Integrated Building Services Engineering Consultants Ltd trading as Operon v PIHL UK Ltd

5 July 2010

This case raised a narrow issue as to the relationship between a party's obligation to give effect to an adjudicator's decision under the Housing Grants, Construction and Regeneration Act 1996 ("the 1996 Act"), and that party's entitlement to rely upon the principle of the balancing of accounts in bankruptcy if, after the date on which the adjudicator's decision is issued, the party in whose favour the decision is given becomes insolvent. It is likely to be of some importance to those operating in the construction industry in Scotland, given the fact that there is, to date, relatively little case law in Scotland on the relationship between the 1996 Act and the insolvency of one party to a building contract.

The case concerns a dispute arising out of a building contract for the construction of two secondary and eight primary schools in Aberdeen. Integrated Building Services Engineering Consultants Limited, trading as Operon ("Operon"), being the sub-contractor in terms of the building contract, sought, in the commercial court, to enforce three decisions of an adjudicator. The court action was defended by the Pihl UK Limited ("Pihl"), the building contractor, on the basis that (i) the adjudicator's decision was reached in breach of the principles of natural justice; and (ii) in view of the fact that Pihl had a number of outstanding claims against Operon (with a combined value of around £8million), that the supervening insolvency of Operon meant that the adjudicator's awards should not be enforced.

At debate, Operon sought summary decree and decree de plano on the basis that the defences lodged disclosed no relevant defence to the action. Pihl opposed the pursuer's motion, arguing that Pihl was entitled to retain any sums allegedly due in respect of the adjudicator's awards, under the principles of the balancing of accounts in bankruptcy (otherwise "insolvency set-off").

Lord Hodge was persuaded that Pihl were entitled to invoke the principles of the balancing of accounts in bankruptcy. He refused Operon's motion for summary decree or decree de plano. He held that the 1996 Act does not operate to exclude the principle of the balancing of accounts in bankruptcy. The balancing of accounts in bankruptcy is an equitable principle and the court can regulate its operation to ensure fairness.

The parties were each represented by members of Axiom Advocates. Gordon Reid QC and Susan Ower acted on behalf of Pihl. Gerry Moynihan QC and Martin Richardson acted on behalf of Operon.

The full decision can be found at:

http://www.scotcourts.gov.uk/opinions/2010CSOH80.html