreement, the Sub-Contract with TML was novated in favour of Enterprise. It seems to me that the relevant clause of the Asset Purchase Agreement was clause 7.1, as set out in full in paragraph 4 above. That provision made the purchaser, Enterprise, responsible "for assigning, novating or otherwise transferring all contracts". On the face of it, therefore, that would include the Sub-Contract between Subterra and TML. That Sub-Contract is not one of the contracts which were expressly excluded from this liability under clause 7.1. Although there is a reference there to the 'Thames Water Contracts', the definition of those contracts in the Schedule includes only the Main Contracts between TWUL and Subterra, not the sub-contracts entered into by Subterra with others.
- Mr. Lofthouse agreed that, if Subterra had requested Enterprise to accept a novation of the Sub-Contract with TML, then Enterprise would have been bound to accept it. It seems to me that that realistic concession comes very close to an acceptance of Miss Barwise's novation case. Moreover, in my view, there is nothing in the Asset Purchase Agreement which provides for another stage in the process - for a novation of the Sub-Contract to be activated at Sub-Terra's request - as opposed to an immediate/automatic novation.
- Accordingly, it seems to me clear that, in purchasing the Business and Assets from Subterra, as defined in the Asset Purchase Agreement (which definition included the contracts entered into by Subterra with others and specifically included this sub-contract with TML), the Sub-Contract was indeed novated in favour of Enterprise.
- Whilst my view as to the proper construction of the Asset Purchase Agreement makes it unnecessary to decide the alternative way in which the novation case was put, it seems to me that, on the facts, there was a strong case for novation by conduct in any event. Paragraph 19-087 of Chitty on Contracts (30th edition) makes clear that acceptance of novation "may be inferred from acts and conduct but ordinarily it is not to be inferred from conduct without some distinct request". Amongst the authorities cited in support of this proposition is the Court of Appeal case of Chatsworth Investments Limited v. Cussins (Contractors) Limited [1969] 1 WLR 1. In that case Lord Denning MR dismissed the submission that the alleged novation was too tenuous and said:
- It seems to me that, similarly, it is very easy to infer a novation in the circumstances of this case. The documents demonstrate that large sums of money were paid by Enterprise to TML. If there was no Sub-Contract, no contractual relationship of any sort between Enterprise and TML, then those payments would not have been made. Moreover, I conclude that the large sum of money, in excess of a quarter of a million pounds, paid by Enterprise just a few days after the Asset Purchase Agreement had been completed, could not relate only to work done by TML for Enterprise after 1st September 2003. The only fair inference is that it related to work carried out in the preceding weeks for Subterra but that, following the Asset Purchase Agreement, Enterprise were now liable to pay for that work. Such a payment was, as Miss Barwise rightly pointed out, in accordance with clause 6.1 of the Asset Purchase Agreement, pursuant to which Enterprise undertook to be responsible for and properly pay all the assumed liabilities.
- Furthermore, as set out in paragraph 6 above, Enterprise themselves, when terminating the Sub-Contact with TML, expressly referred to the existence of a sub-contract between themselves and TML, and even went so far as to identify one of its express clauses. They did not seek to qualify or limit their liability to TML under that novated Sub-Contract nor, in my view, were any such qualifications or limitations available to them.
- It is worth comparing the evidence of novation in the present case with the situation in one of the many authorities that was cited to me, Rok Build Limited v. Harris Wharf Development Company Limited [2006] EWHC 3573 (TCC). In that case, concerned with the enforcement of an adjudicator's decision, the judge concluded that the defendant had an arguable case that the adjudicator did not have the necessary jurisdiction, because the contractor who had signed the construction contract was not the claiming party, Rok Build, but a company called Walter Llewellyn and Sons Limited. On the evidence the judge was quite unable to say when the de facto substitution had come about; what the circumstances of that substitution were; "and what agreement or acquiescence was shown by the defendant to the changed state of affairs". In the present case, on the other hand, there is cogent evidence on all those points, to the effect that the novation was agreed and accepted without question by all three parties.
- In all those circumstances I therefore conclude that, even if my construction of the Asset Purchase Agreement was wrong, a novation by conduct could easily be inferred on the facts.
- For those reasons, therefore, I conclude that there was a contractual link between TML and Enterprise, such that Enterprise could be liable to TML for a claim made under the NLSDA Sub-Contract. What is more, that claim could be pursued in adjudication by TML. In contrast to the evidential position in Rok Build, the evidence of an agreed novation was clear. A novated construction contract in writing satisfies the requirements of section 107 of the Act. The next and rather more difficult question is whether there is a contractual link between Enterprise and Utilities. That, of course, turns on the Deed of Assignment of 15th June 2009.
- It is Utilities' case that what was assigned to them by the TML liquidators was the balance due on the account to be taken arising out of the mutual dealings between TML and Enterprise, pursuant to rule 4.90 of the Insolvency Rules 1986. It is Enterprise's case that something rather less than that was purportedly assigned and that, in consequence, the assignment was invalid.
- The relevant rule is rule 4.90 which provides as follows:
- In Farley v. Housing and Commercial Developments Limited [1984] BCLC 442 there were two contracts between the same contractor and employer in respect of two different building sites. The contractor was wound up on the grounds of insolvency and his claims were assigned to Farley. The employer had cross-claims. An arbitrator was appointed and found that the employer was entitled to monies but at no time did the employer submit a proof in the winding up. Neill J ruled that the arbitration proceedings could not continue because the only cause of action which was capable of assignment following the insolvency was the right to the net balance. He said:
- Rule 4.90, albeit in its earlier version at section 323 of the Insolvency Act 1986, was the subject of a detailed exposition by Lord Hoffmann in Stein v. Blake [1996] 1 AC 243. In that case, the claimant pursued the defendant for damages for breach of contract and the defendant counterclaimed for damages for misrepresentation. The claimant was adjudicated bankrupt and the trustee in bankruptcy thereafter purported to assign to the claimant the right of action against the defendant. The action was stayed on the grounds that, until the trustee had taken an account under section 323, there was nothing to assign. The Court of Appeal allowed the appeal and the House of Lords dismissed the defendant's further appeal.
- The House of Lords held that the choses in action represented by the cross-claims were no longer capable of being assigned, and all that was assignable was the amount due after a mandatory account was taken pursuant to section 323 (ie the claim to a net balance). They further held that a trustee in bankruptcy was entitled to assign a net balance like any other chose in action and that, accordingly, the claimant's claim was valid.
