Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27

“A company in liquidation cannot refer a dispute to adjudication when that dispute includes (whether in whole or in part) determination of any claim for further sums said to be due to the referring party from the respondent party.”

“3. The statement that adjudication is an available process, but the courts will not enforce it, ignores two important elements. Firstly, it ignores the dicta by Edwards-Stuart J at [63] in Twintec v Volker Fitzpatrick where he stated "I am unable to see how it would be either just or convenient to permit an adjudication to continue in circumstances where the decision of the adjudicator will be incapable of enforcement."…”

“Winding up: mutual dealings and set-off 14.25. – (1) This rule applies in a winding up where, before the company goes into liquidation, there have been mutual dealings between the company and a creditor of the company proving or claiming to prove for a debt in the liquidation. (2) An account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings and the sums due from the one must be set off against the sums due from the other. (3) If there is a balance owed to the creditor then only that balance is provable in the winding up. (4) If there is a balance owed to the company then that must be paid to the liquidator as part of the assets. …”

“7. The occasion for taking the account In what circumstances must the account be taken? The language of section 323(2) suggests an image of the trustee and creditor sitting down together, perhaps before a judge, and debating how the balance between them should be calculated. But the taking of the account really means no more than the calculation of the balance due in accordance with the principles of insolvency law. An obvious occasion for making this calculation will be the lodging of a proof by a creditor against whom the bankrupt had a cross-claim. Indeed, it might have been thought from the words "any creditor of the bankrupt proving or claiming to prove from a bankruptcy debt" in section 323(1) that the operation of the section actually depended upon the lodging of a proof. But it has long been held that this is unnecessary and that the words should be construed to mean "any creditor of the bankrupt who (apart from section 323) would have been entitled to prove for a bankruptcy debt". Thus the account to which section 323(2) refers may also be taken in an action by the trustee against a creditor who, because his cross-claim does not exceed that of the trustee, has not lodged a proof: see Mersey Steel and Iron Co. v. Naylor Benzon & Co. (1882) 9 Q.B.D. 648 and In re Daintrey [1900] 1 Q.B. 546, 568. Once one has eliminated any need for a proof in order to activate the operation of the section, it ceases to be linked to any step in the procedure of bankruptcy or litigation. This is a sharp contrast with legal set-off, which can be invoked only by the filing of a defence in an action. Section 323, on the other hand, operates at the time of bankruptcy without any step having to be taken by either of the parties. The "account" in accordance with section 323(2) must be taken whenever it is necessary for any purpose to ascertain the effect which the section had… 8. Do the causes of action survive? 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 is 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. This was the conclusion of Neill J. in Farley v. Housing & Commercial Developments Ltd [1984] B.C.L.C. 442. Mr. Farley was the principal shareholder in W. Farley & Co. (Builders) Ltd, which in 1972 had entered into two agreements with the defendant company to build blocks of flats. Both led to disputes, with claims by the building company for money due under the contracts and cross-claims by the defendant for damages. In 1975 the building company went into insolvent liquidation. In 1979 the liquidator purported to assign to Mr. Farley the benefit of the agreements and all moneys payable thereunder. Mr. Farley then commenced arbitration proceedings under the agreements. The arbitrator stated a special consultative case (p. 447) asking: "(1) Whether by reason of the provisions of [the then equivalent of section 323 as applied to companies] upon the contractor becoming insolvent and being wound up . . . the debts due under the [two agreements] ceased to have a separate existence as chooses in action (and thus thereafter could not be assigned) being replaced by a balance of account under [section 323]." Neill J. answered in the affirmative. I think that he was right. 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.” (Emphasis supplied)

“…There is no reason whatever to think that the introduction of a mechanism for set-off of future debts, and the discounting of such debts for that purpose, was for any other reason than the usual objectives I have mentioned. In particular, there is no coherent or rational policy reason to release the creditor from a substantial part of the creditor's indebtedness to the company when, and to the extent that, such release is not necessary to achieve a set-off of cross-claims.”

