VICTORY HOUSE GENERAL PARTNER LTD v RGB P&C LTD (No 2)
VICTORY HOUSE GENERAL PARTNER LTD v RGB P&C LTD (No 2)
18 April 2018
The contractor’s winding up petition brought to execute the summary judgment enforcing the decision in the first adjudication should be dismissed where the decision in the second adjudication meant that the no award should have been made in the first adjudication
The contractor issued interim payment application 30 and referred the payment dispute in respect of that application to the first adjudication. The adjudicator, in awarding the contractor the sum it had applied for did not have to and did not go into the question as to what would have been the value of the work which was the subject of the application if that work had fallen to be valued by him. The contractor obtained a summary judgment enforcing the decision and issued a winding up petition against the employer to execute the judgment in which the petition debt was based on the judgment debt.
The contractor then issued interim payment application 31, which led to a second adjudication. The adjudicator (i) valued the works carried out up to the time that application 31 was issued and (ii) made no award to the contractor on the basis that the overall value of the works was less than the payment on account made by the employer before application 30 was issued. The logic of the adjudicator’s determination was that (i) The contractor was not entitled to any payment in respect of application 30 based on his valuation of the works and (ii) The award made in the first adjudication should not have been made.
The employer successfully applied to dismiss the winding up petition. Morgan J stated that the general rule is that where a debt is bona fide disputed on substantial grounds, the petition should be treated as inappropriate, as being an abuse of the process and as being one the court should dismiss. The Court of Appeal’s decision in Re Bayoil (1999) should be applied, namely that (i) The general rule should also be applied to disputed cross-claims exceeding the petition debt but (ii) There could be exceptional circumstances where it would be appropriate to allow a petition to go forward even where there was a disputed cross-claim exceeding the disputed debt. The employer’s nascent cross-claim in restitution based on the award of the adjudicator in the second adjudication was a bona fide cross-claim on substantial grounds. There were no special circumstances to take this case outside the general rule because (i) There were special circumstances fortifying rather than weakening the general rule in that the contractor had already received a substantial sum by way of interim payment in excess of the correct interim payment and (ii) It would be quite wrong to bring about the winding up of the employer company for its failure to pay a yet further sum.
THE FULL TEXT OF THE JUDGMENT OF MORGAN J
- This is an application to strike out, and to restrain notice being given of, a winding up petition. The petitioner is RGB P&C Limited and the company in question, and the applicant before me, is Victory House General Partner Limited to which I will refer as "the company" or, when I refer to a relevant building contract, as "the employer".
- The matter has been argued for the course of a full court day and I am giving judgment slightly out of hours at the end of that day. I have decided to give judgment straightaway to avoid the delay which would result if I were to reserve judgment.
- The petition was presented on 16 November 2017. The petition debt is described in these terms:
"The company is indebted to the petitioner in the sum of £819,363.46 in respect of an adjudicator's decision dated 7 November 2017 in respect of goods supplied and services rendered for the development and conversion at Victory House, Leicester Square, London for the petitioner's interim payment application number 30, dated 11 July 2017."
- There is a very considerable background to the matter coming before the court for decision today. However, a brief summary of that background will suffice for present purposes.
- The history begins with a building contract under which the company was the employer and the petitioner was the building contractor. The contract was in the form of a JCT Design and Build Contract 2011. As described in the petition itself, the building contract related to the development and conversion of an office building at Victory House, Leicester Square into a substantial hotel property. Section 4 of the building contact is a lengthy provision, extending I think to nine pages, dealing with payment in relation to the contract sum and adjustments to the contract sum. I will not attempt in this short judgment to summarise those detailed provisions. Suffice to say, so that one understands the later references to "adjudication", the contractual provisions were drafted against the background of the Housing Grants, Construction and Regeneration Act 1996, s.108-114, as amended by the Local Democracy, Economic Development and Construction Act 2009, and against the background of the Scheme for Construction Contracts (England and Wales) Regulations 1998, as amended by further Regulations in 2011.
- There came a point when the parties to the contract disagreed as to their rights and liabilities under the contract and, in particular, as to the sums which were payable by the employer (the company) to the contractor (the petitioner). The contract and the statutory provisions provided for the dispute which had arisen to be referred to adjudication under the 1996 Act. The contractor had served an interim payment application, number 30, on 11 July 2017 and that was referred to an adjudicator who published his adjudication decision on 7 November 2017. The decision is a lengthy one. It considers a number of matters. It considered, in particular, a contention put forward by the employer company that it was not liable to pay the sum identified in interim application number 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 in application number 30. In summary, the adjudicator, for reasons which he gave, did not accept that case put forward by the employer company.
- The employer had a second case which is that it had served the appropriate notice under the contract and under the legislation, in particular, what is called a "pay- less" notice, which meant that the contractor/petitioner was not entitled to be awarded by the adjudicator the figure stated in interim application number 30. The adjudicator rejected that case also. It followed from the reasoning of the adjudicator, and the adjudicator so determined, that the employer was liable to pay the figure in the contractor's interim application number 30. The adjudicator did not go into the question as to what would have been the value of the work, the subject of interim application number 30, if that work had fallen to be valued by him. The figure which he determined was payable by the employer to the contractor was the result of the operation of the contractual and the statutory provisions. It was the figure that had been identified by the contractor, no more and no less.
- The adjudicator's award therefore was that the employer should pay to the contractor the sum of £682,802.88 plus any VAT payable thereon, together with a sum by way of interest.