- Lord Hoffmann explained in detail what happened to the original claim and counterclaim at page 255:
- At page 258, Lord Hoffmann also explained the mechanics of the taking of the account in the following terms:
- The Deed of Assignment was dated 15th June 2009. The recitals to it included the following:
- The assignment itself was in these terms:
- The liabilities were described as follows:
- The position of the liquidators was dealt with in clause 5 as follows:
- It seems to me clear that clause 3 gave rise to the assignment by TML to Utilities of "all such rights, title and interest" as TML may have in "the Net EMSL Balance". The Net EMSL Balance was expressly defined at clause 1.1.4 of the Deed in these terms:
- Thus, on its face, what was assigned to Utilities was the net balance arising out of the mutual dealings between Enterprise and TML. It was the net balance envisaged by Rule 4.90 of the Insolvency Rules. It was the net balance that was the subject of the decision in Farley and Lord Hoffmann's detailed exposition in Stein v. Blake.
- On behalf of Enterprise, Mr. Lofthouse had two principal points in support of his submission that, on analysis, rather less than the net balance under Rule 4.90 was assigned. His first submission was that, although there were four contracts between the parties (namely NLSDA, Lot 8, the Three Valleys and the van hire Sub-Contract), the Deed only purported to assign the claims under NLSDA and Lot 8 and was therefore incomplete and invalid. That argument was itself based on two separate parts of the Deed. First, there was the express definition of "the Contracts" at clause 1.1.1 as meaning NLSDA and Lot 8; secondly, the Schedule, which, in accordance with clause 1.4 must be read as part of the Deed, only referred to NLSDA and Lot 8.
- I do not accept the submission that the Deed of Assignment related only to those two Sub-Contracts. The most important reason for that conclusion is that there is nothing in the operative assignment provision, namely clause 3 (set out above), which could be read as giving rise to any such limitation. The words do not on their face exclude any of the mutual dealings between the parties.
- In addition, as I noted during the course of argument, the reference to NLSDA and Lot 8 as part of the definition of the term "the Contracts" in clause 1.1.1 is actually meaningless, since the term "the Contracts" is nowhere used in any part of the Deed. Furthermore, although it is true that the Schedule only refers to NLSDA and Lot 8, the Schedule is itself only referred to in clause 2.4 of the recitals and not in any of the operative provisions. It is perhaps unsurprising that the Schedule, which is providing a shorthand recitation of the disputes that had arisen, only refers to these two Sub-Contracts because these were the two Sub-Contracts where large claims had arisen and were the subject of the pre-Deed correspondence. The Schedule does not, as a matter of construction, qualify the assignment provision at clause 3.
- On behalf of Enterprise Mr. Lofthouse's second submission was to the effect that clauses 3 and 4, when taken together, appear to be an attempt to assign only a positive balance which may be due to the assignees (TML) in their mutual dealings with Enterprise, and that because there was no assignment of any potential debt or negative balance, it was an unenforceable assignment.
- As a matter of construction, I do not accept that submission either. It seems to me plain that clause 3 and 4 were an assignment of TML's right to an account in relation to the mutual dealings. It is TML's case that that account would demonstrate a balance in their favour. But the Deed also envisages that, once the account has been taken, there may be no such balance: hence the last part of clause 4.1 and the agreement at clause 5.1 that the liquidators might well be joined into any proceedings if, as may be the case, Enterprise pursue a balance due to them following the taking of the account.
- It seems to me that the Deed encapsulates precisely the sort of transaction envisaged by Lord Hoffmann in Stein v. Blake. It is not an invalid assignment of the right to the positive balance only. On the contrary, it seems to me to follow precisely the mechanism explained in Stein v. Blake for the assignment of the right under rule 4.90.
- This same conclusion also serves as an answer to another of Mr. Lofthouse's submissions on this topic, namely that, as a matter of construction, the assignment could only take effect if there was a net balance, so that it was necessary to take the account first before seeing whether the assignment was effective at all. Again, I do not accept that submission. As a matter of construction it seems to me that the assignment in the present case was indistinguishable from the valid assignment in Stein v. Blake.
- It is also convenient, I think, to identify here one final argument that arose on the assignment itself, namely whether the TML liquidators assigned to Utilities the right to adjudicate. Clause 1.1.4 (set out above) certainly suggests that the right to adjudicate was assigned. Moreover, it seems to me that, as a matter of law, an assignment of a right to adjudicate can be legitimate, although such a right needs to be attached to the underlying contract: see, in the context of arbitration, South v. Chamberlayne [2001] 3 EGLR 54.
- Thus, if the Deed of Assignment in the present case operated as an assignment of TML's contractual claim against Enterprise under the NLSDA, then I consider that the right to adjudicate that claim will also have been validly assigned and there is no difficulty under section 107 of the Act. But the question that arises here is this: can it be said that it was the right to adjudicate the dispute under the NLSDA Sub-Contract, as opposed to the Rule 4.90 right to an account and a payment of the net balance, if any, that was validly assigned under the Deed? For the reasons set out in the next three Sections of this Judgment, I have concluded that it was only the latter that was or could be assigned, and not the former.
- It was Enterprise's submission that the assignment was invalid for a number of reasons. The principal elements of that submission were those which I have set out in the preceding Section, namely that the Deed only related to two of the four Sub-Contracts between the parties, and only related to a positive balance on the taking of the account. As explained above, I do not consider that either of those submissions can be made good.
- Another issue in relation to the validity of the assignment concerned the express prohibition on assignment contained in the written terms of the Lot 8 Sub-Contract, and which may well have also been incorporated into the Three Valleys Sub-Contract, although that is not a finding that I can make on this application.
- The prohibition on assignment was in the following terms:
- I was taken to authorities concerned with the prohibition on assignment in contracts such as this and in particular the decision of the House of Lords in Linden Gardens Trust Limited v. Lenesta Sludge Disposals Limited [1994] 1 AC 85. In the speech of Lord Browne-Wilkinson there was a good deal of discussion about the potential difference between the assignment of the right of future performance and the assignment of the fruits of performance, namely, accrued rights for action for debt or damages. Lord Browne-Wilkinson accepted that:
- On the facts of Linden Gardens, however, the first claim failed because of the express prohibition on assignment in that case. The term was that "the employer shall not without the written consent of the Contractor assign this Contract. The Contractor shall not without the written consent of the Employer assign this Contract and shall not without the written consent of the Architect (which consent shall not be unreasonably withheld to the prejudice of the Contractor) sublet any portion of the work …"
- It seems to me that in the present case clause 2.3 (set out in paragraph 53 above) was a wide-ranging prohibition on assignment. On the face of it, there is nothing in the words used which would somehow allow the assignment of the fruits of performance under the Sub-Contract, whilst prohibiting the assignment of the future rights of performance of that same Sub-Contract. On the face of it, the clause prohibits the right to assign the Sub-Contract even after the works had been performed.
