“Don’t wind me up – no guarantee that a judgment debt based on an adjudicator’s decision will be enforced”

Background

In brief, Victory House General Partner Limited (“VHG”) engaged RGB P&C Limited (“RGB”) in relation to works for the development and conversion of an office building in Leicester Square, London.

Disputes arose between the parties which led to several Adjudications.

In Adjudication 1, the Adjudicator decided that RGB’s interim application for payment number 30 (“Interim Application 30”) had been properly made, and rejected VHG’s argument that an appropriate payless notice had been given. It followed that VHG was liable to pay RGB’s Interim Application 30 in full in the sum of £682,802.88 plus VAT and interest.

VHG was not happy with this decision and made an application in the Technology and Construction Court, by way of a Part 8 claim, to challenge it on the following grounds:

1. that the Adjudicator’s decision was invalid because he had breached the rules of natural justice;
2. that VHG was not liable to pay the sum in Interim Application 30 because the parties had entered into a memorandum of understanding which provided for other payments to be made which were not as large as the figure claimed; and
3. VHG’s pay less notice was in any event valid.

In response to VHG’s application, RGB made a cross application seeking judgment based on the decision in Adjudication 1.

The parties’ applications were heard in court on 26 January 2018.Deputy Judge, Miss Joanna Smith QC, did not accept VHG’s argument that the Adjudicator’s decision was invalid, gave judgment for RGB in the sum stated in Adjudication 1 and required VHG to pay up by 2 February 2018.

As Adjudication 1 was now the subject of an order by the court, RGB was entitled to enforce this in any of the ways available to it by way of execution of a judgment debt.

In the meantime, RGB had commenced a further Adjudication (“Adjudication 2”) in which it sought a determination of the value of its work included in Interim Application 31.

In Interim Application 31. RGB had rolled up the value of all the work it had done to date, including the work which had been previously been included in Interim Application 30. According to RGB’s Interim Application 31, the gross valuation of its works came to in excess of £11 million. Taking into account payments of £8.5 million already made by VHG and the sum due to it in respect of Interim Application 30 RGB contended it was owed a further £1.9m.

However, in his decision dated 7 February 2018, the Adjudicator in Adjudication 2 determined that the gross value of the works carried out by RGB was in fact only £7,087,027.59 rather than £11 million. Taking into account the £8.5 million already paid by VHG, this meant that VHG had overpaid RGB by almost £1.5 million even before it paid the sums it was required to pay following the court’s judgment on Adjudication 1. The Adjudicator in Adjudication 2 therefore decided that VHG did not owe RGB any monies.

RGB had previously presented a petition to wind VHG up, on the basis of the sum awarded in Adjudication 1 in respect of Interim Application 30.

RGB’s petition now had added clout because, following Deputy Judge Smith QC’s order on 26 January 2018, it was also entitled to recover the amount awarded to it in Adjudication 1 as a judgment debt.

However, given the Adjudicator’s valuation of the works in Adjudication 2, VHG refused to pay up and instead sought to stop RGB’s petition in its tracks by applying to the court to restrain RGB from advertising the petition and to dismiss it.

In support of its application, VHG argued that if it was to pay the judgment debt based on Adjudication 1, it would immediately become entitled to require repayment of that sum because, as had been determined in Adjudication 2, it had already overpaid RGB.

In essence, the question for the court to decide on VHG’s application was whether, based on the Adjudicator’s findings in Adjudication 2, VHG was entitled to avoid paying the judgment of the court in relation to Adjudication 1.

Did the Adjudicator’s findings in Adjudication 2 trump the judgment of the court in relation to Adjudication 1?

In reaching his decision on this issue, Mr Justice Morgan acknowledged that the petition was based on a judgment debt.

Judgment debts are normally considered indisputably due and payable. In this case the judgment had not been stayed and there was no appeal pending.

Accordingly, in Mr Justice Morgan’s view, VHG ought to have complied with the order made by Deputy Judge Smith QC and he noted that VHG had failed to do so.

However, Mr Justice Morgan then referred to the decision of Mr Justice Coulson in Grove Developments Ltd v S&T (UK) Ltd (upon which my colleague Andrew Ash reported in February 2018).

In this case Mr Justice Coulson had made it clear that in circumstances where an adjudicator had decided that an employer had failed to issue an effective pay less notice in respect of an application for interim payment and had decided that the employer was therefore liable to pay the full amount applied for, without carrying out a proper valuation of the works, the employer was obliged to pay the figure determined by the adjudicator.

According to Mr Justice Coulson, once it had paid up, the employer could then ask a second adjudicator to carry out a valuation of the work included in the application in accordance with the contractual provisions.

