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The recent decision in the case of Enterprise Managed Services vs Tony McFadden Utilities will have significant implications for large-scale construction disputes. Here’s what happened.

Tony McFadden Ltd entered into two framework contracts for the repair and maintenance of water mains in London, as well as two smaller contracts, with Enterprise. McFadden was liquidated in 2007. It was common ground that Enterprise owed McFadden money under one contract (A), although the amount was in dispute. However, each party considered it was owed several million pounds under a second contract (B).

In June 2009 the liquidator assigned the sums due to McFadden from Enterprise under the contracts to Tony McFadden Utilities. In September 2009, McFadden Utilities commenced an adjudication against Enterprise, seeking payment of about £2.5m, based on contract A.

Enterprise argued, first, that because it had been unaware of the assignment until the adjudication was commenced, no dispute between the defendant and Enterprise could have crystallised. Second, it cited rule 4.9 of the Insolvency Rules 1986, which says that in a liquidation a party is entitled to set-off all contracts it has with the insolvent company and arrive at a net balance, which it could not do in an adjudication. Third, Enterprise argued that owing to the substantial amount of documentation produced by the defendant with its referral, the dispute was unsuitable for adjudication. It therefore asked the adjudicator to resign.

The adjudicator refused to resign on the basis that he did not have jurisdiction to decide his own jurisdiction. Enterprise therefore issued proceedings in the Technology and Construction Court.

Judge Coulson said the effect of 4.9 was that, on liquidation, the contracts between McFadden and Enterprise had ceased to exist. Therefore, an account must be taken of the dealings between the parties to ascertain the net balance payable to or by the insolvent company. It was not possible for the liquidator to assign the individual contracts, only the net balance.

The judge was critical of the adjudicator’s decision to evade jurisdictional challenges

However, it was not appropriate for the value of the net balance to be determined by adjudication. It is only possible for a dispute under one contract to be referred to adjudication, and to ascertain the net balance it would almost certainly be necessary to consider multiple contracts.

Furthermore, the judge identified a clash between the certainty envisaged under rule 4.90 and the quick and temporary fix of adjudication. Rule 4.90 envisages that the net balance will be ascertained in one, final set of proceedings. Adjudication is not suitable for this as it can neither deal with all contracts in one set of proceedings nor be finally binding. And it is not appropriate to undertake a piecemeal approach where each underlying contract is the subject of a separate adjudication. Adjudication cannot, therefore, be used to ascertain a net balance in any liquidation. As a result, the adjudication was abandoned.

The decision and reasoning in this case will apply equally where there is no assignment. Once a company goes into liquidation, if there are multiple contracts between the insolvent company and a third party, it will no longer be possible to refer either those individual contracts or indeed the net balance to adjudication – the liquidator will have to commence court or arbitration proceedings.

The judge was critical of the adjudicator’s decision to side-step Enterprise’s jurisdictional challenges. The judge made it clear that if any such challenges are raised, an adjudicator should consider them and express a view at an early stage. Had the adjudicator done so in this case, he may have saved both parties a lot of money.

The judge also commented on the unsuitability of adjudication for large-scale disputes and was critical of the way this adjudication had been extended on a piecemeal basis. Parliament had not intended that adjudications should last months. At the outset of an adjudication the adjudicator must decide if they can reach a fair and reasonable decision within the statutory period. If not, they must conclude that the dispute is not suitable for adjudication and resign.