“33. The importance of the rule is illustrated by the circumstances in the present case. If Bouygues is obliged to pay to Dahl-Jensen the amount awarded by the adjudicator, those monies, when received by the liquidator of Dahl-Jensen, will form part of the fund applicable for distribution amongst DahlJensen's creditors. If Bouygues itself has a claim under the construction contract, as it currently asserts, and is required to prove for that claim in the liquidation of Dahl-Jensen, it will receive only a dividend pro rata to the amount of its claim. It will be deprived of the benefit of treating Dahl-Jensen's claim under the adjudicator's determination as security for its own cross-claim. 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 crossclaims 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. 36. It seems to me that those matters ought to have been considered on the application for summary judgment. But the point was not taken before the judge and his attention was not, it seems, drawn to the provisions of the Insolvency Rules 1986. Nor was the point taken in the notice of appeal. Nor was it embraced by counsel for the appellant with any enthusiasm when it was drawn to his attention by this Court. In those circumstances — and in the circumstances that the effect of the summary judgment is substantially negated by the stay of execution which this court will impose — I do not think it right to set aside an order made by the judge in the exercise of his discretion. I too would dismiss this appeal.”

“65. 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. 66. 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. 67. Miss Barwise argued that the claim under the NLSDA SubContract 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. 68. 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. 69. 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-byelement 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. 70. 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, quickfix 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?”

“The adjudication will produce at most a temporary obligation, more in the nature of an interim payment. However the contractual right to an adjudication is there. Whether or not the court would enforce any order against the company seems inconceivable, as this would defeat the requirement of pari passu distribution, and it may therefore that were the school to make an adjudication application, that might be met by an application for a stay by the liquidators on conventional insolvency grounds.”

“On any view if Primus was to make all or most of its recovery it will emerge solvent with all debtors paid and something left over, and that was the basis for having the CVA to enable it to do so.”

“91. For all of those reasons it cannot be said, adopting the observations of Chadwick LJ, as echoed by Akenhead J, that summary judgment is always to no advantage to a party because inevitably there will be a netting-off exercise taking account of the counterclaim. Where both parties are already in litigation, where the claims and counterclaims have already been advanced or will be advanced, where the supervisor has already taken the view and considered that Cannon is no longer a creditor, a different situation applies. If Primus is the net winner in the litigation it will recover money from Cannon. It will distribute it to its creditors. If Cannon is the net winner it will, in effect, have to prove for its net claim in the CVA. Precisely the same result would obtain had there been no litigation but only a supervisor’s exercise of the netting-off. So although there is no evidence directly from the supervisor as to what he would do, it seems to me to inconceivable there will be any kind of netting-off exercise here unless it is simply a repetition of the view which the supervisor has already taken. The supervisor, of course, had to approve the litigation both in relation to the adjudication enforcement and the separate substantive proceedings. 92. Moreover one should not be distracted by the issue of a counterclaim. If there was no counterclaim but the defendant simply wished to challenge the adjudicator’s decision there is no reason why the mere fact of a CVA should mean there can be no summary judgment. 93. Accordingly I do not accept that Westshields is authority for the proposition that whenever the claimant with an adjudication decision is in a CVA and there is a counterclaim, it must follow without more that there should be no summary judgment. Nor, in my judgement, did Akenhead J purport to lay down any such general rule. 94. It is also worth noting, though I accept it is a minor point, that part of the thinking of Akenhead J when deciding what to do involved the rejection of the argument to the effect that the adjudication there had been statutorily imposed. This seems to indicate that this was a factor he took into account. 95. Furthermore, Akenhead J did not disapprove of Mead and if he was really laying down a rule of general application he would have had to say something more, because on this view of Westshields, one would never get to the stage of stay of execution in a CVA where there is a counterclaim at all and yet Mead is all about stays of execution in connection with counterclaims. If Akenhead J took the view that he was laying down that kind of general rule, he would have been bound to say something about Mead and certainly would have had to qualify it or disagree with it. 96. Furthermore, in Mead itself, although the point was not specifically raised, and it is right to say there was no defendant there, Coulson J when considering the observations he made, would surely have been aware that it is a standard provision in CVAs that there would be a netting-off clause. I cannot say there was one in Mead because the report does not make that clear but it would seem likely that there would have been. 97. There is nothing in any of the other cases which have been cited to me, either originally or following the adjournment, that is inconsistent with this result. There is therefore no procedural bar to summary judgment here. Nor does it follow that there must be a stay of execution without more, which depends upon the same reasoning.”

