Background

We act for Pihl UK Limited, the main contractor for the construction of various schools forming the Aberdeen Schools 3R’s PPP. In December 2007 Pihl subcontracted the mechanical and electrical works (which included design of FF+E) for 2 secondary schools (Cults and Bucksburn) to a company called Integrated Building Services Engineering Consultants Limited, known as Operon. In July 2009 the parties agreed some amendments to this sub contract in response to various issues that had arisen between them and in advance of the handover date for both secondary schools on 23 October 2009.

As part of the amended contract Pihl agreed, subject to certain conditions being met by Operon, to pay sums of money to Operon on 23 October. The schools were handed over timeously by Pihl but Pihl refused to make payment of the sums to Operon on the basis Operon had indeed failed to discharge their obligations. Notices of Withholding were issued and Operon commenced adjudication proceedings against Pihl seeking payment of these sums. Pihl successfully argued before the adjudicator that they had a right to retain payment pending determination of their claims against Operon. The adjudicator duly made an assessment of Pihl’s claims against Operon which, the adjudicator considered, left a balance due for payment. The adjudicator issued his award in December 2009.

Operon served an action against Pihl in the Court of Session around 20 January 2010 seeking enforcement of the adjudicator’s award. On 29 January Operon went into administration.

Issues

It was a matter of agreement that Operon were in insolvent administration. Following initial procedure the court ordered a debate in the action (in advance of which Operon also enrolled a motion for summary decree) to test the legal relevancy of Pihl’s defence in the action. In other words the accepted position in Scots law in relation to adjudicator’s awards is they will be enforced by the courts save where there had been procedural irregularity or a lack of power on the part of the adjudicator to make the award.

At debate Pihl primarily resisted any decree for payment on the basis that Scots Law also entitled them to refuse to make payment on the principle of balancing accounts in insolvency. That is to say Pihl argued that, as Operon were insolvent, (albeit not in liquidation) the court should not grant decree for payment until Pihl’s claims against Operon were determined on their merits and because common law rules relating to retention and set off which apply where both parties are solvent are relaxed by the principle of balancing accounts in insolvency where, as here, the party seeking enforcement is insolvent. Pihl argued that the Housing Grants, Construction & Regeneration Act 1996 did not overturn this principle, that it remained a sound principle of Scots law despite the apparent finding in SL Timber
Systems Limited v Carillion Construction Limited and that this legal principle entitled Pihl to have their claims tested before any adjudication award could be enforced.

So did Pihl have a legal right to refuse to make payment, on the basis Operon were insolvent, until Pihl’s claims were determined? Could these accounts be balanced one against the other given Operon’s insolvency?

Decision and Implications

In his decision issued on 1 July Lord Hodge upheld Pihl’s defence and agreed that their claims do fall to be tested before the adjudicator’s award could be enforced. In so doing the judge effectively agreed that a further ground to refuse to comply with an adjudicator’s award exists in Scotland (making the law here consistent with English Law) and meaning that where a solvent party has counterclaims against an insolvent party (who holds an adjudicator’s award for payment) the solvent party is entitled to have the counterclaim tested before having to comply.

This is a significant decision for anyone involved in construction or engineering in whatever capacity because it confirms that the 1996 Act does not pass the risk of insolvency to the paying party (where that party has a proper claim to be considered).

Further Information

For further information please contact Keith Bishop or usual contact within
the Construction and Projects team.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.