Straw Realisations (No 1) Ltd v Shaftsbury House (Developments) Ltd [2010] EWHC 2597 (TCC)

[2010] EWHC 2597 (TCC)Case No HT-10-143
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 20/10/2010
Before
THE HONOURABLE MR JUSTICE EDWARDS-STUART
Between
Straw Realisations (No 1) Ltd (formerly known as Haymills (contractors) Ltd (in administration))ClaimantShaftsbury House (Developments) LtdDefendant
Mr Marc Rowlands (instructed by Fenwick Elliott) for ClaimantMr Peter Fraser QC & Ms Serena Cheng (instructed by Haldanes) for DefendantHearing Hearing dates: 29 July 2010
Judgment

Introduction

[1]This is a judgment on an application to enforce, by way of summary judgment, two adjudication decisions made in favour of the Claimant. They are:(1) The Decision of Mr Wilkey dated 31 July 2009, in the sum of £31,964.30; and(2) The Decision of Mr Smalley dated 13 October 2009, in the sum of £491,902.86.[2]The disputes that were referred to adjudication arise out of a building contract between the Claimant and the Defendant by which the Defendant engaged the Claimant to construct a new mixed residential and retail development in Islington, London. The contract price was about £8,500,000. Practical Completion was achieved on 9 April 2009.[3]However, on 13 August 2009 an Administration Order was made by the court putting the Claimant into administration. Before this happened Mr Wilkey had made his decision in the first adjudication which required payment to the Claimant of the sum found due by 10 August 2009, and Mr Smalley had been appointed adjudicator in the second adjudication on a further referral by the Claimant. Thus when the Claimant went into administration the adjudication before Mr Smalley was still on foot.[4]Clause 8 of the contract provided for the insolvency of the contractor. Put briefly, it provided that if the contractor became insolvent (which included being put into administration), any provisions of the contract which required any further payment or any release of retention would cease to apply. The central issue raised by the application is to resolve what was described by Mr Marc Rowlands, who appeared for the Claimant, as the "tension between (on the one hand) an extant adjudication decision (Mr Wilkey's) and an ongoing adjudication (Mr Smalley's); and (on the other) the operation of a contractual provision that no further payments are due under the Contract". Related to, and possibly determinative of, this question is whether or not either decision became final and binding because the Defendant did not give an effective notice under clause 9 of the contract within 3 months of the decision, in the absence of which the contract provides that an adjudicator's decision is final and binding.[5]Matters are further complicated by the fact that the Administrators purported to assign the contract to another company. It is now accepted that this assignment was unlawful in that it was in breach of a term of the contract that prohibited assignment of the contract by the contractor, and so this application is made by the Administrators of the Claimant. At the outset of the hearing I asked for and was given an undertaking through Mr Rowlands that the Administrators would accept liability for any adverse order of costs in the event that the application was unsuccessful.[6]The principal argument for the Defendant, who was represented by Mr Peter Fraser QC and Miss Serena Cheng, was that the effect of the administration was to suspend automatically any entitlement to further payment under the contract and to substitute a right to payment only of any net balance due to the contractor (or to the employer) after all claims and cross claims had been taken into account. In effect, the Defendant's case is that the general provisions applicable to situations of liquidation or bankruptcy prevail over the statutory policy in relation to the enforcement of adjudicator's decisions.[7]The application also raises issues as to whether Mr Smalley had jurisdiction to continue the referral before him in the light of the Administration Order and, if he did, whether his decision was reached in breach of the rules of natural justice so that it should not be enforced. Even if the Defendant is unsuccessful on all these points, Mr Fraser submits that if the Claimant is entitled to summary judgment, the court should order a stay of execution.[8]With this brief introduction I now turn to the relevant provisions of the contract.

The contract

[9]The Claimant, who was formerly known as Haymills (Contractors) Limited, was a building contractor. The Defendant is a property developer.[10]On about 6 February 2007 the Defendant entered into a construction contract with the Claimant under which the Claimant was to carry out works to construct "a new mixed residential and retail development comprising seven levels from basement to fifth floor at 29 Highbury Corner and at 37-49 Holloway Road, Islington, London”. The contract was based on the JCT Standard Form of Building Contract with Quantities 2005, but incorporated various bespoke amendments. The Contract Sum was £8,568,242 and the contract provided for sectional completion in two sections. The Date for Possession of Section 1 was 26 February 2007 and Date for Completion was 25 May 2008. For Section 2, the Date for Possession was the same, but the Date for Completion was 15 August 2008. There was provision for liquidated damages for delay at the rate of £15,000 per week in relation to Section 1, and £20,500 per week in respect of Section 2.[11]The contract provided for adjudication, to which the Scheme for Construction Contracts was to apply, as amended by the contract. Paragraph 23 of the Scheme, as amended, provided that:
“(1) in his decision, the adjudicator may, if he thinks fit, order any of the parties to comply peremptorily with his decision or any part of it. (2) (a) the decision of the adjudicator shall be final as well as binding unless within three months of the giving of the adjudicator's decision any party to the dispute serves on the other party or parties notice in writing of its intention to refer the dispute or difference for final determination by legal proceedings. (b) unless the parties to the dispute otherwise agree in writing, any legal proceedings of which written notice has been given in accordance with paragraph 23(2)(a) may not proceed until after Practical Completion or alleged Practical Completion of the Works or determination or alleged determination of the Contractor's employment under this Contract or abandonment of the Works under the Contract in each case.” (a) the decision of the adjudicator shall be final as well as binding unless within three months of the giving of the adjudicator's decision any party to the dispute serves on the other party or parties notice in writing of its intention to refer the dispute or difference for final determination by legal proceedings. (b) unless the parties to the dispute otherwise agree in writing, any legal proceedings of which written notice has been given in accordance with paragraph 23(2)(a) may not proceed until after Practical Completion or alleged Practical Completion of the Works or determination or alleged determination of the Contractor's employment under this Contract or abandonment of the Works under the Contract in each case.”
[12]Clauses 8.5 and 8.7 of the contract provided for the Insolvency of Contractor. For the purposes of the contract a party was deemed to be insolvent if, amongst other things, "he has appointed to him an administrator or administrative receiver" (clause 8.1.4).Clause 8.5 was in the following terms:
“.1 If the contractor is Insolvent, the Employer may at any time by notice to the Contractor terminate the Contractor's employment under this Contract. .2 The Contractor shall immediately inform the Employer in writing if he makes any proposal, gives notice of any meeting or becomes the subject of any proceedings or appointment relating to any of the matters referred to in clause 8.1. .3 As from the date the Contractor becomes Insolvent, whether or not the Employer has given such notice of termination: .1 the provisions of clauses 8.7.4, 8.7.5 and 8.8 shall apply as if such notice had been given and the other provisions of this Contract which require any further payment or any release of Retention shall cease to apply; .2 the Contractor's obligations under clauses 2.1 and 2.2 to carry out and complete the Works and the design of the Contractor's Designed Portion shall be suspended; and .3 the Employer may take reasonable measures to ensure that the site, the Works and Site Materials are adequately protected and that such Site Materials are retained on site; the Contractor shall allow and shall not hinder or delay the taking of these measures.” .1 the provisions of clauses 8.7.4, 8.7.5 and 8.8 shall apply as if such notice had been given and the other provisions of this Contract which require any further payment or any release of Retention shall cease to apply; .2 the Contractor's obligations under clauses 2.1 and 2.2 to carry out and complete the Works and the design of the Contractor's Designed Portion shall be suspended; and .3 the Employer may take reasonable measures to ensure that the site, the Works and Site Materials are adequately protected and that such Site Materials are retained on site; the Contractor shall allow and shall not hinder or delay the taking of these measures.”
[13]Clause 8.7, which was headed "Consequences of termination under clauses 8.4 to 8.6" provided, so far as is material, as follows: “If the Contractor's employment is terminated under clause 8.4, 8.5 or 8.6: .1 the Employer may employ and pay other persons to carry out and complete the Works . . . . . . .4 within a reasonable time after the completion of the Works and the making good of defects (or of Instructions otherwise, as referred to in clause 2.38), an account of the following shall be set out in a certificate issued by the Architect/Contract Administrator or a statement prepared by the Employer: .1 the amount of expenses properly incurred by the Employer, including those incurred pursuant to clause 8.7.1 and, where applicable, clause 8.5.3.3, and of any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise; .2 the amount of payments made to the Contractor; and .3 the total amount which would have been payable for the Works in accordance with this Contract; .5 If the sum of the amounts stated under clauses8.7.4.1 and8.7.4.2 exceeds the amount stated under clause 8.7.4.3, the difference shall be a debt payable by the Contractor to the Employer or, if that sum is less, by the Employer to the Contractor.” .1 the amount of expenses properly incurred by the Employer, including those incurred pursuant to clause 8.7.1 and, where applicable, clause 8.5.3.3, and of any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise; .2 the amount of payments made to the Contractor; and .3 the total amount which would have been payable for the Works in accordance with this Contract;

