Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 80
CA3/10	OPINION OF LORD HODGE in the cause INTEGRATED BUILDING SERVICES ENGINEERING CONSULTANTS LIMITED TRADING AS OPERON Pursuer; against PIHL UK LIMITED Defender: ­­­­­­­­­­­­­­­­­________________

Pursuer: Moynihan QC and Richardson; McGrigors LLP

Defender: Reid QC and Ower; Anderson Strathern LLP

1 July 2010

[1] In this action Integrated Building Services Engineering Consultants Limited ("IBS") seeks to enforce three decisions by an adjudicator dated 22 December 2009. At a diet of debate IBS sought summary decree and decree de plano on the basis that the defences disclosed no relevant defence to the action. Pihl UK Limited ("Pihl") opposed the motion, arguing (a) that the adjudicator had been guilty of procedural unfairness in fixing a timetable which gave them an inadequate time to respond to IBS's submissions and (b) that the supervening insolvency of IBS meant that the awards should not be enforced at this stage as Pihl was entitled to the extension of the right of retention known as the balancing of accounts in bankruptcy.

[2] In the course of the debate Mr Reid QC for Pihl withdrew the argument based on an alleged breach of natural justice. Accordingly, the remaining issue is whether the court should allow Pihl to balance accounts in IBS's insolvency.

Factual background
[3] In 2008 Pihl entered into contracts relating to the construction and refurbishment of schools in Aberdeen for Aberdeen City Council, including a build sub-contract with IBS ("the sub-contract"), under which IBS took on certain responsibilities to design, build and commission the sub-contract works. The project was delayed by financial problems after its funders, the Icelandic bank, Landesbanki, went into administration. The project had to be refinanced, giving rise to delays and consequent claims by IBS against Pihl. As a result parties entered into a sub-contract supplementary agreement dated 8 July 2009 ("the supplementary agreement"), which among other things settled those claims. In performance of that supplementary agreement Pihl placed £1,000,000 in an escrow account with The Royal Bank of Scotland plc.

[4] On completion of certain works, Pihl came under an obligation to pay £500,000 to IBS and to release to them the balance (including accrued interest) on the escrow account. On 23 October 2009 Pihl served four withholding notices on IBS, which stated that Pihl intended to withhold the monies otherwise due to IBS and to refuse to release the funds in the escrow account. Pihl asserted that breaches of contract by IBS were the reason for its so doing.

[5] On 26 October 2009 IBS served three notices requiring adjudication on Pihl in conformity with their sub-contract and supplementary agreement and the Housing Grants, Construction and Regeneration Act 1996 ("the 1996 Act"). The sub-contract contained a dispute resolution procedure, which implemented the 1996 Act, in its Schedule Part 18. That procedure included the following rules:

"14. [D]ecisions of the Adjudicator shall be binding until the Dispute is finally determined by legal proceedings, or by agreement between the parties.

15. The decision of the Adjudicator shall reflect the legal entitlements and obligations of the parties.

....

28. Every decision of the Adjudicator shall be implemented without delay. The parties shall be entitled to such relief and remedies as are set out in the decision, and shall be entitled to enforcement thereof including to take further proceedings, regardless of whether such decision or Dispute is or is to be the subject of any challenge, review or final determination by the courts or an arbiter..."

[6] On 28 October 2009 the Royal Institution of Chartered Surveyors in Scotland appointed Mr John Hunter as adjudicator. The referral notices were dated 2 and 3 November 2009. Mr Hunter thereafter conducted adjudications in relation to the disputes. As Pihl no longer insists on its argument based on an alleged breach of natural justice, it is not necessary to record the details of the adjudication procedure. It suffices to say that Pihl considered that the adjudicator had not given it sufficient time to quantify its substantial claim for damages against IBS for alleged breach of contract. Pihl now avers that its claim is to be valued at about £8 million. On 22 December 2009 the adjudicator issued three decisions holding that Pihl was to pay IBS £23,463.88 plus VAT and interest and that it was to release to IBS the sums held in the escrow account. I was informed that the sum in the escrow account was approximately £619,000.