- But, as noted above, it was not the Sub-Contract or the fruits of performance of that Sub-Contract that was assigned by TML to Utilities in the present case. What was assigned here, both on Utilities' own case and as I have found, was the debt said to arise on the taking of the account in relation to the mutual dealings between TML and Enterprise pursuant to Rule 4.90. The Lot 8 Sub-Contract is just one of those mutual dealings.
- Accordingly, it seems to me that the assigned right here is a very specific right which only arises at all on the insolvency of TML and which, at the time that the Lot 8 Sub-Contract was agreed, might not involve the Lot 8 Sub-Contract at all (because all claims under that Sub-Contract might have been settled by the time of the liquidation) or it might only involve it to a peripheral extent. Thus, notwithstanding the wide words of clause 2.3 (to which I have already referred) I find it difficult to conclude that, to the extent that the taking of an account under Rule 4.90 might involve looking at the financial position under the Lot 8 Contract, that the assignment of that specific right fell within the prohibition provision.
- Thus, I conclude that clause 2.3 of the Lot 8 Sub-Contract (and potentially the same clause in the Three Valleys Sub-Contract) was wide enough to prohibit the assignment of all ordinary claims under or for breach of the Sub-Contract, but was not intended to (and did not) exclude the assignment of the right to an account arising out of the mutual dealings between TML and Enterprise under Rule 4.90, which may or may not involve a consideration of the financial position between the parties under the Lot 8 Sub-Contract and potentially the Three Valleys Sub-Contract.
- Accordingly, it seems to me that the right to an account, and the payment of any account based on the mutual dealings between TML and Enterprise, arising under Rule 4.90 of the Insolvency Rules, has been validly assigned from TML to Utilities. Conversely, as a matter of construction of the Deed of Assignment, and for the detailed reasons set out in Section 7 below, I do not consider that the NLSDA Sub-Contract itself, or the right to make a claim either under or for breach of that Sub-Contract or any of the other three, has been assigned by TML to Utilities. Furthermore, again as set out in more detail in the next Section of this Judgment, I have concluded that the assignment of such a claim would have been impossible anyway. But for the avoidance of doubt I find that, due to the prohibition on assignment discussed above, the specific right to claim under or for breach of the Lot 8 Sub-Contract and (to the extent that the same clause is in the Three Valleys Sub-Contract), the Three Valleys Sub-Contract, those individual claims could not be assigned in any event.
- As noted above, Utilities, the assignees of TML, are entitled to pursue their claim against Enterprise for an account and the payment of what they say is the net balance due under Rule 4.90. It seems to me that, on these facts, this claim could not be pursued in adjudication, but would have to be pursued in court. There are three main reasons for this.
- First, in the present case, there were four Sub-Contracts between TML and Enterprise. Under the Act, an adjudicator can only deal with one dispute under one contract: see Fastrack v. Morrison [2000] BLR 168. Thus, absent agreement, an adjudicator could never undertake the necessary task under Rule 4.90 if there was more than one contract between the parties. He could not in those circumstances become what the authorities describe as "the decision-maker". Furthermore, on the facts here, at least one of those contracts, the van hire Sub-Contract, was not a construction contract at all, which would mean that an adjudicator would have no jurisdiction even to consider it.
- Secondly, as noted in Stein v. Blake, if (as here) 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. As I have said, the Deed of Assignment in the present case envisages just that course. But again, that could not happen in adjudication because it is not possible to have a tripartite adjudication.
- Thirdly, I consider that, on its face, Rule 4.90 envisages that the account will be taken and the balance decided in one set of proceedings where the result would be final and binding. It seems to me that that is the inescapable effect of the words used, particularly in sub-rules 4.90(3) and (4). It is also, I think, what Lord Hoffmann had in mind in Stein v Blake when he referred to the taking of the "single account". Again, therefore, that would rule out adjudication, because the results could only be obtained piecemeal, contract by contract, and could only ever be temporarily binding. Those points are developed further below.
- In my analysis, Utilities have not sought to refer to adjudication the dispute as to their right to an account and a balance due under Rule 4.90. Instead, they have purported to refer to adjudication TML's disputed claim against Enterprise under the novated NLSDA Sub-Contract. That is the only claim identified in the Adjudication Notice which is, of course, the document from which the Adjudicator derives his jurisdiction: see Griffin v. Midas Homes [2000] 78 Con LR 152. Moreover, one of the decisions sought by Utilities is to the effect that Enterprise cannot in the adjudication rely on their Lot 8 claim, which is entirely consistent with their stance that only the NLSDA dispute has been referred. However, for the reasons set out below, I am in no doubt that Utilities did not have the right to refer to adjudication, or seek to ringfence within that adjudication, the dispute under the NLSDA Sub-Contract, which is just one element of the Rule 4.90 mechanism.
- First, I conclude that, as a matter of law, the claim for sums due under the NLSDA Sub-Contract has, in the unequivocal words of Lord Hoffmann in Stein v. Blake, "ceased to exist". Following the liquidation of TML and the assignment of the right under Rule 4.90, as he put it, "the only chose in action which continued to exist as an assignable item of property was the claim to a net balance". Thus the claim under the NLSDA Sub-Contract could not be and was not assigned to Utilities. Because it was no longer extant, it was incapable of assignment under the Law of Property Act 1925.
- Miss Barwise argued that the claim under the NLSDA Sub-Contract did continue to exist because that was the way in which the balance could be ascertained under Rule 4.90. It seems to me that that suggestion was roundly rejected by Lord Hoffmann in Stein v. Blake at page 255F of the report, where he said in terms that such a claim was "merely part of the process of retrospective calculation" and repeated that the only claim which could now exist was the claim to the net balance.
- Accordingly, I find that the only chose in action which TML's liquidators could assign, and did assign, was the claim to a net balance which arose out of the mutual dealings on four separate Sub-Contracts, at least one of which was not even a construction contract. That claim could not be referred to adjudication for the reasons noted at paragraphs 61-64 above.
- Secondly, in the absence of any agreement between the parties, it would 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. Even if the original claim under the NLSDA Sub-Contract somehow continued to exist, it was only as one part of the mechanism for the arriving at a net balance arising from the mutual dealings. Absent agreement between the parties, there is nothing in Rule 4.90 which would justify subjecting this mechanism to the piecemeal, element-by-element approach encompassed in multiple adjudications, particularly in circumstances where, such as here, not all the relevant parties could be joined in to the adjudication in any event. I consider that that conclusion, to the effect that Rule 4.90 envisaged a single and final ascertainment process, is consistent with the clear words of the Rule; consistent with Lord Hoffmann's reference to "a single account" in Stein v. Blake; and consistent both with the earlier decision of the Court of Appeal in MS Fashions v. BCCI [1993] 1 Ch 425 and the subsequent decision of the House of Lords in Secretary of State for Trade and Industry v. Frid [2004] 2 AC 506. In none of those authorities is a piecemeal, slice-by-slice approach suggested as being in any way appropriate for the taking of the account under Rule 4.90.