The facts

[14]The Claimant commenced the Works on about 26 February 2007. By September 2008 a dispute had arisen between the parties concerning the classification of material to be disposed of by the Claimant off site. It was contended by the Claimant that certain materials had been re-classified from "inactive" to "active", with the result that the cost of disposing this material were substantially increased. The Claimant asserted that it was entitled to an additional payment in respect of this variation in the sum of about £470,000, of which only about £250,000 was paid by the Defendant.[15]The Claimant therefore served a Notice of Adjudication on 4 September 2008 and a Mr Judkins was appointed adjudicator by the RIBA. On 17 October 2008 Mr Judkins issued his Decision in which he held that the Claimant was entitled to be paid a sum in excess of £182,000 plus interest and that the Defendant should pay his fees. Those sums were thereafter paid by the Defendant. On 10 November 2008 the Defendant served a notice pursuant to paragraph 23(2)(a) of the Scheme giving notice of its intention to refer the dispute or difference is the subject of the Decision for final determination by legal proceedings. On 15 January 2009 the Defendant issued proceedings to challenge the decision (Claim No HT-09-18) in accordance with its earlier notice.[16]On 9 July 2009, following the issue of the certificate of Practical Completion for the whole of the Works on 9 April 2009, the Claimant served a Defence and Counterclaim in that action. By the Counterclaim the Claimant claimed various declarations and payments, including declarations that it was entitled to an extension of time in relation to Section 2 of the Works and to loss and expense in the sum of about £801,000, and a claim for repayment of the Liquidated Damages deducted by the Defendant in the sum of £551,696. In short, by this Counterclaim the Claimant was claiming all the relief under the contract to which it asserted that it was entitled.[17]Meanwhile, on 3 July 2009, the Claimant referred a further dispute to adjudication, and this was the adjudication in which Mr Wilkey was appointed adjudicator. The scope of this dispute was limited to a claim for the wrongful deduction of liquidated damages in a sum of about £50,000, but the Notice of Adjudication expressly referred to the fact that the Claimant asserted an entitlement to an extension of time for the full period up to the date of completion and that this was the subject of a different dispute.[18]That dispute was the subject of a further Notice of Adjudication dated 27 July 2009, and that was the dispute that was referred to Mr Smalley. In this referral the Claimant sought to recover the balance of the liquidated damages deducted by the Defendant in the sum of about £500,000.[19]As the figures set out in the opening paragraph of this judgment demonstrate, the Claimant was substantially successful in the first adjudication and almost wholly successful in the second adjudication.[20]Mr Wilkey issued his decision on 31 July 2009, by which he ordered the Defendant to pay the Claimant the sum of £31,964 within 7 days of the publication of the Decision and in any event no later than close of business on 10 August 2009. In addition, he ordered the Defendant to pay £6,923 to him in respect of his fees and expenses within the same time.[21]The Defendant did not pay either of these sums and, on 13 August 2009, by an order of the court, the Claimant was put into Administration.[22]During August 2009 there was an exchange of correspondence between Mr Smalley and the parties about the effect of the making of the Administration Order on the adjudication during which Mr Smalley raised the issue of the appropriateness of continuing the adjudication. On 20 August 2009 Kingfisher Associates, a firm of construction dispute and contract advisers acting on behalf of the Defendant, wrote to Mr Smalley stating that any decision which he might make in favour of the Claimant would not be enforceable and that the further pursuit of the adjudication was a waste of time. Mr Smalley replied the following day, 21 August 2009, expressing the initial view that the arguments presented on behalf of the Defendant did not affect his jurisdiction in the adjudication. On the same day PricewaterhouseCoopers, one of whose partners, Mr Oldfield, had been appointed as Administrator, wrote to Vinci Construction UK Limited (“Vinci”), to whom the contract had been purportedly assigned by the Claimant, seeking confirmation that, amongst other things, Vinci would be responsible for the payment of all costs, expenses and disbursements incurred by the Administrator in respect of the adjudication. This letter was countersigned by Vinci and sent thereafter, I assume, to the adjudicator and to the parties. At around the same time Eversheds were instructed on behalf of the Claimant, and on 2 September 2009 they wrote to PricewaterhouseCoopers giving their view that the adjudicator had jurisdiction to continue with the adjudication and that should he decide to stand down in spite of the fact that he had jurisdiction, then it would be likely that he would be considered to have failed to deliver a decision - in which case, they said, he would not be entitled to his fees. In the meantime, by a letter dated 25 August 2009, Kingfisher Associates reiterated their position that the adjudicator had no jurisdiction and, whilst agreeing to attend a meeting before the adjudicator on 8 September, reserved the Defendant's position in relation to the adjudicator's jurisdiction and said that the Defendant’s continued participation in the adjudication would be on that basis and that it would not necessarily be bound by any decision made.[23]On 3 September 2009 Mr Smalley, having received a copy of the letter from Eversheds, wrote to the parties and informed them that he had decided that he had jurisdiction to continue with the adjudication and that accordingly he proposed to do so without further delay. In that letter he said that the question of whether or not the Claimant would be able to enforce any decision would be a matter for the court.[24]In the event, the adjudication went ahead and, on 13 October 2009, Mr Smalley issued a very detailed and comprehensive Decision, running to some 60 pages, plus appendices, in which he directed the Defendant to pay back to the Claimant all the sums withheld by way of liquidated damages apart from a sum of about £25,000. He directed that the Defendant should be liable for 75% of his fees and the Claimant for 25%, but since the Claimant had already paid his fees in full he directed the Defendant to reimburse the Claimant for its 75% share of the fees. These sums were ordered to be paid by 19 October 2009, but neither sum has been paid. Whilst at first sight it may seem surprising that the Claimant, having been almost wholly successful in the adjudication, should be ordered to pay some of the adjudicator's fees, the reason why Mr Smalley made that order was because he found the presentation of the Claimant’s case to have been “convoluted” and that a large number of events had been relied on as causing delays that ultimately had no effect on the critical path to completion.[25]On 5 November 2009 PricewaterhouseCoopers wrote to the Defendant demanding payment of the sums awarded by Mr Smalley. On 24 November 2009 the Defendant replied as follows: “We acknowledge receipt of your Demand letter dated 5 November 2009 which was only received at this office on Saturday 21st November 2009. Mr Wynne-Jones is currently away from office but will return at the end of this week. However, in his absence we will send you a full and proper reasoned paper rejecting your claim. It may not come as a complete surprise to you when I confirm that our leading Counsel has advised that your demands are unenforceable."[26]This letter is relied on by the Defendant as complying with the requirements of paragraph 23(2)(a) of the Scheme, as amended, and thus preventing the decision of Mr Smalley becoming final and binding on the Defendant.

