REUTERS | Navesh Chitrakar

Arbitration, adjudication and insolvency

By all accounts arbitration is enjoying a bit of a resurgence. Rising court fees and increasing costs management in the TCC, as well as an increasing number of international contractors working in the UK, appears to be leading to more and more parties choosing arbitration, rather than litigation, in their contracts.

However, even though parties enter into arbitration agreements, on occasion they try to avoid them, and that’s what happened in the case I want to talk about this week: Philpott and another v Lycee Francais Charles De Gaulle School. It’s actually a Chancery case heard in Birmingham by HHJ Purle QC, and concerned a claim by a contractor in a creditors voluntary arrangement (CVA).

Philpott and another v Lycee Francais Charles De Gaulle School

Messrs Philpott and Orton are the joint liquidators of the contractor, Welconstruct Ltd. Welconstruct had undertaken work for the school under a JCT Intermediate Building Contract 2005 (revision 2007). A dispute arose as to which way monies would flow at the final account stage, with the liquidators claiming £615,000 was due to the contractor, and the school arguing that it was owed £270,000.

It appears that the parties were agreed that the Insolvency Rules 1986 (SI 1986/1925) applied and, given there was a claim and counterclaim, that rule 4.90 in particular applied, the relevant extracts of which are:

“(1) This Rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation…

(3) An account shall be taken of what is due from each party to the other in respect of the mutual dealings, and the sums due from one party shall be set off against the sums due from the other.”

The liquidators wanted the rule 4.90 account to be taken under the court’s direction, but the school was having none of it. The school said that there was a valid arbitration agreement in the contract under which the account could be taken, and that if legal proceedings were allowed to persist the school would obtain a stay under section 9 of the Arbitration Act 1996. HHJ Purle QC agreed with the school, and quite right too!

The judge observed that arbitration agreements do not become inoperative following a liquidation, and recognised the importance of giving effect to the mandatory provisions of the Arbitration Act 1996. He saw no reason why the calculation of the balance due to one party or the other could not be dealt with in an arbitration.

I have rather simplified the case, but that’s because I want to look at the final paragraph of the judgment where the judge said that the liquidators could pursue the school in adjudication.

Is adjudication available?

The judge said that the right to adjudicate remains, although he recognised that it may well be of no practical use as a court would be unlikely to enforce an adjudicator’s decision in favour of an insolvent party (because it would defeat the requirement of the pari passu distribution). However, the judge’s conclusion needs to be contrasted with that of Coulson J in Enterprise Managed Services v Tony McFadden Utilities.

Enterprise v McFadden concerned disputes under four separate sub-contracts, which had been assigned to McFadden after a previous incarnation of that business had gone into liquidation. Coulson J made it clear that, where an insolvency has arisen and there were mutual credits and debts, the original chose in action ceased to exist, and was replaced by a claim for a net balance due under rule 4.90.

Given that one account was required to determine the net balance due and an adjudicator can only deal with one dispute under one contract, Coulson J rightly decided that the adjudicator lacked jurisdiction. There appears to have only been one contract in dispute in Philpott so this point is not relevant, but other elements of Coulson J’s judgment certainly are.

Coulson J said that a rule 4.90 account cannot be adjudicated because any cross claim from a responding party would necessitate the joining of the referring party’s liquidator, and:

“… that could not happen in adjudication because it is not possible to have a tripartite adjudication.”

However, possibly more importantly, Coulson J said that such an account cannot be adjudicated because of the clash between the requirements of rule 4.90 and the adjudication process:

“… there is what I perceive to be a fundamental clash between the certainty and finality envisaged by the full Rule 4.90 process and, to use the vernacular, the temporary, quick-fix solution offered by construction adjudication under the Act. How can a decision that, if challenged, is of a temporary nature only, and would relate just to an element of the chose in action, have any role in or relevance to the taking of a final account under the Insolvency Rules?”

It’s clear to me that Coulson J considered adjudication was not an option where rule 4.90 applied, which contrasts with HHJ Purle QC’s conclusion. I have to say I’m inclined to agree with Coulson J.

And finally

I wonder how many insolvency cases concern construction companies? I’m not an insolvency law expert, but, sadly, I’m guessing quite a few. In March, GB Group went into administration, and the most recent significant casualty appears to have been PC Harrington Contractors. Some may wonder why that is given the economic recovery, but that may well be part of the cause. If a contractor entered into a fixed price contract a couple of years ago and is now finding its labour costs spiralling, you don’t need to be brain surgeon to work out the implications.

MCMS Ltd Jonathan Cope

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