- Thirdly, there is what I perceive to be a fundamental clash between the certainty and finality envisaged by the full Rule 4.90 process and, to use the vernacular, the temporary, quick-fix solution offered by construction adjudication under the Act. How can a decision that, if challenged, is of a temporary nature only, and would relate just to an element of the chose in action, have any role in or relevance to the taking of a final account under the Insolvency Rules?
- This fundamental difference of approach was highlighted by the Court of Appeal in Bouygues (UK) Limited v. Dahl-Jensen (UK) Limited [2000] BLR 522, the only reported case of which I am aware which considered adjudication in the context of the Insolvency Rules. In that case Dahl-Jensen were in liquidation and thus were not, as a matter of law, entitled to summary judgment in respect of an amount found due by the adjudicator. Chadwick LJ referred to Stein v. Blake and he said this:
- 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. This is a third reason why, in my judgment, Utilities have not sought to and cannot adjudicate their claim to the balance of the account arising out of the mutual dealings between the parties.
- Miss Barwise's only answer to Bouygues was to say that it was of no application because Utilities were solvent and not in liquidation. But, so it seems to me, that does not get round the difficulty that the only claim that Utilities can pursue as assignees is the claim under Rule 4.90 that was previously available to TML's liquidators. Therefore the incompatibility of adjudication in this context is, in my view, an insurmountable jurisdictional hurdle to Utilities, just as it would have been to TML's liquidators.
- It is worth exploring, as it always is when matters of theoretical law are being discussed in a commercial context, what the consequences are if the jurisdictional hurdles are overcome. What is the potential effect of the proposed adjudication if, contrary to my views, it were permitted to continue? Let us assume, therefore, that (contrary to my conclusions noted above) the adjudicator did have the necessary jurisdiction and found that Utilities were entitled to, say, £1 million as a result of the Final Account claim on the NLSDA Sub-Contract. In my judgment, is it plain that Utilities would not be entitled to be paid any part of that £1 million. This is because:
- Very wisely, Miss Barwise was alert to this problem, because she sought to argue that it did not necessarily follow that any sums that may be found due to Utilities by the adjudicator could not be paid out immediately following the adjudication. She relied on the decision of Mr. Peter Prescott QC (sitting as a Deputy High Court Judge) in Swissport (UK) Limited v. Aer Lingus Limited [2007] EWHC 1089 (Ch). In that case the judge ordered the payment of the sum of just under £1 million to Swissport (who were in liquidation), notwithstanding the fact that, at the time of his judgment, Aer Lingus's counterclaim was shortly to be the subject of a decision by the EAT.
- At first blush, therefore, that looked a strong case in favour of Miss Barwise's position that the adjudicator here could order a sum to be paid by Enterprise to Utilities. However, on closer analysis, it seems to me that Swissport was a very different case to this. In Swissport there was only one contract between the parties. More importantly, the judge had concluded that the counterclaim advanced by Aer Lingus was shadowy because, as he put it, it depended on "an accumulation of contingencies". It seems to me that is a very different situation to the Lot 8 cross-claim here, which I am in no position to say is anything other than a valid cross-claim based on allegations of overpayment which may or may not succeed. Furthermore, even on the relatively extreme facts in Swissport the judge ordered that the liquidators could not distribute the £1 million until 14 days after the relevant EAT decision and his judgment indicated that, if the EAT decision was in Aer Lingus's favour, a fresh application could be made on their behalf. That practical solution to the problem seems to me to recognise that, as far as is possible on the facts, the Rule 4.90 exercise must involve a simultaneous and final consideration of all claims and cross-claims between the parties.
- For these reasons I do not believe that the decision in Swissport makes any difference to the conclusions that I have set out in paragraph 74 above, to the effect that, even if the adjudication were allowed to proceed, it would be of no value to either party. Indeed I note in that context that, at page 34 of his judgment, the learned judge in Swissport carefully distinguished Bouygues and the other adjudication cases that were cited to him, on the basis that they decided that, given the temporary nature of the result in an adjudication under the Act, "if the claimant is insolvent it will ordinarily be right to grant a stay of execution, else the defendant may never recoup his money if the adjudication turns out to be wrong".
- For all these reasons I have concluded that Utilities cannot adjudicate the claim under the NLSDA Sub-Contract. Indeed, I do not believe that that claim, on its own, has even been assigned to them or was capable of being assigned to them. 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 (including the number of contracts and the number of likely parties), 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.
- There is, however, a separate reason why I have concluded that the adjudicator does not have jurisdiction to consider this alleged dispute in any event. For the purpose of this analysis, let us assume that I am wrong in my conclusions set out above and that it was somehow open to Utilities to refer to adjudication the dispute under the NLSDA Sub-Contract.
- That claim could not have been brought by Utilities until after the 15th June 2009, when the Deed of Assignment had been sealed. However, Utilities did not notify Enterprise of the existence of either the assignment or their claim as assignees for another three months, until 21st September 2009. On that date they gave notice of the assignment and, on the very same day, purported to refer the dispute under the NLSDA Sub-Contract to adjudication.
- It is trite law that a claiming party in adjudication cannot ambush the responding party by purporting to refer to adjudication a new claim which is not yet in dispute. In Amec Civil Engineering v. Secretary of State for Transport [2005] BLR 227 May LJ reviewed the authorities on this topic and confirmed the principle outlined by Jackson J (as he then was) at first instance to the effect that:
- But here, so it seems to me, the issue arises with stark clarity. Utilities first gave notice to Enterprise of their claim at precisely the same time as they referred that claim to adjudication. On the face of it, it was simply not possible for a dispute between Utilities and Enterprise about that claim to have crystallised prior to the notice of adjudication. There was no interval between the two events. The responding party first became aware of the claiming party's claim at the same time as Adjudication Notice itself.
- On behalf of Utilities, Miss Barwise argued that the dispute which was being referred to adjudication was the dispute which crystallised last year between the liquidators of TML and Enterprise. She said that, for these purposes, Utilities were simply standing in the shoes of TML and were entitled to rely upon the crystallisation of the original dispute. She said that Utilities could therefore refer this claim to adjudication in the precipitate manner they did.
