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CM December DECEMBER 2018

THE CICM MAGAZINE FOR CONSUMER AND COMMERCIAL CREDIT PROFESSIONALS

THE CICM MAGAZINE FOR CONSUMER AND COMMERCIAL CREDIT PROFESSIONALS

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OPINION<br />

Victory for law and<br />

common sense<br />

Payments due in construction contracts can be<br />

very complicated and a cause of disputes – not easy<br />

for credit managers.<br />

AUTHOR – Peter Walker<br />

IF you should see me in London’s<br />

Leicester Square, I am usually<br />

going to the neighbouring<br />

Chinatown for a meal of Chinese<br />

dim sum, but a winding-up petition<br />

relating to the development and<br />

conversion of Victory House in the Square<br />

instead was recently the concern of a High<br />

Court judge. A creditor, the contractor,<br />

had petitioned for the winding-up of the<br />

employer because of non-payment of over<br />

£800,000 awarded by an adjudicator of an<br />

arbitration.<br />

An unusual element of the case was<br />

that the debt was not disputed, but it was<br />

part of a complicated transaction. The<br />

complication was a counter-claim for more<br />

than the outstanding amount.<br />

The dispute itself arose from a<br />

contractor’s application for an interim<br />

payment under a building contract to<br />

develop and convert Victory House into<br />

a hotel. The contract was governed by<br />

the JCT Design and Build Contract 2011,<br />

and the agreement referred to interim<br />

payments and pay-less notices should<br />

there be disputes about the instalments.<br />

There is also legislation such as the Scheme<br />

for Construction Contracts (England and<br />

Wales) Regulations 1998 (SI 1998/649).<br />

These agreements are very complicated:<br />

credit management is very difficult.<br />

The debtor, or employer of the<br />

contractor, therefore challenged the<br />

petition for winding up, and it had made<br />

what is called a Part 8 Application under<br />

the Civil Procedure Rules. A claimant may<br />

use this procedure, where it firstly ‘seeks<br />

the court’s decision on a question which<br />

is unlikely to involve a substantial dispute<br />

of fact’. There may alternatively be a<br />

specified type of proceedings, although this<br />

seemingly did not apply to this situation.<br />

The situation was a building contract<br />

providing for stage payments. The<br />

contractor was to obtain a transformer<br />

or substation from the relevant statutory<br />

authority. Once this had been installed,<br />

work could begin to commission the hotel’s<br />

electrical and mechanical services.<br />

DISPUTED DELAYS<br />

An arbitration and High Court judges<br />

indicate that there were problems. These<br />

included delays and a disagreement<br />

about the entitlement of the contractor<br />

to an interim or stage payment. In<br />

March 2017 the parties to the agreement<br />

tried to resolve the dispute by means<br />

of a Memorandum of Understanding<br />

acknowledging the delays. This included<br />

the information that the contract price<br />

was around £6.6m, but the employer had<br />

paid just over £8 million. The contractor<br />

wanted more funds to complete the job.<br />

The Memorandum allowed for three stage<br />

payments of £200,000 each.<br />

The first two payments were made,<br />

and in June 2017 there was an operating<br />

transformer. The contractor then applied<br />

for a payment under the main contract.<br />

The amount was just over £682,000<br />

plus VAT. The employer objected, and<br />

it asserted that payments were now<br />

governed by the Memorandum.<br />

Time for arbitration! There were<br />

plenty of issues including the allegation<br />

that the third payment required by the<br />

Memorandum had not been made. The<br />

Adjudicator decided that it was legally<br />

binding, but importantly that it did not<br />

supersede the building contract. The<br />

Memorandum suspended the obligation<br />

to make interim payments under that<br />

contract until the transformer had been<br />

installed. The employer should therefore<br />

pay the amount demanded plus of course<br />

interest until the date of payment.<br />

NATURAL JUSTICE<br />

The employer then decided to appeal to<br />

the Technology and Construction Court<br />

in the High Court, where in November<br />

2017 Joanna Smith QC sitting as a deputy<br />

judge reviewed the facts in Victory House<br />

General Partner Ltd v RGB P&C Ltd<br />

[<strong>2018</strong>] EWHC 102 (TCC). The employer<br />

asserted that there had been a breach of<br />

natural justice, and it suggested that the<br />

adjudicator had gone ‘on a frolic of his<br />

own’.<br />

Joanna Smith QC responded by<br />

referring to the judgment in Cantillon<br />

Ltd v Urvasco Ltd [2008 EWHC 282<br />

(TCC), which stated the obvious, that an<br />

adjudicator must be shown to have failed<br />

to apply the rules of natural justice. The<br />

breaches must be material such as where<br />

the adjudicator has failed to bring to the<br />

attention of the parties an important<br />

issue. An adjudicator’s frolic would apply,<br />

for example, if he or she decided on a<br />

factual or legal issue not argued by either<br />

side.<br />

Edwards-Stuart J in Roe Brickwork Ltd<br />

v Wates Construction Ltd [2013] EWHC<br />

3417 (TCC) refined this ruling. It would<br />

be acceptable for an adjudicator to decide<br />

on the information before him or her,<br />

although neither party had contended it.<br />

They must, however, have been aware of<br />

the material.<br />

The Recognised Standard / www.cicm.com / <strong>December</strong> <strong>2018</strong> / PAGE 24

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