The decision of Mr Smalley

[27]Mr Fraser submitted that the decision of Mr Smalley was unenforceable for two reasons. First, the Administration Order deprived Mr Smalley of jurisdiction over the dispute referred to him since the only dispute between the parties following the administration became one over the "net balance" due after the exercise required under clause 8.7 of the contract. Second, Mr Smalley's decision was reached as a result of clear breaches of natural justice.[28]In my view, there is nothing in the jurisdiction point. Mr Smalley was appointed before the Administration Order was made and so the dispute referred to him did not include, and could not have included, any dispute that arose as a result of the making of the Administration Order. In Westwood Structural Services Limited v Blyth Wood Park [2000] EWHC 3138 (TCC), Coulson J had to consider a clause which provided that on the determination of the employment of the contract the employer was not bound to make any further payment to the contractor that may be due under the contract until after completion of the works. There were two adjudications in that case, the first of which was started before the employer determined the contract. In relation to that adjudication the judge remarked, at paragraph 7, that the "adjudicator properly decided that since the determination had occurred after the commencement of the adjudication, he did not have the jurisdiction to address it". In my judgment, the same applies here. Mr Smalley had no jurisdiction to consider the consequences of the Administration Order because it occurred after the commencement of the adjudication.[29]I turn now to the submissions based on the breach of natural justice. As I have already indicated, the dispute referred to Mr Smalley concerned the Claimant’s entitlement to an extension of time. Accordingly, the adjudicator would have to consider the contractor's original programme and whether and how the various delaying events relied on by the contractor impacted on that programme so as to cause critical delay. The complaints made by the Defendant are that the adjudicator was told by the Claimant, or those representing it at the adjudication, that the electronic master programme was not available, when in fact it was. Further, it was alleged that the adjudicator then produced his own programme but did not give the Defendant any proper opportunity to deal with it or address its contents. In this context it is said that Mr Smalley only gave isolated parts of his version of the programme to the Defendant for comment.[30]Having considered the evidence put before the court at the hearing, I find that the facts relating to the master programme were as follows. The programme had been prepared by a Mr Gabriel Ige, who subsequently left the Claimant in about July 2009. An electronic copy of the master programme was on his computer which he took with him when he left the Claimant. Mr Gary Lambourne, who made a witness statement for the purpose of the hearing, was involved in the adjudication on behalf of the Claimant and said that neither he nor his colleague, Mr Peter Cowan, who was responsible for preparing the programming case, had access to an electronic copy of the master programme. All that they had was a locked PDF copy of the programme. For the purposes of the adjudication he reproduced this programme into an Excel format so that it could be used by the parties and the adjudicator. Mr Miles, a partner in Haldanes, the solicitors acting for the Defendant, said, in his second witness statement, that he had been told by Mr Bratland, of the Defendant, that a former director of the Claimant, Mr Jason Smith, who was made redundant on 13 August 2009 as a result of the administration, telephoned Mr Ige on 23 September 2009 who agreed to send him a copy of the program in electronic form, which he did later the same day. Mr Smith immediately forwarded the programme to Mr Bratland. However, by this time it was effectively too late for the electronic version of the programme to be of any use in the adjudication.[31]Mr Miles’s second witness statement continued as follows: “It is simply not possible to find out who within Haymills had even tried to obtain a copy of the programme, and how they had gone about doing so. However, Mr Lambourne says in his evidence that neither he nor Mr Cowen [sic] “had access to it". I suggest it is unlikely that either of them had troubled themselves to ask Mr Ige, because it appears that had they done so, he would have provided a copy to them in the same way that he provided a copy to Mr Smith." In my view, this passage falls far short of establishing any improper conduct on behalf of those acting for the Claimant at the adjudication. I find it inherently unlikely that Mr Lambourne and Mr Cowan would have gone to the considerable trouble of producing a version of the master programme in Excel if they thought that they could have obtained an electronic version of it simply by making a telephone call to Mr Ige. Mr Lambourne said that he had no idea how Mr Smith obtained a copy of the master programme and that he never saw it. It may well be that Mr Lambourne and others within the Claimant’s camp could have done more than they did to track down an electronic version of the master programme, but this falls far short of any conduct that might be described as amounting to fraud such as to vitiate the decision of the adjudicator.[32]As to the second point, I have considered Mr Smalley's decision and I can find no basis for criticising what he did. On the contrary, he seems to have taken considerable pains to ensure that he decided the dispute only on the basis of the evidence and submissions put forward by the parties. For example, at paragraph 2.18 of his Decision, Mr Smalley said this: “I frequently found that the most effective way of reaching my decisions was to use charts to plot the programme/progress details that were being argued. I subsequently decided to incorporate some of the charts into my Decision, whenever I viewed them as a useful tool for assisting the parties in understanding the logic/reasons that I applied in reaching my conclusions on extension of time entitlement. I wish to emphasise that all of the programme logic that I applied came from that that was argued by either of the parties. The base point for each party was the Master Programme and I adopted that as the main tool for task durations and sequences incorporated in Haymills original programme intention. I then reviewed the respective interpretations that the parties had applied to the Master Programme and made my decision on points of difference and the entitlement or otherwise to extension of time." In section 5 of his Decision Mr Smalley considered the Defendant’s analysis of the Master Programme and Haymills "Original Programme", recording his surprise that the Claimant had been unable to locate the original computerised version of the Master Programme and saying that he accepted the Defendant’s submission that the critical path that had been retrospectively applied was not the true critical path that initially flowed through the Master Programme when it was first produced. He said, at paragraph 5.03 that "where and to the extent that the [Defendant] persuaded me that the critical path displayed on the programmes produced by Haymills was in error, I applied the corrected view of the critical path in my determination of extension of time entitlement". At paragraph 6.13 Mr Smalley concluded by saying this: “I was aware of the need to keep within the submissions made by the parties. I accordingly ensured that the dates, periods and logic incorporated in my charts were restricted to the arguments and data presented to me in the adjudication. I was aware of the fact that if I moved away from the parties submissions, I must give them the opportunity to comment."[33]I have cited these passages by way of example to demonstrate the general approach of Mr Smalley which, in my view, was beyond criticism. I conclude that there is absolutely nothing in the Defendant's attack on Mr Smalley's approach, let alone anything that remotely approaches a failure to observe the principles of natural justice.[34]For these reasons I reject the submissions that Mr Smalley either lacked jurisdiction or did not observe the principles of natural justice. The issue which remains in relation to the adjudications, to which I now turn, is whether or not in either case the Defendant served notice of intention to contest the findings of the adjudicator as required by paragraph 23 of the Scheme, as amended.