- Even assuming that the dispute under the Sub-Contract could be adjudicated, I do not accept that submission. It seems to me that, for a dispute to arise for the purposes of any reference to adjudication, there has to be a dispute between the two parties who are going to be the parties to the adjudication. If Party A wishes to adjudicate a dispute with Party B, it has to give Party B at least some opportunity of responding to its claim before it can say that that claim is disputed. The fact that Party B had earlier rejected a claim made by Party C, and Party A is now proposing to pursue some or all of Party C's claim itself, may well be important in considering what a reasonable time might be to allow for the crystallisation of the dispute before it can be referred to adjudication, but it cannot mean that Party B is not entitled to any time at all to consider the claim now made against it, for the first time, by Party A.
- For a dispute to crystallise, there must be a claim made by the claiming party against the responding party, which claim the responding party has had an opportunity at least to consider, even if a reasonable period for consideration might only be short, depending on the facts. It is only at the end of that period that the claim can legitimately be said to have become a dispute capable of being referred to adjudication. That simply did not happen here.
- Because Utilities make this claim as the assignees of TML, in order for a dispute to arise between themselves and Enterprise, Enterprise were entitled at least to consider their claim and, for example, to consider whether or not Utilities' position as assignees made any difference to the validity or otherwise of the claim previously brought by TML. In the present case, of course, it was Enterprise's case that it did. In such circumstances it cannot be appropriate for a notice of assignment to be simultaneous with the Adjudication Notice. Where they are simultaneous, as here, it cannot be said that a dispute had crystallised prior to the referral.
- That conclusion is also borne out here by the subsequent developments once Enterprise had taken the notice point. It appears that Utilities were troubled by the argument enough to start later adjudication proceedings in respect of the same claim, presumably in order to say that the crystallisation had at least occurred by the time of the second adjudication notice. However, despite the obvious notice difficulties, Utilities refused to abandon the first adjudication, and when a second adjudicator was appointed to deal with the same disputes as the first, Utilities realised the somewhat tangled web they were weaving and chose to abandon that second adjudication altogether.
- I should add for completeness that, on the evidence, there was no explanation for what I consider to be Utilities' rather aggressive tactics, whereby their Adjudication Notice was served at the same time as the Notice of Assignment. After all, they had taken the assignment in June, but they had not notified Enterprise of that assignment, and offered no explanation for that omission. They failed to give Enterprise even a week or a fortnight to consider the new position once they had provided the Notice of Assignment notwithstanding, as I have said, that they had allowed over three months to go past without pursuing the assigned claim at all. In those circumstances I am obliged to conclude that Utilities were determined to put pressure on Enterprise by endeavouring to use the summary adjudication process at all costs, and by denying them any opportunity to consider the change to the landscape following the assignment.
- For these separate reasons therefore I conclude that the adjudicator did not have the necessary jurisdiction to consider this claim and that the adjudication process currently in train must be halted.
- Although, on one view, it may be said to be immaterial to my analysis of the legal arguments set out above, I ought to set out briefly my views as to the course and conduct of this adjudication. I do so, not only because I have firm views on this topic, but also because those views are entirely consistent with my conclusion that, in the present case, the Rule 4.90 account can only be addressed in court, where the claims and cross-claims on all four Sub-Contracts can be properly addressed, with all the parties properly joined, rather than in the current limited adjudication proceedings.
- Utilities' adjudication claim in relation to the NLSDA Sub-Contract is for £2.5 million. It is a Final Account dispute, so in order to understand how that claim is calculated it is necessary to understand the claim for the full account of £7 million (which is disputed) and then deduct the sum previously paid (which also appears to be disputed). The Final Account claim is based on a series of detailed schedules, and the papers indicate that the supporting material fills more than 40 Lever Arch files. I note in passing that the material on the Lot 8 cross-claim, which is the subject of Enterprise's response in the adjudication, appears to be similarly extensive. Thus, this was a claim or a dispute which, because of its sheer size, may well not have been appropriate for the summary statutory adjudication process in any event: see for example paragraph 123 of the judgment of His Honour Judge Toulmin CMG QC in AWG Construction Services Limited v. Rockingham Motor Speedway Limited [2008] EWHC 888 (TCC).
- In such circumstances, where the sheer volume/size of a claim may make it unmanageable in an adjudication, the course to be adopted by the adjudicator is clear. As the same judge explained in CIB Properties Limited v. Birse Construction Limited [2004] EWHC 2365 (TCC), the adjudicator has to decide at the outset whether or not he can discharge his duty to reach a decision impartially and fairly within the time limit prescribed by the Act. If he cannot, he ought to resign. Thus, at the outset, the adjudicator, Mr. Robert Shawyer of Always Associates, had to ask himself that question. In arriving at the answer, he was of course entitled to assistance from the parties.
- Unhappily, it does not appear that the adjudicator asked himself that question or adopted this approach. His very first letter, 25th September 2009, correctly identified the date of 22nd October as being the final date for his decision under the Act. He was immediately aware of the difficulties this created, because in that letter he asked for an extra two weeks, thus extending his time to the maximum six weeks permitted by the Act (assuming the consent of the referring party). That would have taken the date of the decision to 5th November 2009.
- The correspondence demonstrates that it was immediately apparent to everyone that the claim on the NLSDA Sub-Contract alone, let alone any consideration of Lot 8, could not be addressed within that (extended) statutory period. Instead of asking himself whether or not in such circumstances the adjudication should be permitted to continue, the adjudicator merely sought to extend time on what appears to be an entirely piecemeal basis. That has resulted in an extension of time all the way through to 23rd December 2009, three times as long as the original period set down in the Act.
- The fact that this was ultimately an agreed extension of time is, so it seems to me, nothing to the point, since the agreements have been piecemeal and, from Enterprise's perspective, as the responding party, were based on their not unreasonable apprehension that a failure to agree extensions sought by the adjudicator might ultimately rebound to their detriment. Their solicitors' email of 5th October, addressing one such extension, stated – in my view correctly - that "it is becoming increasingly apparent that given the scale and complexity of the matters in dispute…it is quite unsuitable for the adjudication process". Moreover, if a responding party is asking for the whole of the remaining statutory period simply to put in a response (as Enterprise were here), the adjudicator cannot just declare that he will grant such an extension of time, provided that there was a similar extension for his own decision. He must decide if the request is genuine and necessary. If it is not, he must refuse it and fix a shorter period for the response. If he concludes that it is a justified request, then that would then be a clear pointer to the impossibility of dealing with the adjudication in the prescribed time.
- Piecemeal extensions in large and paper-heavy Final Account disputes are not what the Act was designed for. The enthusiasm on the part of some adjudicators to permit 'creep' in these cases should be curbed. Obviously, if the parties are agreed at the outset that the adjudicator's time for his decision should be extended by 2 or 3 months, then there is no difficulty. But in this case, there was no such agreement; on the contrary, there were disagreements about everything, including complexity and extensions of time, as well as the adjudicator's jurisdiction. That all demonstrates, in my judgment, that this large Final Account claim was never suitable for adjudication. The adjudicator ought to have made plain at the very beginning that he was unable to deal properly and fairly with the dispute referred to him in the time prescribed by the Act. I am afraid that, as far as I can tell, that responsibility was abdicated to the parties and a certain amount of pressure was put on Enterprise to agree to piecemeal extensions of time. In my judgment that is not the way to conduct adjudication and is contrary to the guidance set out in CIB v. Birse.
