Enterprise Managed Services Ltd v McFadden Utilities Ltd

Factual and Procedural Background

The claimant, Company A, initiated proceedings under CPR Part 8 on 27th October 2009 seeking multiple declarations against the defendant, Company B, related to ongoing adjudication proceedings commenced by Company B in September 2009. Company A contended that the adjudicator lacked jurisdiction and that the adjudication, scheduled to conclude on 23rd December 2009, should be aborted immediately.

Underlying the dispute are contractual relationships stemming from a Main Contract dated 5th May 1998 between Company C and Company D, with subsequent sub-contracts involving Company B and Company A. In August 2003, Company A purchased the business and assets of Company D, including contractual rights and liabilities, pursuant to an Asset Purchase Agreement containing provisions for novation of contracts.

Following the purchase, payments were made by Company A to Company B under a sub-contract initially between Company D and Company B. Disputes arose regarding final account claims and overpayments under multiple sub-contracts, including the NLSDA Sub-Contract and others referred to as the Lot 8, Three Valleys, and Van Hire Sub-Contracts.

In June 2009, liquidators of Company B assigned to Company B Utilities certain rights described as the "Net Company A Balance" under a Deed of Assignment. Subsequently, Company B Utilities issued a Notice of Assignment and referred a dispute to adjudication based solely on the NLSDA Sub-Contract claim, seeking payment of approximately £2.5 million plus VAT and interest.

The adjudication process was marked by extensions far exceeding statutory time limits, with the adjudicator ultimately setting a decision date three times longer than initially prescribed. Company A challenged the adjudicator's jurisdiction, arguing that the claim referred to adjudication no longer existed as an assignable cause of action and that the adjudication was procedurally and substantively inappropriate.

Legal Issues Presented

1. Whether the NLSDA Sub-Contract between Company D and Company B was validly novated in favour of Company A.
2. What rights and liabilities were assigned under the Deed of Assignment dated 15th June 2009 between Company B and Company B Utilities.
3. Whether the Deed of Assignment constituted a valid assignment.
4. Whether Company B Utilities, as assignees, had the right to pursue adjudication of the NLSDA claim against Company A.
5. Whether the adjudicator had jurisdiction to consider the dispute referred to adjudication.

Arguments of the Parties

Company B Utilities' Arguments

• The NLSDA Sub-Contract was novated to Company A by virtue of the Asset Purchase Agreement.
• The Deed of Assignment validly assigned to Company B Utilities the net balance due under Rule 4.90 of the Insolvency Rules 1986, including the right to adjudicate.
• The adjudication notice validly referred the dispute to adjudication and the adjudicator had jurisdiction.
• Company B Utilities argued that the dispute had crystallised prior to referral because they stood in the shoes of the original contracting party, Company B.
• Contended that the adjudication could proceed despite the insolvency context and multiple contracts involved.

Company A's Arguments

• There was no novation of the NLSDA Sub-Contract to Company A, or alternatively, novation only occurred by conduct from 3rd September 2003 onwards.
• The Deed of Assignment only assigned rights to a net balance under Rule 4.90 and did not assign individual claims under the sub-contracts.
• The assignment was invalid or incomplete as it only referenced two of four sub-contracts and purported to assign only a positive balance, excluding potential negative balances.
• The adjudicator lacked jurisdiction because the claim referred to adjudication no longer existed as an assignable cause of action.
• The dispute had not crystallised at the time of adjudication referral because notice of assignment and adjudication were simultaneous, denying Company A opportunity to respond.
• The adjudication process was unsuitable due to the complexity, volume of documentation, and multiplicity of contracts involved.

Table of Precedents Cited

Court's Reasoning and Analysis

The court first determined that the NLSDA Sub-Contract was validly novated from Company D to Company A by construction of the Asset Purchase Agreement and, alternatively, by conduct. This conclusion was supported by contractual provisions obliging Company A to assume liabilities and by the pattern of payments made post-purchase. The court distinguished this case from others involving uncertain novation, finding clear evidence of acceptance by all parties.

Turning to the Deed of Assignment, the court found that the liquidators of Company B validly assigned to Company B Utilities the right to the net balance arising from mutual dealings under Rule 4.90 of the Insolvency Rules 1986. The assignment was not limited to specific sub-contracts despite references to only two sub-contracts in the recitals and schedule. The court rejected arguments that the assignment was invalid for assigning only a positive balance, holding that the assignment included the right to take an account which could result in no balance due.

The court analysed the prohibition on assignment in the Lot 8 Sub-Contract, concluding that while ordinary claims under the sub-contract could not be assigned without consent, the right to an account under the insolvency rules was a specific right arising only on insolvency and was not caught by the prohibition.

Regarding adjudication jurisdiction, the court held that Company B Utilities, as assignees, could not pursue the NLSDA claim by way of adjudication because only the net balance claim under Rule 4.90 survived insolvency and assignment, and such a claim could not be piecemeal adjudicated. The adjudicator’s jurisdiction was limited to disputes under a single contract, but the net balance claim involved multiple contracts and parties, some of which were not construction contracts, thereby exceeding adjudication jurisdiction.

The court further reasoned that the Rule 4.90 account must be taken in a single, final, and binding proceeding, incompatible with the temporary and provisional nature of adjudication decisions. The existence of cross-claims and the necessity of joining liquidators as parties made adjudication impractical and legally improper.

Additionally, the court found that the dispute had not crystallised at the time of adjudication referral because notice of assignment and adjudication were simultaneous, denying Company A a reasonable opportunity to consider the claim. The court rejected the argument that the dispute crystallised earlier between Company B and Company A, emphasizing that the parties to adjudication must be the same and the respondent must have had time to consider the claim.

The court criticized the adjudicator’s conduct, noting failure to assess jurisdiction and fairness within statutory time limits, resulting in piecemeal time extensions and an unsuitable adjudication process for a large, complex final account dispute. The adjudicator’s refusal to address jurisdictional issues and the pressure on Company A to agree extensions were viewed as contrary to proper adjudication practice.

Holding and Implications

The court held that:

• The NLSDA Sub-Contract was validly novated to Company A.
• The right to an account and net balance under Rule 4.90 of the Insolvency Rules 1986 was validly assigned from Company B to Company B Utilities.
• Company B Utilities could not pursue adjudication of the NLSDA Sub-Contract claim because only the net balance claim survives insolvency and assignment, and such claims cannot be adjudicated piecemeal.
• The adjudicator lacked jurisdiction to consider the dispute referred to adjudication.
• The dispute had not crystallised at the time of adjudication referral, rendering the adjudication invalid.
• The adjudication process was unsuitable for the complexity and volume of the claims involved.
• The current adjudication must be aborted.

The direct effect of this decision is to halt the ongoing adjudication proceedings and direct the parties to pursue the net balance claim, if at all, through appropriate court proceedings. No broader precedent altering the law of assignment or adjudication jurisdiction was established beyond the application of existing principles to the facts. The judgment underscores the incompatibility of insolvency set-off claims with statutory adjudication procedures and the necessity of clear, crystallised disputes for adjudication to proceed.