[7] Thereafter, IBS sent Pihl a letter before action on 11 January 2010 and commenced this action on 18 January 2010. Shortly afterwards, on 29 January 2010, National Westminster Bank plc, the holder of a mortgage debenture over the property and undertaking of IBS, appointed administrators to IBS. Pihl avers that IBS is insolvent and that it is entitled to retain the sums which may be due to IBS until its claims against IBS have been determined and offset against its liability. Pihl avers that the statement of affairs, which IBS's directors produced, records an estimated deficiency of assets available for non-preferred creditors of £6.9 million and that the administrators consider that such unsecured creditors will receive a dividend of no more than 3p in the pound. It avers that at the conclusion of the administration IBS will be wound up or will be deemed to have been dissolved.

The submissions of the parties
[8] Mr Moynihan QC for IBS, in seeking summary decree, submitted that the 1996 Act had altered the common law and had restricted the circumstances in which a party could rely on the principle of balancing accounts in bankruptcy. The 1996 Act sought through the introduction of adjudication to enable parties to obtain speedily a binding and enforceable interim decision and it was the task of the courts to assist the prompt enforcement of adjudicator's decisions: Construction Centre Group Ltd v Highland Council 2003 SC 464, at para 14. The mischief which the 1996 Act addressed was the wrongful withholding of funds. Averments of insolvency, which fell short of liquidation, did not constitute a defence in either Scotland or England to enforcement of such decisions: SL Timber Systems v Carillion Construction Ltd 2002 SLT 997 and Rainford House Ltd v Cadogan Ltd [2001] BLR 416.

[9] English jurisprudence suggested that the court would usually exercise its discretion under RSC Order 47(1)(a), which remained part of the Civil Procedure Rules by operation of Part 50, to stay execution of a judgment where there was no dispute that the claimant was insolvent. That rule gave the court a discretion to stay execution of a judgment or order if there were special circumstances which rendered it inexpedient for the court to enforce it. But if the defendant's failure to pay sums, which an adjudicator had awarded, caused or significantly contributed to the insolvency, a stay would not be justified: Wimbledon Construction Company 2000 Ltd v Derek Vago [2005] BLR 374. The burden of showing that a stay was justified rested on the party seeking the stay: Pilon Group Ltd v Breyer Group Ltd [2010] EWHC 837 (TCC). In Scotland there was no equivalent to that procedure and thus effect should be given to the 1996 Act by enforcing the adjudicator's decisions notwithstanding the supervening insolvency. If IBS had been insolvent when the case was before the adjudicator and Pihl had pleaded that insolvency as another ground of set off, that would have been a relevant issue for the adjudicator to consider. Pihl had not asserted that IBS was insolvent in its submissions to the adjudicator and therefore could not assert the right to balance accounts in bankruptcy as a defence to the enforcement of the adjudicator's award: Construction Centre Group Ltd.

[10] The court should therefore give effect to the parties' contract by enforcing the adjudicator's decisions without delay. The sub-contract contained warranties of solvency (clause 5.1.8) and also a provision (clause 35.1.6.4) which allowed the sub-contract to be brought to an end in specified circumstances including IBS's insolvency, the appointment of an administrator or receiver and the winding up of the company. Thus the parties must be taken to have addressed the contingency of insolvency in their agreements. By contrast, Rule 28 of the Schedule Part 18 contained no qualification in the event of insolvency. Unless Pihl were able to plead IBS's insolvency as a ground of retention before the adjudicator issued his decisions, that ground was not available to it to withhold payment of the sums awarded. To allow retention based on IBS's insolvency, which occurred after the commencement of this action, would be to allow Pihl to raise an unfounded defence - the alleged breach of natural justice - to resist payment and then abandon that defence at the hearing on this motion, once its non-payment had contributed significantly to IBS's insolvency, as IBS averred. If the court were to allow Pihl to retain in these circumstances, it would defeat the purpose of the 1996 Act and allow a person against whom an adjudicator had made a decision to use capricious manipulation to avoid its obligations. This approach, which involved the enforcement of the parties' contract in Rule 28 of the Schedule Part 18, was entirely consistent with that of the House of Lords in Melville Dundas Ltd v George Wimpey UK Ltd 2007 SC (HL) 116.