- The adjudicator compounded that failure by refusing to address the jurisdiction points raised fairly and squarely by Enterprise. He repeatedly said that he could not decide his own jurisdiction and he therefore refused to grapple at all with the jurisdiction issues being raised. Of course the adjudicator was right to say that he could not make a binding decision on his own jurisdiction: see paragraph 10 of the judgment of May LJ in Pegram Shopfitters v. Tally Weijl (UK) Limited [2003] EWCA Civ 1750. However, it is always useful, and often important to the parties, for the adjudicator to consider and express a view as to jurisdiction at an early stage, even if only in outline, particularly where, as here, the jurisdictional debate overlapped with the size, volume and timing issue referred to above. In my judgment, the adjudicator ought to have outlined his conclusions as to jurisdiction when the points were first raised by Enterprise. If he had done so, I think he would have also seen how important it was for him to decide at the outset whether or not this Final Account claim could be dealt with fairly under the summary adjudication process.
- In my judgment, the adjudicator ought to have taken more of a grip on this adjudication at the start, and reached early views both as to jurisdiction and as to whether it could be dealt with fairly in the time period. Had he done so, I think it likely that for one, or maybe even both, of these reasons he would have concluded that the adjudication could not be properly or fairly progressed and that the right course was resignation. That would have obviously saved a good deal of time and money, not least the costs of these Part 8 proceedings which, as I understand it, are now put at the barely credible figure of £240,000. The fact that, as a matter of practicality and fairness, this claim was not suitable for the summary adjudication process only supports my conclusion that the reference to adjudication was inappropriate as a matter of law.
- In my judgment, for the reasons set out in Section 4 above, the Sub-Contract was novated from Subterra to Enterprise. In addition, for the reasons set out in Sections 5 and 6 above, the right to an account on any net balance due under Rule 4.90 of the Insolvency Rules 1986 was validly assigned by TML to Utilities. No other claim or right was so assigned.
- For the reasons set out in Sections 7 and 8 above, Utilities are not assignees of, are not able to pursue piecemeal, the separate claims making up the Rule 4.90 account and balance. The adjudicator does not have the jurisdiction to consider just one element of that accounting process, because that individual claim no longer exists. It is a claim on which he could not reach a final and binding conclusion anyway. Further, and in any event, even if Utilities could pursue a claim against Enterprise based solely upon the NLSDA Sub-Contract, a dispute between the parties in respect of that claim had not yet crystallised at the time of the Adjudication Notice.
- For the reasons set out in Section 9 above, I consider that if the adjudicator had asked himself the right questions at the outset, he would have reached the same view as I have done (that he did not have jurisdiction), and would also have concluded that he could not deal fairly with this Final Account claim in the time prescribed by the Act. These Part 8 proceedings would not have been necessary.
- I ought to say that, although Miss Barwise put the points on behalf of Utilities very clearly and very forcefully, there was a sense in which I felt that she was having to jump between two rather different stools, depending on the particular questions that I was putting to her. Thus, when it suited her purposes, such as on the crystallisation issue, she emphasised that Utilities were just standing in TML's shoes and pursuing TML's old claims, so as to argue that the dispute had crystallised a year or so before the Notice of Adjudication. On other occasions, such as when she sought to distinguish Bouygues, she needed to stress that this was a new claim advanced by a new and solvent claiming party. In the end I concluded that this discrepancy arose from the inherent flaw in Utilities' position: although they had taken an assignment of the right under Rule 4.90 to an account, they had chosen – presumably for tactical reasons – to pursue in adjudication a claim that in law no longer existed, namely TML's final account claim under the NLSDA Sub-Contract.
- Accordingly, I declare that the adjudicator does not have the requisite jurisdiction and the present adjudication must be aborted. I invite the parties to agree the precise form of any other declarations arising from this Judgment.
MR. JUSTICE COULSON:
1. INTRODUCTION
2. THE MATERIAL FACTS
"Recitals
A. The Vendor carries on the Business and has agreed to sell and the Purchaser has agreed to purchase the Business and the Assets as a going concern on the terms and conditions set out in this Agreement.
B. The Guarantor is the parent company of the Purchaser and has agreed to enter into this Agreement for the purposes of acting as the Guarantor of the Purchaser's obligations to the Vendor hereunder.
Definitions and Interpretations
'Assets' - the property rights, contracts, goodwill and undertaking and other assets owned or used in or in connection with the Business as at the completion date to be sold and purchased in accordance with clause 2.1 other than the Excluded Assets.
'Assumed Liabilities' - all liabilities of the Vendor arising from the operation of the Business (including the Creditors) or any of the Assets and incurred before the Completion Date whether actual or contingent but for the avoidance of doubt excluding the Excluded Liabilities, and references to an Assumed Liability to be construed accordingly.
'Business' - together the business of providing network and civil engineering services to the public and private utility sectors including the Trans4M Contracts (the Utilities Services Business) and the provision of know-how and development facilities and related goods and services for related products (the Pipe Systems Business) under the name Subterra as currently carried on by the Vendor at the date hereof.
'Contracts' - All contracts and other arrangements, whether set out in writing or not, entered into by or on behalf of the Vendor and/or any other member of the Vendor's group solely in connection with the business including without limitation: (i) those listed in Schedule 9 Contracts including the IP Licences received…
2. Sale and Purchase of the Business and Assets
2.1 The Vendor agrees to sell (or procure such sale or transfer) with full title guarantee and the Purchaser agrees to purchase the Business as a going concern and all the Assets free of all encumbrances as at the close of business on the Completion Date. The Assets to be sold and purchased pursuant to this Agreement are …
2.1.2 The benefit subject to the burden of the Contracts.
2.1.3 The benefit subject to the burden of the Customer Contracts.
…
4. Consideration
4.1 The aggregate consideration for the purchase of the Business, Goodwill and the Assets payable by the Purchaser to the Vendor is
4.1.1 £577,000 plus or, as the case may be, minus the amount by which the adjusted net asset value exceeds or as appropriate is less than £9,423,000 and
4.1.2 An obligation on the part of the Purchaser to assume, pay, satisfy, discharge and fulfil the Assumed Liabilities.
…
6. Liabilities
6.1 The Purchaser herby undertakes that it shall be responsible for and shall promptly perform, assume and pay, discharge or satisfy all the Assumed Liabilities.