Whether either of the decisions of Mr Wilkey or Mr Smalley is final and binding

[35]In relation to the decision of Mr Wilkey, I did not understand Mr Fraser to submit that any notice had been served that would have complied with paragraph 23(2)(a) of the Scheme.[36]Mr Fraser submitted that the service by the Claimant of its Defence and Counterclaim in action HT-10-18 in which it claimed a further extension of time, a claim which embraced the subject matter of both adjudications, made it unnecessary for the Defendant to comply with paragraph 23(2)(a) because, in effect, litigation about the subject matter of the two decisions was already on foot. In the case of the decision of Mr Wilkey, I consider that there is a very short answer to this. The Defence and Counterclaim was served on 9 July 2009, some three weeks before Mr Wilkey gave his Decision. I am unable to see how anything done prior to the issue of Mr Wilkey's Decision can amount to some form of notice that it is being disputed. For all that the Defendant could have known, the Claimant might have decided to accept the decision of Mr Wilkey and not to pursue that part of the Counterclaim that would have been concerned with it.[37]Mr Fraser also relied on a letter from Haldanes to the Administrator dated 2 September 2009. In this letter Haldanes wrote: “We are instructed that a purported assignment of the contract took place between you as administrator and Vinci Construction UK Limited ("Vinci"). This is evidenced by the e-mail from Mr Lambourne (apparently acting as agent for Haymills) dated 18 August 2009 in which it is expressly stated that the contract had been assigned to Vinci. However, when the provisions of clause 7 of the contract were drawn to your attention, it was asserted that no assignment of the contract but merely that a sale of the debts had taken place. You will or should be aware that no debts are due from Shaftesbury, either current or contingent. In any event, the sale of the alleged debt is not binding upon Shaftesbury as the Courts have ruled on numerous occasions that a prohibition in a contract of assignments of contracts all rights, as is the case here, is a valid and enforceable contractual provision. It is also noted that you have indicated your intention to pursue certain adjudication claims against Shaftesbury on the half of Haymills. You are no doubt aware of judicial authority which precludes the enforcement of any such awards if, in the unlikely event, Haymills is successful in those adjudications. However, by pursuing unmeritorious claims you have put Shaftesbury to considerable trouble and expense in respect of which Shaftesbury is taking legal advice upon the recovery of its losses from the Administrators of Haymills." The words emphasised in the second paragraph were those specifically relied on by Mr Fraser.[38]What is curious about this letter is that it appears that the writer was completely unaware of the fact that Mr Wilkey had already made a decision in the Claimant’s favour. The reference to judicial authority precluding the enforcement of any awards "if, in the unlikely event, Haymills is successful in those adjudications", with the implied assertion that any such awards would be contested, can only be a reference to adjudications that were currently on foot but not concluded. Since the letter omitted any reference to the Decision of Mr Wilkey, I find it hard to see how, even on the most benevolent construction, it can be said to disclose dissatisfaction with that decision, let alone an intention to challenge it. The assertion in the previous paragraph to the effect that no debts were due from the Defendant, either current or contingent, appears to have been made solely in the context of the purported sale of the debts referred to in the previous sentence.[39]For these reasons, I reject the submission that the Defendant served a notice in relation to Mr Wilkey's Decision that complied with paragraph 23(2)(a) or that the service of the Defence and Counterclaim by the Claimant on 9 July 2009 rendered such a notice unnecessary.[40]In relation to the Decision of Mr Smalley, I consider that the submission based on the service of the Defence and Counterclaim must also fail for precisely the same reasons. Further, by the time of Mr Smalley's Decision the Claimant was in administration and the legal proceedings were effectively frozen.[41]However, Mr Fraser submitted that in the case of Mr Smalley the Defendant did serve a notice that complied with paragraph 23(2)(a) of the Scheme. This was the letter of 24 November 2009, the relevant parts of which I have set out in full in paragraph 25 above. It was not, of course, submitted that this letter could act as such a notice in relation to the decision of Mr Wilkey, because it was written more than 3 months after he issued his Decision.[42]The letter was written in response to a letter from PricewaterhouseCoopers, dated 5 November 2009, demanding payment of the sums awarded by Mr Smalley, which were by then overdue.[43]The effect of the Administration Order was that the Defendant did not have an absolute right to start proceedings against the Claimant: it could only do so with the leave of the court or the consent of the administrator (see paragraph 43(6) of Schedule B1 to the Insolvency Act 1986).[44]In my view, paragraph 23(2)(a) contemplated a situation where each party was solvent and in which the appropriate way of challenging an adjudicator's decision was to take proceedings in the courts for a final determination of the matters in dispute. That is why the notice required was that of an intention to refer the dispute for final determination by legal proceedings. The purpose of the notice was clearly to achieve finality in relation to that dispute unless one or other party expressed dissatisfaction with it within three months and indicated an intention to challenge it in the appropriate manner.[45]But to require the service of such a notice after a party had become the subject of an administration order, would be to require the other party, first, to give notice of an intention to take action that it did not have a right to take without the permission of the court and, second, to give notice of an intention to take a particular course of action that it would very probably not wish to take. The reason for the latter being that it would only need to refer the dispute for final determination by legal proceedings if it had satisfied the award - a course that would have the consequence that, even if it was permitted to take such proceedings and was successful, it would be most unlikely to recover anything like the full amount that it had paid in satisfaction of the award. It seems to me likely that the only realistic course open to a person in this position would be to resist enforcement of the award on the ground of the insolvency of the other party.[46]It seems to me that to require a party to give notice of a course of action that it did not have the power to take and that it would be unlikely to wish to take (even if given permission to take it), but not of the action that it would be most likely to want to take, does not make business sense.[47]There is high authority for the proposition that if a literal reading of the language of a contract leads to an absurd result, and one which reflects an intention which the parties could never have had, the law does not require a court to attribute to the parties such an intention: see for example, the well known dictum of Lord Diplock in The Antaios [1984] AC 191 ("if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must yield to business commonsense"), and the observations of Lord Hoffmann to similar effect in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, at 913.[48]In these circumstances, I consider that, as a matter of construction, paragraph 23(2)(a) did not have to be strictly followed once one of the parties to the contract had become the subject of an administration order or was in liquidation. That is not to say that thereafter it should cease to have any application at all, because there was still a need to indicate whether or not the decision was accepted or was to be challenged. In my judgment, following the administration or liquidation of the party in whose favour the decision had been made paragraph 23(2)(a) required the dissatisfied party to communicate to the other, within three months of the decision, an intention to challenge it by some appropriate means.[49]The letter of 24 November 2009 made it clear that the Defendant was rejecting the Administrator’s claim based on Mr Smalley's Decision on the grounds that it was unenforceable. Accordingly, since the letter was served within three months of the Decision, I consider that it was a valid notice under paragraph 23(2)(a) of the Scheme with the result that the Decision of Mr Smalley is not final and binding and is therefore not beyond challenge.