If the second adjudicator then determined that a valuation done in accordance with the contractual provisions resulted in a smaller figure being due by way of interim payment “than the amount paid” in accordance with the first adjudication, the employer would then be entitled to ask for repayment of the overpayment.

In the present case, the first Adjudicator and Deputy Judge Smith had decided that VHG was liable to pay the full amount applied for by RGB in Interim Application 30 because VHG had failed to issue an effective pay less notice.

However, VHG did not pay up following Adjudication 1 and had not sought a true valuation in respect of Interim Payment 30.

Instead, the parties had participated in a second adjudication which involved a valuation of RGB’s works included in its Interim Application 31.

Based on this valuation of the works, the adjudicator had determined that no further payment was due under the contract in respect of RGB’s works.

Since the second adjudicator’s valuation of Interim Application 31 included all the works for which RGB had previously applied it “subsumed” RGB’s Interim Application 30.

Accordingly, Mr Justice Morgan acknowledged that if VHG were to pay the judgment debt based on Interim Application 30, it was arguable that it would immediately become entitled to repayment of the entire sum by virtue of the second adjudicator’s decision and his valuation of Interim Application 31.

Although the second adjudicator hadn’t decided that RGB should repay the difference between his valuation of the works and the amounts previously paid by VHG, nevertheless, Mr Justice Morgan accepted in principle that, by virtue of the second adjudicator’s decision, VHG had a “nascent” cross claim in relation to the sums claimed in the winding up petition.

Mr Justice Morgan then considered various cases where the court had been asked to enforce an undisputed debt in circumstances where the respondent had a potential but disputed cross-claim which exceeded the debt.

In Re Bayoil SA [1999] 1 WLR 147, the petition was based on an Arbitrator’s award in respect of a claim for freight. The respondent applied for the petition to be dismissed or stayed on the ground that it had a genuine and serious cross claim in an amount which exceeded the debt.

Here the Court of Appeal confirmed that, save in exceptional circumstances, the same rule that prevented petitions from proceeding on disputed debts, also applied in circumstances where there was a bona fide cross-claim on substantial grounds which exceeded the petition debt.

Mr Justice Morgan noted that in the course of giving the Court of Appeal’s judgment on the issue, Lord Justice North had observed that:

"The ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up."

Although he was not required to assess whether the Adjudicator’s valuation of RGB’s works in Adjudication 2 was in fact correct, nevertheless, Mr Justice Morgan had no doubt that VHG’s cross claim was a bona fide one and one which was on substantial grounds.

He observed that the Adjudicator in Adjudication 2 had “…worked his way through the various issues raised before him”. He had calculated that the gross value of the work done, up to the valuation date, was £7,087,027.59  and, after taking into account the retention had determined that the net payment due to RGB, as an interim payment up to the valuation date, including all the work in interim application number 30 and interim application number 31, was £6,980,722.18 . The logic of this determination was that RGB had already received a substantial sum in of the order of £1.5 million, in excess of the sum due on a true valuation in accordance with the contractual provisions.

Accordingly, applying the decision in Re Bayoil, Mr Justice Morgan dismissed the winding-up petition.

In conclusion he said “it may appear a strong thing to say that the employer, having failed to comply with a judgment against it, should nonetheless escape the consequences involved in a winding-up … I also consider it is a more just result than the alternative  contended for by the petitioner”.

So what does all this mean?

Whilst judgment in Grove Developments Limited v S&T (UK) Limited offers some redress to those payers who fail to issue effective notices in so far as it affords them the right to seek a true valuation of the contractor’s works in a second Adjudication, nevertheless, such redress is predicated on the payer first paying the amount decided in the first adjudication, pending the outcome of the second.

The Victory House case now suggests that the paying party could avoid having to pay the amount decided in the a first Adjudication in circumstances where it has been able to obtain a subsequent  Adjudicator’s decision on the true value of the contractor’s works and where this later decision confirms that the paying party has already over paid the contractor.

However, such instances will be rare and so it remains vitally important for a paying party to issue effective pay less notices on time if it disputes a contractor’s application for payment and wishes to protect its interests.

Conclusion

In Victory House the respondent to the petition successfully avoided having to pay the judgment debt based on the first Adjudicator’s decision but only because it could demonstrate it had a bona fide cross-claim on substantial grounds in an amount which exceeded the petitioner’s claim.

It remains to be seen whether a court will offer the same leniency in circumstances where the respondent to a petition refuses to pay the first Adjudicator’s decision but has yet to obtain a second Adjudicator’s decision as to the true value of the works.

In this case the judge had sympathy for VHG (see Mr Justice Morgan’s comments at paragraph 34 of the judgment) because there was clear evidence from an independent third party (i.e. the Adjudicator in Adjudication 2) that VHG had overpaid and therefore, to this extent, this case was an exception to the norm.