[11] Mr Reid QC for Pihl submitted, first, that the 1996 Act was designed to secure the cash flow of a solvent contractor during the currency of a competently performed contract and not to give a windfall benefit to the creditors of an insolvent and incompetent contractor. The principle of balancing accounts in bankruptcy was an equitable doctrine, applied to construction contracts, and was a deep seated principle of the common law which the 1996 Act did not overturn, either expressly or by necessary implication. He referred to Melville Dundas Ltd, Lord Hope at para 32, and the Stair Memorial Encyclopaedia, Volume 12, "Interpretation of Statutes", at para 1126.

[12] Secondly, he submitted that the 1996 Act proceeded on the basis that both parties were solvent and did not seek to transfer the risk of insolvency. It determined who was to hold disputed money pending the final resolution of the dispute. Payment of funds on an interim arrangement to an insolvent company would prevent the return of the funds if the other party won the argument in the final resolution of the dispute. The English authorities avoided this unfair result through the device of a stay of execution of judgment. The Scottish courts had a wide discretion to determine procedure in the interests of justice and could avoid an unfair result in this case by refusing summary decree. It did not matter that the question of IBS's insolvency had not been raised before the adjudicator issued his decision; the court had to consider the effect of insolvency at the date of the court hearing, when an insolvent party sought to enforce an adjudicator's decision in its favour. Mr Reid referred to Ross v Ross 1895 22R 461, Highland Council v Construction Centre Group Ltd 2004 SC 480, Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522, Busby Spinning Co Ltd v BMK Ltd 1988 SC 70, Rainford House Ltd (above), JPA Design & Build Ltd v Sentosa UK Ltd 2009 EWHC 2312 (TCC), Pilon Ltd (above) and Melville Dundas Ltd (above).

Discussion
[13] The case raises a sharp issue about the relationship between a party's obligation to give effect to an adjudicator's decision under the 1996 Act and that party's entitlement to plead the balancing of accounts in bankruptcy, if, after the date of the decision, the party in whose favour the decision was given becomes insolvent. To address that issue I examine first the purpose of the 1996 Act and then the principle of balancing accounts in bankruptcy. Finally, I consider whether any case law points against the conclusions which I have reached.

(i) The 1996 Act

[14] Part II of the 1996 Act applies to construction contracts which are in writing. Certain provisions within that Part are relevant to this case. Section 108 gives a party to such a contract the right to refer a dispute arising under the contract to adjudication. Section 108(3) requires that the contract shall provide that the adjudicator's decision is binding until the dispute is finally determined by legal proceedings, by arbitration or by agreement. Where a contract does not comply with the requirements of section 108, the adjudication provisions of the Scheme for Construction Contracts shall apply: s.108(5). Sections 109 and 110 create an entitlement to stage payments in construction contracts of a duration of 45 days or more. Section 111 restricts a party's right to withhold payment, by requiring the party to give effective notice of an intention to do so, and providing that that notice must specify the amounts to be withheld and the grounds for withholding payment of those amounts. Section 113 restricts the effectiveness of "pay when paid" clauses (where B stipulates that he will not pay C until A has paid him) to the circumstance when A is insolvent, and defines insolvency in that context.

[15] It is well known that the purpose of Part II of the 1996 Act was to encourage co-operation between the parties to a construction contract, to preserve the cash flow of contractors and sub-contractors during the contract, and to improve the efficiency of the construction industry. See Melville Dundas Ltd, Lord Hoffmann at para 12, Lord Hope at para 36. The process of adjudication, which section 108 introduced, is to be seen in this context. In Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd, Chadwick LJ (at para 26) described section 108(3) and the provisions of the Model Adjudication Procedure, which implemented it, thus:

"The purpose of those provisions is not in doubt. They are to provide a speedy method by which disputes under construction contracts can be resolved on a provisional basis. The adjudicator's decision, although not finally determinative, may give rise to an immediate payment obligation. That obligation can be enforced by the courts. But the adjudicator's determination is capable of being reopened in subsequent proceedings. It may be looked upon as a method of providing a summary procedure for the enforcement of payment provisionally due under a construction contract."