“26. In a number of the authorities which I have cited above the point has been made that each case must turn on its own facts. Whilst I respectfully agree with that, it does seem to me that there are a number of clear principles which should always govern the exercise of the court's discretion when it is considering a stay of execution in adjudication enforcement proceedings. Those principles can be set out as follows: a) Adjudication (whether pursuant to the 1996 Act or the consequential amendments to the standard forms of building and engineering contracts) is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute. b) In consequence, adjudicators' decisions are intended to be enforced summarily and the claimant (being the successful party in the adjudication) should not generally be kept out of its money. c) In an application to stay the execution of summary judgment arising out of an Adjudicator's decision, the Court must exercise its discretion under Order 47 with considerations a) and b) firmly in mind (see AWG Construction Services v Rockingham Motor Speedway [2004] EWHC 888). d) The probable inability of the claimant to repay the judgment sum (awarded by the Adjudicator and enforced by way of summary judgment) at the end of the substantive trial, or arbitration hearing, may constitute special circumstances within the meaning of Order 47 rule 1(1)(a) rendering it appropriate to grant a stay (see Herschell Engineering Ltd v Breen Property Ltd (unreported) 28 July 2000, TCC). e) If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted (see Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522 (CA) and Rainford House Ltd v Cadogan Ltd (unreported) 13 February 2001). f) Even if the evidence of the claimant's present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if: (i) the claimant's financial position is the same or similar to its financial position at the time that the relevant contract was made (see Herschell); or (ii) The claimant's financial position is due, either wholly, or in significant part, to the defendant's failure to pay those sums which were awarded by the adjudicator (see Absolute Rentals v Glencor Enterprises Ltd (unreported) 16 January 2000, TCC).”

“It has to be recognised that when considering the cause of financial difficulties the court (rather like its consideration of a similar argument in the context of security for costs), has necessarily a somewhat imperfect picture. There has been no trial and no cross-examination of witnesses, and clearly the court has to the best it can on the circumstances. But having done so here, and with the numerous materials which are available to me, I have no doubt at all for the present purposes that the repudiation did not cause the CVA and it did cause the present financial predicament of Primus. Or at least, and I need go no further than this, that it did so in significant part.”

“32. It has long been established in the relatively short period of time in which the Housing Grants Construction and Regeneration Act 1996 ("HGCRA") has been in force that it is necessary for a party challenging the jurisdiction of the adjudicator to reserve its position in relation to its challenge; for instance, although not cited in argument, this issue was raised and commented upon by Mr Justice Dyson as he then was in The Project Consultancy Group v The Trustees of the Gray Trust[1999] BLR 377 at Paragraphs 14 and 15. Having reserved its position appropriately and clearly, that party can safely continue to participate in the adjudication and then, if the decision goes against it, to challenge its enforceability on jurisdictional grounds in the Court. If it does not reserve its position effectively, generally it cannot avoid enforcement on jurisdictional grounds…It is however difficult to envisage circumstances in which a jurisdictional challenge on the grounds that there is no dispute should not and can not be the subject of a reservation of rights.”