7. Contracts
7.1 The Purchaser shall be responsible for assigning, novating or otherwise transferring all Contracts other than (i) the Trans4M Contracts which are to be dealt with by the Trans4M Sub-Sub-Contracts; (ii) The Thames Water Contracts which are to be assigned to the Purchaser upon Completion and (iii) all other contracts to which any member of the Vendor's Group is a party where the Vendor shall be responsible in accordance with clause 7.7.
7.2 Subject to clause 7.9 the Purchaser shall accept an assignment, novation or other transfer of and shall be entitled to the benefit of and shall observe and perform or procure to be observed and perform with effect from the Completion Date all the obligations of the Vendor under the Contracts to be observed or performed in accordance with their respective terms following Completion provided always that the terms of the assignment, novation or other transfer do not operate to transfer or require the Purchaser to assume any Excluded Liabilities."
Schedule 20 identified the Thames Water Contracts and included the Primary Term Agreement related to the NLSDA.
"… as a result of this termination and in accordance with clause 20 of your Sub-Contract Agreement we must advise you of the termination of your Sub-Contract Agreement with Enterprise Management Services Limited, formerly Subterra."
"We act on behalf of Tony McFadden Utilities Limited who, on 15 June 2009, took assignment from the Liquidators of Tony McFadden Limited of the rights of Tony McFadden Limited against yourselves arising out of, amongst other things, the North London Service Delivery Alliance Sub-Contract of 13 November 2002.
Please treat this letter as a Notice of Assignment.
There is a dispute with regard to the valuation of the final account submitted by Tony McFadden Limited to you in relation to this Contract and, accordingly, we enclose Notice of Intention to Adjudicate. An application will be made to the Chartered Institute of Building for the appointment of an Adjudicator and a copy of the application is enclosed.
A copy of this letter and the enclosed Notice has been sent to your solicitors, HBJ Gateley Wareing LLP."
The only document served with that letter was the Adjudication Notice. That sought payment of the sum of £2.5 million-odd together with VAT and interest, by reference only to the NLSDA Sub-Contract.
(a) NLSDAUtilities' claim in the adjudication is put at £2.5 million together with VAT and interest. Enterprise value that claim at £258,518, although their independent expert puts it at a higher figure of £538,773.76.
(b) Lot 8
Utilities make no claim in the adjudication by reference to the Lot 8 Sub-Contract. It would appear that, in the past, TML's liquidators valued that claim at around £2.6 million. As noted above, Enterprise's claim in the liquidation was that TML owed them about £3 million-odd in relation to the Lot 8 Sub-Contract. Their documents in the adjudication - where they refer to the Lot 8 Sub-Contract to demonstrate to the Adjudicator that "Enterprise have a valid and quantified liquidated set-off right against any sums due to TML" such that "the Adjudicator cannot order any payment to Utilities", but in respect of which they say that the adjudicator does not have any jurisdiction to consider further - demonstrates a sum due to them of £1.7 million-odd (their expert's figure) or £2.16 million (their own figure).
(c) Three Valleys
Utilities have indicated a claim of £4,282 in relation to this Sub-Contract but, doubtless as a result of this jurisdiction dispute (the existence of claims under more than one contract being a central point of objection raised by Enterprise), their recent solicitor's statement indicates that this claim is now abandoned. Enterprise say that they have concerns that they may have overpaid on this sub-contract too, but no details of the overpayment are given.
(d) The Van Hire Sub-Contract
Again Utilities have indicated a claim for £5,807 which their solicitor's statement says is now abandoned. No cross-claim has been identified by Enterprise although, given that TML were in liquidation, their lack of certainty about the precise financial position under this and the preceding sub-contract is not entirely surprising.
3. THE ISSUES
(a) Was the NLSDA Sub-Contract between Subterra and TML novated in favour of Enterprise? (Section 4 below)(b) What rights and liabilities were the subject of the Deed of Assignment of 15th June 2009 between TML and Utilities? (Section 5 below)
(c) Was the Deed a valid assignment? (Section 6 below)
(d) Can Utilities as assignees adjudicate the NLSDA claim against Enterprise? (Section 7 below)
(e) Does the Adjudicator have the necessary jurisdiction to undertake this adjudication? (Section 8 below)
4. WAS THE NLSDA SUB_CONTRACT BETWEEN SUBTERRA AND TML NOVATED IN FAVOUR OF ENTERPRISE?
"It would be very easy to infer a novation in the circumstances of this case."
5. WHAT RIGHTS AND LIABILITIES WERE THE SUBJECT OF THE DEED OF ASSIGNMENT OF 15th JUNE 2009 BETWEEN TML AND UTILITIES?
5.1 The Issues
5.2 The Insolvency Rules 1986
"4.90 – Mutual credits and set-off
(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) The reference in paragraph (1) to mutual credits, mutual debts or other mutual dealings does not include [and then various excluded debts are identified including, for example, a debt due after the company went into liquidation].
(3) 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.
(4) A sum shall be regarded as being due to or from the company for the purposes of paragraph (3) whether–
(a) it is payable at present or in the future;
(b) the obligation by virtue of which it is payable is certain or contingent; or
(c) its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion. …"
5.3 The Relevant Authorities
"The purpose of the rule as to set off in insolvency is to do substantial justice between the bankrupt or insolvent company and the creditors. Where the facts are appropriate the rule applies automatically and irrespective of the wishes of the parties. In the present case it is plain from the without prejudice correspondence in January 1975 that there were claims and cross-claims relating to the two contracts and that the respondent was putting forward cross-claims which were capable of proof within the terms of section 30 of the Bankruptcy Act 1914. …
Accordingly on 5th February 1975 the rights of the contractor and the respondent inter se became subject immediately to the provisions of section 31. In accordance with section 31 an account had then to be taken and the balance of the account and no more became the sum thereafter owing to or from the respective parties. …
It is clear that after the contractor went into insolvent liquidation in February 1975 an account should have been taken of what was due in respect of the mutual dealings between the contractor and the respondent. It is apparent from the pleadings in the arbitration that such an account would have disclosed that certain sums were prima facie admitted to be due from the respondent to the contractor but that the respondent was contending that he had had cross-claims against the contractor for an amount exceeding these admitted sums. At that stage the taking of the account may well have involved arbitration proceedings to determine what sums were due from the contractor to the respondent. Until such an account had been taken, however, it would not have been possible to ascertain whether any sum was due from the respondent to the contractor or vice versa. It is certainly possible and indeed in accordance with the contention of the present respondent that the taking of the account would have disclosed that no sum was payable for the respondent at all. …
In the light of this decision I am satisfied that the arbitration proceedings cannot continue."