To similar effect, in Rainford House Ltd, Judge Richard Seymour QC at pp.421-422 described the policy in these terms:

"The policy underlying Part II [of the 1996 Act] is, in my judgment, that there should be a swift mechanism by which a dispute under a construction contract as to who has to pay what to whom while the construction work to which the contract relates is in progress can be resolved on a binding, but interim, basis, leaving the final resolution of disputes, if that proves to be necessary, to follow at leisure."

[16] In my opinion, the provisional nature of the adjudicator's decision and the reservation of a final determination to another decision maker are important characteristics of the procedure. While Lord Hoffmann in Melville Dundas Ltd was considering other provisions within Part II of the 1996 Act, there is nothing in the terms of s.108 which renders inapplicable the view which he expressed (at para 12) that:

"It seems to me most unlikely that Parliament intended that provisions intended to improve the efficiency of the construction industry should determine priorities between the employer and an insolvent contractor's creditors."

Similarly, Lord Hope in the same case, in discussing the Consultation Paper issued in May 1995 by the Department of the Environment, "Fair Construction Contracts", which led to the 1996 Act, stated of the section on protection against insolvency:

"[T]here is no indication here that it was the intention to reduce the protection that it was already the practice for the employer to seek to obtain against the risk of the contractor's insolvency in the event of the determination of his employment under the contract."

I recognise that in this passage Lord Hope was referring to a provision, entitling the employer to withhold payment of the contractor on the determination of the contract, which the majority of the House of Lords judged to be effective notwithstanding the enactment of Part II of the 1996 Act. But the approach of the majority in that case is in my opinion consistent with the view that the obligation to implement an adjudicator's decision without delay does not necessarily supersede an employer's other entitlements on a contractor's insolvency.

[17] In England and Wales, the courts have not, as a general rule, enforced the decisions of an adjudicator in favour of a contractor who was demonstrably insolvent and unable to repay the sums to be paid. In Bouygues (UK) Ltd the matter was straightforward as Dahl-Jensen were in liquidation at the time of the reference to adjudication, well before the application for summary judgment to enforce the adjudicator's decision; and in English law set off on bankruptcy operated to merge parties' claims thereby extinguishing one party's debt and leaving only the balance due to the other party: Rule 4.90 of the Insolvency Rules 1986. Thus the Court of Appeal refused summary judgment on a claim arising out of an adjudication, which was necessarily provisional, and allowed the claims to be resolved in the liquidation.

[18] In Rainford House Ltd the contractor went into administrative receivership before the adjudicator issued a decision in its favour. When the contractor sought to enforce the decision, the employer counterclaimed on the basis that it had overpaid the contractor and for damages for breach of contract. The contractor sought summary judgment. Judge Richard Seymour QC granted summary judgment but, because there was credible evidence which was not answered and which created a strong prima facie case that the contractor was then insolvent, granted a stay of execution of the summary judgment, on condition that the employer pay into court the amount due on the adjudicator's decision and interest. He opined, in a passage which followed immediately the one which I quoted in paragraph [15] above, that it was not the policy of the 1996 Act to transfer as between the parties to construction contracts the risk of insolvency of one of the parties; and he interpreted section 113 as supporting that view.

[19] In England and Wales, where there is a probability, or at least a significant risk, that the contractor will be unable to repay the judgment sum, the court will take into account as factors militating against the grant of a stay of execution (i) the fact that a contractor's financial position was the same or similar to its position when the relevant contract was made and (ii) the employer's failure to pay the sums awarded by an adjudicator where that had caused or significantly contributed to the contractor's financial predicament: see the decisions of Coulson J in Wimbledon Construction Company 2000 Ltd, JPA Design and Build Ltd and Pilon Ltd v Breyer Group plc. In the former circumstance the employer, who has chosen to enter into a construction contract, which included an adjudication scheme providing for provisional payments, with a contractor in a particular financial state, cannot be heard to complain if the contractor enforces its rights under the contract. In the latter circumstance the employer is discouraged from bringing about a contractor's insolvency by withholding sums which an adjudicator has found to be provisionally due.