The effect of the Administration Order and clause 8 of the contract

[50]Underlying Mr Fraser’s submissions was the theme that the rationale of the policy towards the enforcement of adjudicator’s decisions was “Pay now, argue later” so that once a party became insolvent, in the sense that it could no longer pay its debts, the basis for the policy no longer existed. He submitted in particular that the contract provided a contractual definition of insolvency and, that when one of the parties was in a situation that fell within that definition, the rules of bankruptcy set-off applied with the result that the only subsisting financial obligation was to pay or recoup whatever sum was due on the mutual taking of accounts.[51]In short, Mr Fraser submitted, the contract terms exactly mirror the insolvency provisions in the Insolvency Rules so that any claim to payment ceased to exist as at the date of the administration and is replaced in law by the balance produced by the accounting exercise. He submitted also that the Insolvency Rules applied to administration because, by Rule 2.85, if the administrator decides to make a distribution to creditors the exercise of mutual balancing of accounts takes place in the same way as it would if the company was in liquidation.[52]Mr Rowlands submitted that nothing short of liquidation (or bankruptcy) was sufficient to bring about the automatic mutual setting-off of accounts (relying on a dictum of Lord Hope in Melville Dundas Ltd v George Wimpey UK Ltd [2007] BLR 257, at paragraph 33) and thereby to prevent enforcement of an adjudicator's decision. He submitted that the authorities showed that compliance with an adjudicator's decision should take precedence over any clauses in the contract that purported to achieve the contrary. His riposte to Mr Fraser's reliance on the contractual machinery was, in effect, to point out that this was simply another example of an attempt to deploy contractual machinery to frustrate the enforcement of an adjudicator's decision.[53]Mr Rowlands also pointed out that no notice of distribution had been given in the administration so that the mutual taking of accounts under Rule 2.85 had not been triggered. He reminded me that the policy of Parliament was that decisions of adjudicators should be complied with and that the courts should be astute to prevent that policy from being undermined. In addition, he contended that the decisions of both Mr Wilkey and Mr Smalley had become both binding and final, and this reinforced his submission that they should be enforced.[54]As I see it, the issues here are:(1) Whether, as a matter of construction, clauses 8.5 and 8.7 of the contract relieve the Defendant from the obligation to comply with the decision of either adjudicator on the grounds put forward by Mr Fraser; and,(2) If so, what effect (if any) is to be given to those decisions; and(3) Whether, in the light of the making of the Administration Order,the decision of either adjudicator should be enforced by way of summary judgment under CPR 24.2; and,(4) If the answer to (3) is yes in either case, whether there should be a stay of the enforcement under RSC Order 47.1.[55]I have already set out the relevant provisions of clause 8 of the contract. It is also necessary to set out the provisions of Rule 2.85 of the Insolvency Rules 1986. These are as follows: “(1) This Rule applies where the administrator, being authorised to make the distribution in question, has, pursuant to Rule 2.95 given notice that he proposes to make it. (2) In this Rule"mutual dealings" means mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a date in the administration that does not include any of the following- (a) any debt arising out of an obligation incurred after the company entered administration; . . . (3) An account shall be taken as at the date of the notice referred to in paragraph (1) of what is due from each party to the other in respect of the mutual dealings and these sums due from one party shall be set off against the sum due from the other . . . (8) Only the balance (if any) of the account owed to the creditor is provable in the administration. Alternatively the balance (if any) owed to the company shall be paid to the administrator as part of the assets except where all or part of the balance results from a contingent all prospective debt owed by the creditor and in such a case the balance (or that part of it which results from the contingent all prospective debt) shall be paid if and when that debt becomes due and payable."[56]It is accepted that there has been no notice of distribution here pursuant to Rule 2.95 and, further, that there may never be one because the Claimant is so "spectacularly insolvent" (to use Mr Fraser's words). Thus, so far as the Insolvency Rules are concerned, the time has not arrived in the administration at which an account must be taken of what is due from each party to the other in respect of their mutual dealings. It may be that it is unlikely to arise: it seems that the Claimant has potential assets to the value of about £50,000 and liabilities in excess of £35 million (and perhaps very much more).[57]I therefore accept the submission of Mr Rowlands that the application of the rules of statutory set-off has not been triggered as a consequence of the making of the Administration Order. However, that does not mean that the existence of the order has no application in this case. I shall discuss this further below.

The effect of clause 8

[58]The question is whether or not the provisions of clause 8 and, in particular, of clauses 8.5 and 8.7, have the effect that the Defendant no longer has to comply with the decision of either adjudicator on the grounds that the obligation to comply with the decision is displaced by the provision in clause 8.5.3.1 that "the other provisions of this Contract which require any further payment or any release of Retention shall cease to apply" and/or the machinery in clause 8.7.4 for the setting-off of the claims and cross-claims between the Claimant and the Defendant and the consequence that the balance is to be a debt payable by the Claimant to the Defendant or vice versa (clause 8.7.5).[59]The tension here is between the contractual provisions which, in the case of insolvency (as defined, including administration), are intended to mirror the general rules relating to bankruptcy and liquidation, and the contractual obligation created by statute to comply with decisions of an adjudicator.[60]There is a line of cases in which the question has arisen as to the extent, if at all, to which the existence of a cross-claim or a provision in a contract entitling a party to exercise a right of set-off can prevail over the obligation to comply with a decision of an adjudicator. This line of cases effectively ends with an authoritative judgment of Ramsey J in William Verry Limited v The London Borough of Camden [2006] EWHC 761 (TCC). At paragraphs 24 and 25 of his judgment he said this: “24. . . . Whilst adjudication is not arbitration, in my judgment , the phrase "the decision of the adjudicator is binding" is intended to provide a similar degree of compliance by the parties, except that in the case of an adjudicator's decision, the decision is not "final" but is "interim" unless the parties agree to accept it as finally determining the dispute. The intention of Parliament must be that the decision is binding and enforced at the interim stage. If the decision were no more than another contractual obligation, which could be breached or could be reduced or diminished by other contractual obligations, then the fundamental purpose of providing cash flow in the construction industry would be undermined. As Lord Justice Mantell said inFerson v Levolux,at para 30, "the contract must be construed so as to give effect to the intention of Parliament, rather than to defeat it". In my judgment, that can only be done by giving proper effect to the word "binding" by enforcing the decisions of adjudicators. 25. Where there are potentially competing disputed rights and obligations those disputes must give way to the enforcement of the decision of an adjudicator, otherwise it is evident that such claimed rights and obligations would defeat the binding nature of the adjudicator's decision and the intention of Parliament that such adjudicator's decisions should be complied with in the interim." Ramsey J then went on to note that there had been decisions which appeared to contemplate that a contractual right might allow a party to avoid in whole or in part the obligation to comply with the adjudicator's decision and, in particular, the decision of His Honour Judge Thornton QC in Bovis Lend Lease v Triangle Developments Ltd [2003] BLR 31, in which Judge Thornton concluded that where other contractual terms clearly have the effect of superseding or providing for an entitlement to avoid or deduct from a payment directed to be paid by an adjudicator's decision, those terms will prevail.[61]In Ferson Contractors v Levolux AT Ltd [2003] BLR 118, the decision of the Court of Appeal to which Ramsey J referred in the passage quoted above, the contract provided that if the contractor determined the subcontract for any reason mentioned in the contract "All sums of money that may then be due or accruing due from the Contractor to the-Contractor will cease to be due or to accrue due"(clause 29.8). The sub-contract also provided that “Until after completion of the Sub-Contract Works and the making good of defects . . . the contractor shall not be bound by any provisions of the sub-contract to make any further payment to the sub-contractor" (clause 29.9).[62]In relation to that clause Mantell LJ said, at paragraph 30:
"But to my mind the answer to this appeal is the straightforward one provided by Judge Wilcox. The intended purpose of section 108 is plain. It is explained in those cases to which I have referred in an earlier part of this judgment. If Mr Collings and HHJ Thornton are right, that purpose would be defeated. The contract must be construed so as to give effect to the intention of Parliament rather than to defeat it. If that cannot be achieved by way of construction, then the offending clause must be struck down. I would suggest that it can be done without the need to strike out any particular clause and that is the means adopted by Judge Wilcox. Clauses 29.8 and 29.9 must be read as not applying to monies due by reason of an adjudicator's decision."
On this point Ramsey J concluded, at paragraph 28, "In my judgment, the effect of those statutory provisions and all the passages in Levolux is generally to exclude a right of set-off from an adjudicator's decision."[63]Whilst it is true that Ramsey J's conclusion is expressed in terms of excluding a right of set-off, his reasoning applies to any contractual provision that is relied on to trump the obligation to comply with an adjudicator's decision. In my judgement, it does not matter that the contractual provision in question mirrors the provisions of the Insolvency Rules: it remains no more than a provision in a contract, it is not a statutory instrument. On this point I accept the submissions of Mr Rowlands.

