Integrated Building Services Engineering Consultants Limited T/a Operon V. Pihl Uk Limited

JurisdictionScotland
CourtCourt of Session
JudgeLord Hodge
Neutral Citation[2010] CSOH 80
Date01 July 2010
Publication Date01 July 2010
Docket NumberCA3/10

OUTER HOUSE, COURT OF SESSION

[2010] CSOH 80

CA3/10

OPINION OF LORD HODGE

in the cause

INTEGRATED BUILDING SERVICES ENGINEERING CONSULTANTS LIMITED TRADING AS OPERON

Pursuer;

against

PIHL UK LIMITED

Defender:

________________

Pursuer: Moynihan QC and Richardson; McGrigors LLP

Defender: Reid QC and Ower; Anderson Strathern LLP

1 July 2010

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

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

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

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

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

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

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

....

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

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

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

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

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

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

[11] Mr Reid QC for Pihl submitted, first, that the 1996 Act was designed to secure the cash flow of a solvent contractor during the currency of a competently performed contract and not to give a windfall benefit to the creditors of an insolvent and incompetent contractor. The principle of balancing accounts in bankruptcy was an equitable doctrine, applied to construction contracts, and was a deep seated principle of the common law which the...

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