"The principles so far discussed should provide an answer to the first of the issues in this appeal, namely, whether if A, against whom B has a cross-claim, becomes bankrupt, A's claim against B continues to exist as a chose in action so that A's trustee can assign it to a third party. In my judgment the conclusion must be that the original chose in action ceases to exist and it 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.
…
The cross-claims must obviously be considered separately for the purpose of ascertaining the balance. For that purpose they are treated as if they continued to exist. So, for example, the liquidator or trustee will commence an action in which he pleads a claim for money due under a contract and the defendant will counterclaim for damages under the same or a different contract. This may suggest that the respective claims actually do continue to exist until the court has decided the amounts to which each party is entitled and ascertained the balance due one way or the other in accordance with section 323. But the litigation is merely part of the process of retrospective calculation, from which it will appear that from the date of bankruptcy, the only chose in action which continued to exist as an assignable item of property was the claim to a net balance."
"If bankruptcy set-off is self-executing, it does not require the trustee or anyone else to execute it. The argument gives too literal a meaning to the notion of taking an account. … In the case of a bankruptcy, vesting is determined by the law. But for present purposes I can see no logical distinction between a case in which the trustee assigns the right to the net balance and one in which the bankrupt's claim, though subject to bankruptcy set-off, did not vest in him in the first place.
It is true that the trustee will ordinarily not be party to the action between assignee and creditor. So if the creditor is asserting that there is actually a net balance in his favour for which he is entitled to prove, a successful outcome of the action will not, as a matter of res judicata, oblige the trustee to allow his proof. But there is no reason why a defendant should not, with leave, join the trustee as a defendant to his counterclaim. Even if the action had been brought by the trustee, the creditor would have needed the leave of the court to make a counterclaim. In these circumstances, there seems to me little additional inconvenience in having to add the trustee as a party. I would therefore hold that a trustee may assign the right to the net balance like any other chose in action.
…
There is greater difficulty if the trustee has assigned less than the net balance, i.e. to have kept back some credit item in the calculation. This would be an assignment of a part of a debt. On ordinary principles it would not be enforceable in proceedings to which the trustee was not a party. Only if the trustee joined as a plaintiff could the single account envisaged by section 323 be taken."
5.4 The Deed of Assignment
"2.3 Rule 4.90 of the Insolvency Rules 1986 provides that where, before a company goes into 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.
2.4 Before the company went into liquidation there may have been mutual credits, mutual debts or mutual dealings between the company and EMSL and/or between the company and Subterra in relation to the matters set out in the Schedule.
2.5 The liquidators wish to assign and the assignee wishes to receive the benefit of the Net EMSL Balance and the Net Subterra Balance on the terms set out in this Deed.
"3. Assignment
3.1 In consideration of the Assignee agreeing to pay the purchase price, of which the company hereby acknowledges receipt of the first instalment of £50,000, the company hereby assigns to the Assignee all such right, title and interest as the company may have in the Net EMSL Balance and the Net Subterra Balance to hold the same unto the Assignee absolutely."
"4.1 Nothing in this Deed shall be construed as effecting any assignment or other form of transfer to the Assignee of any liability or other obligation owed by the company. If upon the taking of accounts pursuant to Rule 4.90 of the Insolvency Rules 1986 there is a net balance owed by the company to EMSL and/or to Subterra, such balance shall remain the company's liability and the Assignee shall have no obligation in relation thereto."
"5.1 The Assignee hereby agrees to indemnify and keep indemnified the company and the liquidators against all reasonable costs and expenses incurred by either of them (including but not limited to legal costs, adverse legal costs and the liquidators' own time costs) as a result of the company being made a party to any claim made by the Assignee against EMSL and/or Subterra to recover the Net EMSL Balance and/or the Net Subterra Balance."
5.5 The Rights Assigned
'"Net EMSL Balance' means the sum due to the company from EMSL upon the taking of accounts of what is due from each party to the other in respect of the mutual dealings between the company and EMSL pursuant to Rule 4.90 of the Insolvency Rules 1986 together with all rights appurtenant thereto including without prejudice to the generality of the foregoing the right to adjudicate, arbitrate or bring legal proceedings to establish, enforce and/or receive payment of all or any part of the Net EMSL Balance."
6. WAS THE DEED A VALID ASSIGNMENT?
6.1 The Issue
6.2 Prohibition on Assignment
"The Sub-Contractor shall not assign, novate, sub-contract or otherwise dispose of this Agreement without the previous written consent of the Contractor which may be withheld at the sole discretion of the Contractor."
For present purposes, this provision needs to be read with TML as "the Sub-
Contractor" and Subterra, subsequently Enterprise, as "the Contractor".
6.3 The Authorities
"… It is at least hypothetically possible that there might be a case in which the contractual prohibitory term is so expressed as to render invalid the assignment of rights to future performance but not so as to render invalid assignments of the fruits of performance. The question in each case must turn on the terms of the contract in question."
This provision was sufficient to give the defendant contractor a complete defence to the claim by the original employer's assignees.
6.4 Summary
7. CAN UTILITIES AS ASSIGNEES ADJUDICATE THE NLSDA CLAIM AGAINST ENTERPRISE?
7.1 Could The Rule 4.90 Claim Be Adjudicated?
7.2 What Dispute Has Been Purportedly Referred To Adjudication?
"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."
7.3 The Impracticality of the Position Adopted by Utilities
(a) Money could only be paid to the successful party 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; and
(b) Enterprise would have a cross-claim under the Lot 8 Sub-Contract which, on the face of the figures, might over-top the sum found due by the Adjudicator under the NLSDA Sub-Contract. That would entitle Enterprise to a complete set-off: see, by way of example only, JPA Design & Build v. Sentosa [2009] EWHC 2312 (TCC).
This valueless result would therefore have been achieved following considerable expense by both parties, in circumstances where the sum found by the adjudicator could in any event be challenged as of right by either of those parties in subsequent court proceedings.
7.4 Summary
8. DOES THE ADJUDICATOR HAVE THE NECESSARY JURISDICTION?
8.1 Primary Answer
8.2 Secondary Answer – The Absence of a Crystallised Dispute
"The mere fact that one party (whom I shall call 'the claimant') notifies the other party (whom I shall call 'the respondent') of a claim does not automatically and immediately give rise to a dispute. It is clear, both as a matter of language and from judicial decisions, that a dispute does not arise unless and until it emerges that the claim is not admitted."
As I observed during the oral submissions, this is a point that is frequently taken by unsuccessful responding parties seeking to avoid the enforcement of an adjudicator's decision. Given the broad meaning ascribed to the word "dispute" it is rarely one which has found favour with the court.
9. THE COURSE OF THE ADJUDICATION
10. CONCLUSIONS