The effect of a party becoming insolvent or being on the verge of insolvency

[64]It is perhaps relevant to note that in none of the three cases just discussed was either party insolvent or in administration. However, that factor was present in Melville Dundas Ltd v George Wimpey UK Ltd [2007] BLR 257, which was decided by the House of Lords in April 2007 - a year after the decision of Ramsey J in Verry. In Melville Dundas the facts were as follows. On 2 May 2003 the contractor applied for an interim payment in the sum of £396,630. There was no dispute that the final date for payment was there for 16 May 2003, and there was similarly no dispute that the amount of the interim payment was £396,630. Wimpey did not pay that sum. On 22 May 2003 administrative receivers of the contractor were appointed by the contractor's bank. Shortly afterwards, Wimpey exercised its contractual right to determine the contractor's employment under the contract on 30 May 2003. By doing this, certain provisions of the contract were brought into effect, including clause 27.6.5.1, which provided:
"Subject to clauses 27.5.3 and 27.6.5.2 the provisions of this contract which require any further payment or any release or further release of retention to the contractor shall not apply; provided that clause 27.6.5.1 shall not be construed so as to prevent the enforcement by the contractor of any rights under this contract in respect of amounts properly due to be paid by the employer to the contractor which the employer has unreasonably not paid and which, where clause 27.3.4 applies, have accrued 28 days or more before the date when under clause 27.3.4 the employer could give first notice to determine the employment of the contractor."
[65]It was held by the House of Lords, Lords Mance and Neuberger dissenting, that clause 27.6.5.1 applied the principle of compensation, or balancing of accounts, in bankruptcy to all cases where the employer determined the employment of the contractor under the clause in question. It did this by giving it the employer the right to withhold payment of liquid debts pending the make up of the account between the employer and the contractor. However, the clause excluded from this mechanism payments that the employer had unreasonably not paid and which accrued 28 days formal before the date when the employer could first have given notice to determine the employment of the contractor.[66]At paragraph 3 of his opinion Lord Hoffmann said this:
"Before the House, however, [it was] submitted on behalf of the contractor that the words "which require any further payment. . . to the contractor" should be read to mean "which give rise to any further liability to make payments to the contractor" and have no application to a liability for interim payment which has already accrued. In my opinion this is not what the clause says. "
Require any further payment" means require the employer to pay any more money." Lord Hoffmann continued, at paragraph 11:
"Instalment payments are in their nature provisional liabilities. As has been frequently said, they are to provide the cash flow for the contractor or sub-contractor to enable him to perform his duties under the contract. But when the contractor's employment has been determined in consequence of the appointment of a receiver two consequences follow. First, the contractor no longer has any duties to perform. Secondly, the liability to make an interim payment is no longer provisional. While the employer retains the money, he can set it off against his cross-claim for non-completion against the contractor. In practice, where the contractor has become insolvent, the employer will have a cross-claim for damages which exceeds the contractor's claim for unpaid work. On the other hand, once the employer has paid the money, it is gone. It is swept up by the bank’s floating charge and the employer will have to prove in the liquidation for his cross-claim. Upon insolvency, liability to make an interim payment therefore becomes a matter which relates not to cash flow but to the substantive rights of the employer on the one hand and the contractor's secured or unsecured creditors on the other."
[67]Lord Walker agreed with Lord Hoffmann, and Lord Hope delivered a separate opinion in which he gave his own reasons for allowing the appeal whilst also agreeing (save for one point that is not relevant for present purposes) with the reasons given by Lord Hoffmann.[68]In relation to the argument based on the meaning of the words "which require any further payment . . . to the contractor shall not apply", Lord Hope said this, at 264:
"26. Mr Howie said that once a sum had become due under the contract it could not cease to be due. The words "any further payment" should not be read as including an interim payment which the employer was already obliged to pay under clause 30.3.5 because the final date for its payment in terms of clause 30.3.6 had already passed by the date of the determination of the contractor's employment. The position would have been different if the employer had given a written notice to the contractor under clause 30.3.4 not later than five days before the date of payment stating the amount proposed to be withheld and the grounds for doing so. No such notice was given in this case. As the interim payment was an amount that the employer was already due to pay under the provisions of the contract before the determination of the contractor's employment, it was not a "further payment". 27. There are two problems with this argument. First, it involves reading into this part of the clause words that are not there. It seeks to confine it to payments which are not already due. But the words "any further payment" are unqualified. Their plain meaning is that the contractor ceases to be entitled to require any further payment whatever. As my noble and learned friend Lord Hoffmann has said, their effect is that the contractor cannot require the employer to pay any more money. This is, of course, a temporary arrangement, as the reference to clause 27.6.5.2 at the beginning of the clause indicates."
[69]Like Lord Hoffmann's comments before him, this passage is in pretty unequivocal terms. However, neither Lord Hoffmann nor Lord Hope was directing his mind to a payment that was due as a result of an adjudicator's decision, which was the point that was considered by the Court of Appeal in Ferson v Levolux. I consider that, on this point, this court is bound by the latter decision.[70]Lord Mance and Lord Neuberger gave dissenting opinions, both concluding that a contractual regime which anticipated the effects of liquidation could not, in the absence of an actual liquidation, defeat the provisions of the 1996 Act. However, at paragraph 111 of his opinion, Lord Neuberger said this:
"Once a contractor becomes insolvent, there is at any rate in English law, and as I understand it in Scots law, and automatic set-off arrangement (see rule 4.90 of the Insolvency Rules 1986 as discussed in Stein v Blake [1996] AC 243 and, in the context of a case such as this, in Bouygues (UK) Ltd v Dahl Jensen (UK) Ltd [2000] BLR 522 paras 29-34). Accordingly, the importance given by the legislature to cash flow for contractors and subcontractors in sections 109 to 111 effectively gives way to the importance of rights of creditors once there is an insolvency. In those circumstances, one can see the argument that there should be nothing objectionable in the parties providing for a regime such as that contemplated by the proviso to clause and 7.6.5.1 in anticipation of liquidation."