[20] In Scotland there is much less case law on the relationship between the 1996 Act and a contractor's insolvency. But I have already referred to the decision of the House of Lords in Melville Dundas Ltd, in which, in my opinion, the majority decision gives clear guidance on the general approach to be adopted. I consider in the next section the balancing of accounts in bankruptcy and the case of Highland Council v Construction Centre Group Ltd. That leaves Lord Macfadyen's decision in SL Timber Systems Ltd. In that case the employers, in their defence to the enforcement of an adjudicator's decision, asserted, among other things, that the contractors were insolvent and would not be able to make repayment if the employers eventually succeeded in the dispute in a subsequent litigation or arbitration. The contractors denied this. Lord Macfadyen considered three English cases, Bouyges (UK) Ltd, Rainford Ltd and Absolute Rentals Ltd v Gencor Enterprises Ltd (2001) 17 Const LJ 322. In the latter case, Judge David Wilcox declined to stay judgment enforcing an adjudicator's decision in the face of assertions about the contractor's financial standing. Lord Macfadyen found it difficult to draw any clear guidance from those cases and considered that the reasoning in the first two depended on specialities of English procedure. He concluded:

"I must approach the matter by turning once again to the terms of the 1996 Act and the scheme made thereunder. There seems to me to be nothing in the legislative provisions to qualify the expressed intention that an adjudicator's provisional award should be enforced pending final resolution of the dispute, to the effect of making an exception in the case where the claimant, although not in liquidation, can be shown to be insolvent. I am therefore not persuaded that the defenders' averments to the effect that the pursuers are insolvent constitute a relevant defence".

[21] A decision of Lord Macfadyen in this field of law, as in many fields, is worthy of respect. I have no difficulty in accepting a proposition that mere averments of a claimants' insolvency, which the claimant contests as in the SL case, should not provide a basis for the court delaying the enforcement of an adjudicator's decision. To allow delay on that basis would defeat the aims of Part II of the 1996 Act. But I respectfully decline to follow Lord Macfadyen's opinion insofar as it may be understood to assert that the undisputed insolvency of the claimant cannot be a defence if the claimant is not in liquidation. I have reached that view for three reasons. First, the decision of the majority of the House of Lords in Melville Dundas Ltd, which postdated his decision, points against such an interpretation of the scope of the 1996 Act and the Scheme. Secondly, no question of the balancing of accounts in bankruptcy arose in the circumstances of the SL case and Lord Macfadyen was not addressed on that principle. And, thirdly, as I discuss below, I am persuaded that when a company enters administration within the meaning of Schedule B1 to the Insolvency Act 1986 and there is strong evidence of its insolvency, the principle of balancing of accounts in bankruptcy can be invoked.

(ii) Balancing of accounts in bankruptcy
[22] Scots law has long recognised an equitable extension of the compensation of debts in the form of the balancing of accounts in bankruptcy. The equities in support of the principle are obvious: it was, as Goudy stated (Bankruptcy 4^th ed., p.550),

"inequitable that the debtor of a bankrupt should be forced to pay in full, while he could only get a dividend for the debt due to him".

Thus compensation, which allowed the balancing of two liquid debts, was by the operation of equity extended to entitle the creditor of a bankrupt to set off illiquid debts against a bankrupt's claim.