“37. The underlying issue is whether, taking account of the particular reservation, a party by participating in the adjudication has waived its right to object on grounds of jurisdiction. If the party does not raise any objection and participates in the adjudication then, even if there is a defect in the jurisdiction of the adjudicator, that party will create an adhoc jurisdiction for the adjudicator and lose the right to object to any decision on jurisdictional grounds. If a party raises only specific jurisdictional objections and those jurisdictional objections are found by the court to be unfounded then that party is precluded from raising other grounds which were available to it, if it then participates in the adjudication. That participation amounts to a waiver of the jurisdictional objection and confers ad-hoc jurisdiction. Obviously this assumes that, at the relevant time when the party participated in the Adjudication, the jurisdictional objection was available. Some jurisdictional objections, for instance as to the scope of the dispute, may only become apparent during the adjudication process or at the time of the decision. 38. Where a party raises a general reservation to the jurisdiction of an adjudicator but does not specify any particular ground for such an objection that raises potential difficulties for both the adjudicator and the other party. The adjudicator cannot investigate any specific objection and, if appropriate, decide not to proceed. The other party cannot decide whether any specific objection has merit. If so it might decide whether to take steps to remedy the situation by, for instance, starting a new adjudication. Equally, if a general reservation as to jurisdiction were to be sufficient to cover all matters that had arisen or might arise then there would, in principle, be no need for any specific objection, except to give the other party and the adjudicator a chance to consider it. 39. Those practical difficulties suggest that the use of general reservations is undesirable but that does not answer the question whether a general jurisdictional reservation does permit a party to participate in an adjudication without thereby waiving its right to objection on jurisdictional grounds. The decision in Bothma provides strong support for the effectiveness of a general reservation. In addition in the context of arbitration, prior to the provisions of s.73 of the Arbitration Act 1996, a general reservation was held to the sufficient to preserve objection to jurisdiction by a party who participated in an arbitration. ...”

“41. I respectfully adopt that approach which seems to me to be equally applicable in the case of adjudication. The question in this case is therefore, whether the words of general reservation were sufficiently clear to prevent Ringway's subsequent participation in the adjudication from amounting to a waiver or an ad-hoc submission...”

“21. I can draw these various strands together: … (b) For there to be an implied agreement giving the adjudicator such jurisdiction, one needs to look at everything material that was done and said to determine whether one can say with conviction that the parties must be taken to have agreed that the adjudicator had such jurisdiction. It will have to be clear that some objection is being taken in relation to the adjudicator's jurisdiction because otherwise one could not imply that the adjudicator was being asked to decide a non-existent jurisdictional issue which neither party had mentioned. (c) One principal way of determining that there was no such implied agreement is if at any material stage shortly before or, mainly, during the adjudication a clear reservation was made by the party objecting to the jurisdiction of the adjudicator. (d) A clear reservation can, and usually will, be made by words expressed by or on behalf of the objecting party. Words such as "I fully reserve my position about your jurisdiction" or "I am only participating in the adjudication under protest" will usually suffice to make an effective reservation; these forms of words whilst desirable are not absolutely essential. One can however look at every relevant thing said and done during the course of the adjudication to see whether by words and conduct what was clearly intended was a reservation as to the jurisdiction of the adjudicator. It will be a matter of interpretation of what was said and done to determine whether an effective reservation was made. A legitimate question to ask is: was it or should it have been clear to all concerned that a reservation on jurisdiction was being made? (e) A waiver can be said to arise where a party, who knows or should have known of grounds for a jurisdictional objection, participates in the adjudication without any reservation of any sort; its conduct will be such as to demonstrate that its nonobjection on jurisdictional grounds and its active participation was intended to be and was relied upon by the other party (and indeed the adjudicator) in proceeding with the adjudication. It would be difficult to say that there was a waiver if the grounds for objection on a jurisdictional basis were not known of or capable of being discovered by that party.”

“33. There is little to add to these observations. If a party does not effectively reserve its position on a given jurisdiction issue, of which it had actual or constructive knowledge, it cannot raise it as an effective objection to a claim for the enforcement of the relevant adjudication decision...”

“Allied P&L is important because the responding party took various points on jurisdiction, each of which failed. Although they subsequently discovered a much better argument on jurisdiction, because they had not previously referred to it, or reserved their position in respect of it, the court found that they could not rely on it subsequently to resist enforcement. By contrast, a general reservation of position can, depending on the circumstances, be effective, as Ramsey J found (with some hesitation) in Laker Vent Engineering... However it all depends on the facts: the court will usually look with disfavour on an unspecific general reservation of the responding party's position on jurisdiction if it thinks that it was worded in that way to try and ensure that all options (including ones not yet even thought of) could be kept open.”