Lord Neuberger then went on to say briefly why did not accept the argument to which he referred at the end of that passage. Where Lord Neuberger uses the words "insolvent" or "insolvency" in this passage I think that he must be taken to be referring to either bankruptcy or liquidation, which was, respectively, the situation in the two cases cited, otherwise one would have expected him to have concurred with Lord Hoffmann and Lord Hope.[71]But looking at the case more generally, in the light of the strong dissenting opinions given by Lord Mance and Lord Neuberger I consider that the court should adopt a fairly cautious approach when seeking to apply the reasoning of the majority of their Lordships in that case to cases in which the facts are not identical. It seems to me that it is important to bear firmly in mind Lord Hoffmann's emphasis on the provisional nature of interim payments under a construction contract and the fact that in that case a receiver had been appointed, presumably at the instigation of the bank. On the other hand, as I have already indicated, he was not concerned with a payment that was due as a result of an adjudicator's decision.[72]In the context of this type of case I consider that there is a relevant difference between a decision of an adjudicator which is not final but is binding until the court determines otherwise, and a decision that has become both final and binding, such as I have found to be the case with Mr Wilkey's award.[73]Bouygues (UK) Ltd v Dahl Jensen (UK) Ltd was a case where an adjudicator made an obvious error in his calculations of each of the parties’ claims. When calculating one party’s entitlement he took a gross sum (which included the retention) and then deducted the amount actually paid during the works, which did not include retention. Since the retention fund stood at about £350,000 the consequent balance that he struck on the account between the parties was wrong by that amount. Dyson J (as he then was), hearing the application to enforce the award at first instance, concluded that the mistake made by the adjudicator was one that was within the adjudicator's jurisdiction to make with the result that the award should be enforced. The Court of Appeal agreed with Dyson J's conclusion on the question of the adjudicator's jurisdiction, and therefore dismissed the appeal, but granted a stay on a different point, namely that Dahl Jensen was in liquidation at the time of the application for summary judgment.[74]In the Court of Appeal Chadwick LJ said this, at paragraphs 34 and 35: "34 Lord Hoffmann 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 the insolvency order. Lord Hoffmann 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 may clear, the account can be re-opened 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 the 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 of 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.”[75]Chadwick LJ said that these matters should have been considered on the application for summary judgment, but the point had not been taken and the attention of the judge was not drawn to the Insolvency Rules 1986. The point was first raised by the court at the hearing before the Court of Appeal. Accordingly, the court did not consider that it was appropriate to set aside the order made by the judge, but instead ordered a stay of execution of the judgment.[76]Since the conclusion of the argument Mr Fraser has helpfully drawn my attention to a decision of the Outer House of the Court of Session that was issued on 1 July 2010, Integrated Building Services v PIHL UK Ltd [2010] CSOH 80, but of which neither party was aware at the time of the hearing on 29 July 2010. I make absolutely no criticism of the fact that counsel were not aware of this decision: it may well not have been published on the internet by that stage. I therefore gave both parties an opportunity to make brief submissions on this decision, which they helpfully did.[77]The facts of the case were that the Defender, PIHL, entered into a sub contract with the Pursuer, Integrated Building Services ("IBS"), for part of the construction and refurbishment of schools in Aberdeen. On completion of certain works, PIHL became liable to pay IBS £500,000 and to release to them the balance on an escrow account. On 23 October 2009 PIHL served four withholding notices on IBS stating its intention to withhold the money which it was otherwise due to pay IBS. IBS promptly served three notices referring the matter is to adjudication and on 28 October 2009 an adjudicator was appointed. On 22 December 2009 the adjudicator issued three decisions in which he held that PIHL was to pay IBS £23,463 and was to release to IBS the sums held in the escrow account, which totalled about £619,000. PIHL did not pay the sums ordered by the adjudicator and on 18 January 2010 IBS commenced proceedings. However, shortly afterwards a bank, who held a mortgage debenture over the property and undertaking of IBS, appointed administrators. PIHL then argued that since IBS was insolvent it was entitled to retain the money until its claims against IBS had been determined and offset against its liability. It appeared that any dividend from the administration was unlikely to be more than about 3p in the pound.[78]It was submitted on behalf of IBS, as it was by Mr Rowlands before me, that any situation of insolvency falling short of liquidation did not constitute a defence to an application to enforce an adjudicator's decision. It was submitted that this approach was consistent with the decision of the House of Lords in Melville Dundas.[79]On behalf of PIHL it was submitted that the principle of balancing accounts in bankruptcy was a deep seated equitable doctrine that applied to construction contracts which the 1996 Act did not overturn. Counsel for PIHL also relied on the decision in Melville Dundas. The judge, Lord Hodge, observed that the case raised 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. That is very similar to the issue that I have to decide on this application.[80]Lord Hodge began by setting out the principles underpinning the Housing Grants, Regeneration and Construction Act 1996, citing amongst other authority the well-known passage from the judgment of Chadwick LJ (at paragraph 26) in Bouygues (UK) Ltd v Dahl Jensen (UK) Ltd [2000] BLR 522, in which he said:
"The purpose of the 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."
[81]Lord Hodge went on to say that 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. I agree with him. He then cited an observation of Lord Hoffmann in his opinion in Melville Dundas, at paragraph 12, where he said:
"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."
[82]Lord Hodge went on to reach the following conclusion, at paragraph [16]:
"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.” Later in his judgment, at paragraph [28], Lord Hodge said: "
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 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."[83]However, it is important to draw attention to an apparent and relevant difference between English and Scots law and procedure which is likely to affect any consideration of these issues in a Scottish court. It appears that in Scotland there is (or was) no procedure equivalent to the power of an English court to stay the enforcement of a judgment. Thus a court in Scotland must choose between giving or refusing summary judgment on an application to enforce an adjudicator's decision. It cannot do what is sometimes done in England and Wales, which is to give summary judgment but then to impose a stay of execution of the judgment until further order. This may or may not be the reason for the rule in Scotland 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 (ie. on the verge of insolvency).[84]Whilst taking note of this difference between Scots law and the law of England and Wales, I agree with the approach of Lord Hodge in Integrated Building Services v PIHL: it seems to me that once there has been some event, such as a court order, that affects the assets of one of the parties or the ability of a party to bring proceedings to challenge a decision of an adjudicator, the position becomes different and the order of priorities between the need to enforce the decisions of adjudicators and the need to implement the rules of insolvency shifts in favour of the latter.[85]However, I am not aware of any decision in England and Wales in which a court has declined to enforce an adjudicator's award in a situation where one of the parties is in fact insolvent - in the sense of being unable to pay its debts as they fall due - but has not been made the subject of an administration order, company voluntary arrangement, or any similar form of intervention. In other words, there is no English equivalent to the Scots doctrine that the principle of bankruptcy set off can be invoked where a party is vergens ad inopiam. I regard this as confirmed by Lord Hope in Melville Dundas, at paragraph 33.