[23] There is no consensus as to whether the principle of balancing accounts in bankruptcy is a species of retention, by which the enforcement on behalf of the bankrupt of payment of a liquid debt to him is suspended to allow the defender the opportunity to make his claim against the bankrupt liquid and thereby plead compensation of debts. The alternative view is that it is an extension of compensation by which illiquid debts owed by the bankrupt may extinguish liquid debts owed to the bankrupt leaving only a balance due. There are passages in Bell's Commentaries II pp.118-124 which support each view. Gloag & Irvine at pp.314-315 presented it as a species of compensation, and speak of setting off the present value of future or contingent debts against the bankrupt's debt. Lord Drummond Young in A v B 2003 SLT 242 at para 20 saw it as a species of the setting off of one claim against another, resulting in the extinction of the smaller claim as distinct from retention which involved a right to withhold payment. On the other hand Lord McLaren in Ross v Ross, which was a case of equitable retention and did not involve the balancing of accounts in bankruptcy, categorised the principle as a species of retention (pp.466-467). More recently in Inveresk plc v Tullis Russell Ltd [2010] UKSC 19, Lord Hope, in approving (at para 33) the discussion on the subject of retention in the 12^th edition of Gloag & Henderson, appears to approve of the categorisation of the principle as a form of retention, in which the debtor of the bankrupt is entitled to withhold payment until the amount of his illiquid claim has been ascertained.

[24] Often the correct characterisation of the principle may be of limited practical importance in the context of a bankruptcy or corporate insolvency as the insolvency practitioner and creditors of the insolvent, rather than incur costs on legal proceedings, will seek by negotiation to strike a balance between the insolvent's claims and those of his or its creditors.

[25] What is important in my view is that the balancing of accounts in bankruptcy is an equitable principle: Ross v Ross, Highland Council v Construction Centre Group Ltd, Bell's Commentaries II p.121, Gloag & Irvine p.314, Goudy p.551. The court can regulate its operation to ensure fairness.

[26] It has been held, and in their submissions in this case parties agreed, that the principle of balancing of accounts on bankruptcy is available not only on bankruptcy or liquidation, but also when the party is vergens ad inopiam: Paul & Thain v The Royal Bank of Scotland (1869) 7 M 361, Lord Ormidale at pp.364-365, Busby Spinning Co Ltd v BMK Ltd 1988 SLT 246, Wilson on Debt (2^nd ed) p.165.

[27] In my opinion there is a good ground for applying the principle when an administrator is appointed to a company by the court under section 8 of the Insolvency Act 1986 as the inability or likely inability to pay its debts is a precondition of the order: section 9. Similarly, if the company itself or the holder of a floating charge appoints an administrator under Schedule B1 to that Act, the principle may properly be applied if there is sufficient prima facie evidence of insolvency. If a creditor were unable to assert the principle of balancing accounts in bankruptcy in an insolvent administration, unfairness could result. He might be prevented from seeking to have the company wound up paragraph 42 of Schedule B1 - and the company might proceed to deemed dissolution without ever being wound up - paragraph 84 of Schedule B1.

(iii) The balancing of accounts in bankruptcy in the context of the 1996 Act
[28] In my opinion, the 1996 Act does not exclude the principle of balancing of accounts in bankruptcy. Nor does it confine its application to circumstances in which it is pleaded before the adjudicator. While, like compensation, it must be pleaded, I consider that the principle can be pleaded when the claimant seeks to enforce the adjudicator's decision in a court action. The entitlement to plead the principle arises from the claimant's insolvency. The obligation to pay the sum due under the adjudicator's decision is a contractual obligation to implement the result of the provisional dispute resolution procedure. Following the approach of the House of Lords in Melville Dundas Ltd, I do not consider that that obligation supersedes the obligant's rights to assert the principle on the claimant's insolvency. The decision of the adjudicator is a provisional award. The speed of the process by which he or she reaches the decision, on occasion, may not allow the parties to present their positions in full. But that is the nature of the process, which is designed to facilitate cash flow in the context of a continuing contract by reaching interim decisions and leaving the final resolution of disputes until later. It would be strange in my view if an adjudicator's decision, provisional as it is, were, in the absence of misbehaviour by an obligant, to prevent the obligant from asserting its rights occasioned by the supervening insolvency of the claimant. I doubt if allegations of insolvency, which were seriously contested, would justify the application of the principle in the context of the 1996 Act. But those are not the circumstances of this case.

