CM December DECEMBER 2018

OPINION
AUTHOR – Peter Walker
On the facts in front of her Joanna
Smith QC, in her judgment in January
2018, rejected the contention that the
arbitrator had failed to apply the rules
of natural justice. The parties had, for
example, made submissions regarding
the Memorandum of Understanding.
There were other considerations, and
the adjudicator had furthermore posed
specific questions to the parties, who
had the opportunity to answer. Part 8
Procedure was not appropriate in a claim
including disputed facts.
WINDING UP OR WIND-UP
The adjudication debt, however, as
ordered by Joanna Smith QC was unpaid
in February 2018, so the contractor
petitioned to wind up the employer.
The employer applied in the Chancery
Division of the High Court, to strike out
the petition. Morgan J in the resulting
case In re Victory House General Partner
Ltd [2018] 3 WLR 1024 noted that there was
other litigation, not about the judgment
debt, but about a liability to make a
further payment under the contract.
The contractor, for example, had made
an application for a further payment of
around £3 million, and the absence of any
payment resulted in another adjudication.
The adjudicator significantly decided that
the value of the work done was around £7
million, but that the contractor had been
paid around £8.5 million, i.e. there had
been an overpayment.
This did not end the dispute, because
the employer, not the contractor, initiated
a third arbitration. It claimed that there
were defects in the work.
Morgan J considered this background
to the contractor’s winding-up petition.
He noted that, if the employer paid
the judgment debt resulting from the
first arbitration, it would have a crossclaim
against the contractor due to the
overpayment found by the adjudicator in
the second arbitration.
He turned for guidance to the decision
of Coulson J in Grove Developments Ltd
v S&T (UK) Ltd [2018] EWHC 123 (TCC).
This case concerned the construction
of a new hotel at Heathrow Terminal 4.
There was a completion date of October
2016, but the project was not ready until
March 2017. There were three subsequent
adjudications. The first decided that a
Schedule of Amendments was part of the
contract. The second decided that the
contractor was entitled to an extension
of time, but only until January 2017. The
third arose from the employer’s pay-less
notice in response to the contractor’s
application for a stage payment. This is
important to credit management, because
if an employer does not serve such a notice
on time, it is deemed to have accepted
the valuation. This is known as a smashand-grab
claim, whereby a contractor
claims payment of the sums in their
interim application without regard to the
employer’s assessment as to its validity.
The third arbitration concluded that it was
not entitled to do so with the result that
the contractor was entitled to £14 million.
The employer finally started a Part
8 Application, but Coulson J ruled that
the pay-less notice was effective. It was
accompanied by a spreadsheet detailing
the sum to be paid. Coulson J added
that upon payment the employer could
apply for an adjudication of the true sum
due. It could then make a claim for any
consequent financial adjustment.
NO SHORT CUTS
There are consequently no short cuts when
the other party has what Nourse LJ in the
Court of Appeal described as ‘a genuine
and serious cross-claim’. He did not have
to deal with a Part 8 Application, but he
was considering an undisputed debt case
In re Bayoil SA [1999] 1 WLR 1471. Bayoil
had chartered a tanker, but there were
problems with the tanker’s engines and
with the voyage generally. There were
disputes resulting in an arbitration, and
the ship’s owner was awarded over $1
million. When there was a subsequent
petition to wind up Bayoil, it did not
dispute the debt, but its counterclaim
exceeded the awarded amount.
Nourse LJ proceeded cautiously, and he
pointed out the potentially serious effects
of a winding-up order. It was ‘draconian’,
and if it was wrongly made, a company
would have little chance of revival.
Morgan J in the Victory House case
followed this reasoning. The amount
awarded by the adjudicator was not
disputed, but the employer had a
substantial bona fide cross-claim based
on the alleged overpayment. The judge
therefore dismissed the winding-up
petition.
A victory for law and common sense!
A Part 8 Application or winding-up
petition can be the correct procedure
after the award of an undisputed and
unpaid judgment debt, but there are no
procedural short cuts if the debtor has a
justifiable cross-claim. Where there are
complicated building and other contracts
involving stage payments, credit managers
must monitor them carefully.
Peter Walker is a freelance business
writer.
The Recognised Standard / www.cicm.com / December 2018 / PAGE 25