The making and effect of an administration order

[86]Paragraph 11 of Schedule B1 to the Insolvency Act 1996 provides that a court may make an administration order in relation to a company only if satisfied(a) that the company is or is likely to become unable to pay its debts and(b) that the administration order is reasonably likely to achieve the purpose of administration. This effectively equates to a power to make an administration order when a company is on the verge of insolvency, and not only when it is in fact insolvent.[87]As I have already mentioned, once a company is put into administration no legal process may be instituted or continued against the company without the consent of the administrator or the permission of the court. So if one party has been put into administration that provides an immediate fetter on the other party's right to seek a final determination of an adjudicator's decision with which it is dissatisfied. It cannot be assumed that the court will automatically give permission for the bringing of a claim to determine matters decided by an adjudicator: for example, if the court was satisfied that there would be no assets from which the company in administration could repay the sum paid under the adjudicator's decision if it was held to have been wrong, it might take the view that to allow proceedings to be brought against the company would be a waste of time and costs so that it was not in anyone's interest for permission to be given. In these circumstances whilst the decision of the adjudicator may be provisional in theory, in practice it would have become final.[88]It is clear, therefore, that the making of an administration order has effects on the rights of the parties with the result that the principle of "pay now, argue later" may no longer be capable of achievement. The party who has paid money to the other pursuant to an adjudicator’s award no longer has an unfettered right to have the issue decided by the adjudicator determined finally by a court or arbitrator. As Etherton LJ put it in Re Kaupthing Singer and Friedlander Ltd (in administration) [2010] EWCA Civ 518, at paragraph 7: "Broadly speaking . . . on the making of the administration order the rights of creditors to enforce the company's obligations are suspended until the conclusion of the administration.”

The relevant principles

[89]Having regard to the decisions discussed and referred to in this judgment, I consider that the following principles are established or can be derived:(1) A clause in a contract that purports to supersede the obligation to comply with an adjudicator’s decision, in this case the provision for a mutual setting off of the accounts between the parties on the happening of certain events as set out in clause 8.5 and an obligation only to pay the balance and the restriction on any further payments, cannot prevail over an obligation to comply with the decision of an adjudicator: see Ferson v Levolux and Verry v Camden.(2) If, at the date of the hearing of the application to enforce an adjudicator's decision, the successful party is in liquidation, then the adjudicator's decision will not be enforced by way of summary judgment: see Bouygues v Dahl Jensen and Melville Dundas. The same result follows if a party is the subject of the appointment of administrative receivers: see Melville Dundas.(3) For the same reasons, I consider that if a party is in administration and a notice of distribution has been given, an adjudicator's decision will not be enforced.(4) If a party is in administration, but no notice of distribution has been given, an adjudicator's decision which has not become final will not be enforced by way of summary judgment. In my view, this follows from the decision in Melville Dundas as well as being consistent with the reasoning in Integrated Building Services v PIHL.(5) If the circumstances are as in paragraph (4) above but the adjudicator's decision has, by agreement of the parties or operation of the contract, become final, the decision may be enforced by way of summary judgment (subject to the imposition of a stay). I reach this conclusion because I do not consider that the reasoning of the majority in Melville Dundas extends to this situation.(6) There is no rule of English law that the fact that a party is on the verge of insolvency ("vergens ad inopiam”) triggers the operation of bankruptcy set-off: see Melville Dundas, per Lord Hope at paragraph 33. However, the law in Scotland appears to be different on this point (perhaps because the Scottish courts do not enjoy the power to grant a stay in such circumstances).(7) If a party is insolvent in a real sense, or its financial circumstances are such that if an adjudicator's decision is complied with the paying party is unlikely to recover its money, or at least a substantial part of it, the court may grant summary judgment but stay the enforcement of that judgment.[90]In relation to point (7) above, the factors affecting the discretion of the court when considering whether or not to grant a stay where it appears that the successful party would be unable to repay an award if it was subsequently held to be wrong are clearly set out in the judgments of Coulson J in Wimbledon Construction Ltd v Derek Vago [2005] BLR 374, Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC) and Pilon Ltd v Breyer [2010] BLR 452 - the last two involving a Company or Creditor’s Voluntary Arrangement. Broadly speaking, Coulson J said that where a party is in insolvent liquidation or there is no dispute on the evidence that it is insolvent (or unlikely to be able to repay the sum awarded by the adjudicator), a stay of execution will usually be granted unless either that party's financial situation was the same or similar to its financial situation at the time when the relevant contract was made or its insolvency is due, either wholly or in significant part, to the other party's failure to pay the sums awarded by the adjudicator (this is just a broad summary in my own words for convenience: where the point arises reference should be made to Coulson J's judgments).[91]By way of explanation of points (4) and (5) above, I have reached the conclusion that the approach of the House of Lord's in Melville Dundas should be adopted in a case where the adjudicator's decision is still provisional, has not been complied with and the company that was successful in the adjudication has become the subject of an administration order. However, if the adjudicator's decision has become final, so that it is no longer capable of being reconsidered by the court, then I consider that the approach of the House of Lords in Melville Dundas ceases to be appropriate because of the emphasis placed by Lord Hoffmann on the provisional nature of the interim payment that was the subject of the dispute in that case. It seems to me that his reasoning cannot be applied where the obligation in question is final and binding. As I have already said, I consider that in the light of the powerful dissenting opinions in that case a court should be cautious when applying the reasoning of the majority of the House to a case in which the facts are different, even if only slightly different.

Conclusions in relation to the applications for summary judgment

[92]Since I have concluded that the decision of Mr Wilkey is final and binding, it follows from the principles that I have set out above that the Claimant is entitled to summary judgment in relation to the decision of Mr Wilkey.[93]Conversely, it follows that the Claimant is not entitled to summary judgment in respect of the decision of Mr Smalley, albeit that I have held that it is a valid decision, because I have concluded that it has not become final: the letter of 24 November 2009 amounted to a valid notice under paragraph 23(2)(a) of the Scheme, as amended. I therefore give the Defendant leave to defend in relation to Mr Smalley's decision.[94]This is plainly not a case where the Claimant's insolvency has been brought about by the failure to pay the award: the Claimant was put into administration only three days after Mr Wilkey's award became payable and, in any event, the Claimant is so heavily insolvent that prior payment of the sum awarded by Mr Wilkey would have been neither here nor there.[95]The litigation that was commenced in January 2009, which if pursued would have required the court to determine the true position between the parties, has been frozen as a result of the administration order. I suspect that it may never be revived, but that is not a matter which is before me.[96]In these circumstances, it seems to me that I should follow the precedent set by the decisions in Bouygues and Mead and order a stay of the enforcement of Mr Wilkey's decision until further order.[97]There is also a further reason why I consider that a stay is justified. It is unclear what would happen to the sum awarded by Mr Wilkey if it was ordered to be paid to the administrators. It may be that the administrators would be bound to pay it over to Vinci pursuant to the assignment which, of course, as between the Claimant and the Defendant, is accepted as having been made in breach of contract. That would not ordinarily constitute promising ground from which to mount an application for payment of Mr Wilkey's award.[98]However, in the first skeleton argument submitted on behalf of the Claimant it was submitted that there was no need for a stay in the light of a guarantee that had been proffered by Vinci. But in the supplemental skeleton argument served on behalf of the Claimant, in which it was accepted for the first time that the assignment of the assets was prohibited under the contract, there was no reference to any continuing reliance on the earlier offer of a guarantee by Vinci. I therefore do not take it into account. However, if contrary to my present understanding, this guarantee is to be relied on, that will have to be the subject of argument at a further hearing.[99]I should make it clear that if I am held to be wrong in not giving summary judgment in respect of Mr Smalley’s decision, I would stay the enforcement of that judgment for the same reasons.[100]I will hear the parties on any questions of costs and the appropriate form of relief. In the meantime, I direct that the Claimant has liberty to apply on 7 days notice to lift the stay of enforcement in respect of the judgment on Mr Wilkey’s award or otherwise vary the order.

Cited in 2 later judgments