Adjudication – Insolvency – Injunction – Appellant seeking to refer building dispute to adjudicator – Respondent objecting to adjudication – Court finding basic incompatibility between adjudication and insolvency set-off and adjudication futile and waste of resources – Appellant appealing – Whether contractual claim of insolvent contractor continuing following liquidation – Whether adjudicator having jurisdiction to deal with claim by insolvent company – Whether adjudication having utility – Appeal allowed – Cross-appeal dismissed
The appellant subcontracted to provide electrical installation works for the respondent on a construction site at 6 St James’s Square, London SW1 but subsequently went into insolvent liquidation. The respondent claimed that the appellant had abandoned the project prematurely, with the result that it had to pay £325,000 for replacement contractors. The appellant said that the respondent still owed money for some of the work done and claimed £219,000 in unpaid fees and damages for loss of profits.
The liquidators wished to refer the appellant’s claim to adjudication. The respondent objected, arguing that the appellant’s claim and the respondent’s cross-claim had cancelled each other by insolvency set-off. There was no longer any dispute under the contract and adjudication was not available. In any event, any decision by the adjudicator would not be enforced until the liquidators had calculated the net balance so that an adjudication would be futile.
The High Court granted an injunction preventing the continuation of the adjudication: [2018] EWHC 2043 (TCC). The Court of Appeal held that, as a matter of principle, the choice of forum could not dictate whether a claim had been extinguished. An adjudicator had jurisdiction to consider a claim advanced by a company in liquidation which was not precluded by the liquidation set-off rules. However, the adjudication process and the insolvency regime were mutually incompatible. It would only be in exceptional circumstances that a company in insolvent liquidation and facing a cross-claim could succeed in an adjudication. Even though an adjudicator might technically have jurisdiction, any decision would be incapable of enforcement and therefore futile: [2019] EWCA Civ 27; [2019] PLSCS 20. The appellant appealed and the respondent cross-appealed.
Held: The appeal was allowed. The cross-appeal was dismissed.
(1) The starting point was that nothing in the Housing Grants, Construction and Regeneration Act 1996 or in the Scheme for Construction Contracts (England and Wales) Regulations 1998 expressly created a single dispute rule, as a matter of jurisdiction. The jurisdiction of the adjudicator was, subject to the overriding requirement that the dispute referred arose under the contract, mainly defined by the terms of the reference in each particular case. The existence of a cross-claim operating by way of insolvency set-off did not mean that the underlying disputes about the company’s claim under the construction contract and (if disputed) the cross-claim simply melted away so as to render them incapable of adjudication. A future or contingent claim might survive set-off so as to be enforceable after the debt became due. When a liquidator caused a company in liquidation to pursue a contractual claim by litigation or arbitration, the pleaded claim remained one based upon the underlying contract, even if an undisputed set-off was acknowledged, or a disputed set-off was raised by way of defence. Nor did the existence of insolvency set-off deprive the owner of the original claim of ancillary rights under the transaction which created it. If (as was not in dispute) a liquidator was entitled to pursue the company’s claims, pursuant to a clause referring disputes under the contract to arbitration, the same had to apply to the right to refer disputes to adjudication. There was no reason why the two forms of dispute resolution should be treated differently: Stein v Blake [1996] AC 243 followed.
(2) The Court of Appeal had considered that there was a basic incompatibility between adjudication and the regime set out in the Insolvency Rules and that an adjudication would be futile. However, there was no proper basis for the grant of an injunction to restrain the pursuit of adjudication merely because the company making the reference was in an insolvency process and there were cross-claims between the company and the respondent to the reference which triggered insolvency set-off. Once it was appreciated that there was jurisdiction under section 108 of the 1996 Act in such circumstances, the insolvent company had both a statutory and a contractual right to pursue adjudication as a means of achieving resolution of any dispute arising under a construction contract to which it was a party, even though that dispute related to a claim which was affected by insolvency set-off. It would ordinarily be inappropriate for the court to interfere with the exercise of that statutory and contractual right. Injunctive relief might restrain a threatened breach of contract but not, save very exceptionally, an attempt to enforce a contractual right, still less a statutory right.
(3) That very steep hurdle was not surmounted, either generally in the context of insolvency set-off or on the particular facts of the case. Dispute resolution was an end in itself, even where summary enforcement might be inappropriate or for some reason unavailable. In many cases, disputed cross-claims needing to be resolved as a prelude to a final arithmetical set-off account would both, or all, arise under the same construction contract, as in the present case, because all the mutual dealings between the parties would have arisen under the aegis of that single contract. Even if they arose under more than one construction contract, the adjudicator would be better placed than most liquidators to resolve them. It was no answer to the utility (rather than futility) of construction adjudication in the context of insolvency set-off to say that the adjudicator’s decision was unlikely to be summarily enforceable. Furthermore, it would not be in every case that summary enforcement would be inappropriate. The proper answer to all the issues concerning enforcement was that they could be dealt with at the enforcement stage, if there was one. Construction adjudication, on the application of the liquidator, was not incompatible with the insolvency process. It was not an exercise in futility, either generally or merely because there were cross-claims falling within insolvency set-off, and there was no reason why the existence of such cross-claims could constitute a basis for denying to the company the right to submit disputes to adjudication which parliament had chosen to confer.
Peter Arden QC, Ben Shaw and Chantelle Staynings (instructed by Blaser Mills LLP, of High Wycombe) appeared for the appellant; Fiona Sinclair QC and Thomas Crangle (instructed by Fladgate LLP) appeared for the respondent.
Eileen O’Grady, barrister