[29] I consider that the equitable nature of the principle would allow the court to police its application to prevent an employer withholding sums due under an adjudicator's decision and thus engineering the insolvency of the contractor. Were that to occur, the court could decline to allow the set off of the debts in the insolvency. I observe, by way of analogy, that bad faith in the acquisition of a debt is a ground for refusing to allow compensation of liquid debts: Goudy, p.552; Finlayson v Russell (1829) 7 S 698.

[30] The ability to plead the balancing of accounts in bankruptcy does not give an obligant under an adjudicator's decision a licence to withhold funds. On obtaining a decision from an adjudicator, the claimant can seek its enforcement in the court on a shortened period of notice. It is the practice in our commercial court to seek to conjoin any challenge to the decision with the action for its enforcement and to determine both in the context of a summary decree motion in the latter. This supports the prompt enforcement of adjudicators' decisions.

(iv) Other case law
[31] For completeness, I consider cases or points in cases which I have not mentioned so far. In Construction Centre Group Ltd v Highland Council an Extra Division refused a reclaiming motion against a decision of Lord Macfadyen to grant summary decree, enforcing an adjudicator's award, and declined to remit the case to the Outer House to consider matters which had not been raised before the adjudicator. Those matters included (a) the fact that after summary decree was granted the employer had terminated the contract and under the contract was not liable to pay the contractor any further sums until certain procedures had been completed and (b) a plea of compensation of debts.

[32] In relation to the first, the Inner House construed the contract, having regard to the objective of the 1996 Act that adjudication was to achieve a speedy provisional decision which was enforceable and binding pending final determination, and held that the employer's right to pay no further sums did not encompass sums already due under an adjudicator's decision. In relation to the second, the court held that the employer, having failed to assert a right of retention or compensation before the adjudicator, could not, consistently with its contractual obligations to give effect to the adjudicator's decision, raise such a plea in the action to enforce that decision. Lord Hamilton (at p.473G-H) explained the court's approach in this way:

"To allow it would fail to recognise, first, the nature of the Adjudicator's order as being a resolution, albeit provisional, of a dispute between the parties and, second, the nature of the present action as being an enforcement mechanism for that order rather than proceedings concerned with the underlying question of the true and ultimate indebtedness (if any) of the Employer".

[33] I accept and am bound by that approach in similar circumstances. In my opinion, however, the present case falls to be distinguished from the facts in Construction Centre Group Ltd. This case is one of supervening insolvency. Thus Pihl was not in a position before the adjudicator issued his decision to plead the balancing of accounts in bankruptcy. It appears that, since the appointment of the administrator and having had sight of the directors' statement of affairs, Pihl now infers that IBS was insolvent in December 2009, as it has stated in its note of argument. But there is no evidence of demonstrable insolvency before the adjudicator's decision; the thrust of both parties' cases has been that this was a supervening insolvency.

[34] I note that in Melville Dundas Ltd Lord Hope in an obiter dictum at para 33 stated that the doctrine of balancing accounts in bankruptcy was available only in the event of bankruptcy or liquidation. This is contrary to the view that the principle is available when a person is vergens ad inopiam, which is the agreed position of the parties to which I referred in paragraph [26] above. It does not appeal that in that case the parties addressed the House of Lords on the precise limits of the application of the principle or that Lord Hope was seeking to define those limits. It may be that it is very difficult or almost impossible to operate the principle when a person's insolvency is not demonstrated by a formal legal act and that the plea, having been stated, would be worked out in practice by achieving a sell off in a subsequent formal insolvency. But the older authorities to which I have referred suggest that it can be pleaded before formal insolvency. Lord Hope's statement is also contrary to the view which I have reached in relation to the circumstance in which the appointment of an administrator is combined with clear and uncontested evidence of insolvency. In the absence of further discussion of the point by counsel, I respectfully adhere to the view which I have reached.

Conclusion
[35] I am persuaded that Pihl is entitled to invoke the principle of balancing accounts in bankruptcy as a defence to this action to enforce the adjudicator's decisions. I therefore refuse IBS's motion for summary decree or for decree de plano. I will put the case out by order to determine further procedure.