- The employer was not content with the result of that adjudication (which I will hereafter call "Adjudication No.1"). The employer brought proceedings against the contractor in the High Court, in particular in the Technology and Construction Court. It brought those proceedings by way of a Part 8 claim. It raised three points in particular as to why it should not be obliged to make the payments which had been determined by the adjudicator in Adjudication No.1. That claim form provoked an application by the contractor in the Technology and Construction Court for the enforcement of the award in Adjudication No.1.
- The rival applications came before a judge of the Technology and Construction Court, namely, Miss Joanna Smith QC sitting as a deputy judge of the High Court, and she gave a judgment dealing with the matters argued before her on 26 January 2018,  EWHC 102 (TCC). She dealt, in particular, with the contractor's application to enforce the determination in Adjudication No.1. She held in para.38 of her judgment that the contractor was entitled to summary judgment in that respect. However, that did not dispose of all the matters raised in the Part 8 claim form. It disposed of one of those matters, namely, whether the adjudication decision was invalid for breach of natural justice, but it did not determine two other matters, one relating to the memorandum of understanding and the second relating to the question as to the notices which had been served by the employer and as to the effect of those notices.
- Following the handing down of judgment, the Deputy Judge then made an order. She entered judgment for the contractor in the sum stated in Adjudication No.1 plus interest. She made an order for costs against the employer and in favour of the contractor and she then made case management directions as to what was to happen in relation to outstanding points raised initially in the Part 8 proceedings. Those points were directed to go forward for further litigation and determination and, indeed, I have been shown the pleadings which were served in accordance with the Deputy Judge's order. However, it is important to recognise the fact that those matters are still being pursued does not in any way detract from the final and binding character of the judgment which was made by the Deputy Judge. The reason those other matters are still being litigated, as I understand it, is that they may have a bearing not on a liability to make payment under interim application number 30 but may have a bearing on a liability to make some further payment under the contract.
- I also point out that the Deputy Judge did not grant a stay of the judgment she had given. Indeed, she ordered that the judgment be complied with by paying the judgment sum on 2 February 2018. There has been no appeal against that order.
- As I indicated, the petition debt is based on the judgment debt. So that it is clear, I consider that the judgment debt is no longer a disputed debt. There is no question of a set-off being asserted against the judgment debt. A set-off, when it can be asserted, is a defence. It is too late here for a defence. The matter has now been the subject of the judgment. Furthermore, in the absence of a stay, the contractor is entitled to enforce its judgment in any of the ways available to it by way of execution of a judgment.
- Some time went by. The employer did not pay the judgment debt. Instead the contractor served a further interim application notice, number 31, and that led to a second adjudication before a different adjudicator, and the second adjudicator made his decision, extending to some 64 pages, on 7 February 2018. I will refer to this as "Adjudication No. 2". My attention has been drawn to some only of the paragraphs in this lengthy decision. It appears from the text, between paras.270-271 of the decision,,that the adjudication was pursuant to a reference by the contractor seeking a determination that the value of the work done, for which an interim payment should be made, was in excess of £11 million. It also appears from the same place that the employer had, prior to the date of this adjudication, paid on account a sum in excess of £8.5 million. Accordingly, the contractor was seeking to have a further sum of approximately £3 million by way of further interim payment. The total sum of £11.7 million, which was claimed, did, of course, include all of the work done and, therefore, included the work done which was the subject of interim application number 30. In other words, application number 31 rolled up all of the work to be the subject of an interim payment up to that date and therefore included all of the work the subject of application number 30.
- I was referred to paras.151-153 of Adjudication No.2 as to the matter which was referred to the adjudicator in Adjudication No. 2. Paragraph 151 reads:
"The dispute referred to me is agreed to be a valuation of the completed works as at 1 September 2017 but for the purposes of an interim payment."
The next two paragraphs read:
"For the avoidance of any doubt, I am not considering the value of the final adjustments to the contract sum.
In these circumstances, I am required to carry out the valuation exercise following the contractual procedures for interim valuations."
That makes it clear that there is a difference under the contract between a valuation carried out for the purpose of an interim payment and a valuation carried out for the purposes of a final adjustment to the contract sum. The valuation for the purpose of the final adjustment to the contract sum has not yet taken place. I understand that the process has been initiated but further steps need to be taken and a figure, based on the final adjustment to the contract sum, has not yet been arrived at and, therefore, no such figure is currently due and payable.
- Having identified the matter referred to him in that way, the adjudicator then worked his way through the various issues raised before him. He drew attention to clause 4.6 in the contract, which identified certain requirements which had to be complied with by the contractor before the contractor could put forward the work which had been done as eligible work for a valuation for interim payment purposes. The adjudicator described the effect of these provisions at para.242 of the decision in these terms:
"The effect of these provisions is that for the purposes of valuing the works for the purposes of an interim payment, the claimant was required to submit to the respondent estimates relating to each variation and failure to provide those estimates within 14 days of the date of the relevant instruction results in no value for that variation being included in interim payments."
- The adjudicator then applied the contractual provisions, interpreted in that way, to the material before him. At para.269 he reached the conclusion that the gross value of the work done, up to the valuation date, was £7,087,027.59. He then calculated, taking into account the retention, that the net payment due to the contractor, 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. He pointed out what had now become obvious, at 273 of his decision, that the figures he had arrived at were smaller than the amount which had previously been paid on account by the employer. He therefore determined, at para.275 and 276, that on the basis of a valuation of the works, for the purposes of an interim payment, in accordance with the parties' contract, the sum due on interim application number 31 was nil. He did not make an order that the contractor pay back any part of the £8.5 million already received and, as I understood the submissions to me, the adjudicator did not have power to make that order, but the logic of his determination is that the contractor has received a substantial sum, something of the order of £1.5 million, in excess of the sum due on a true valuation in accordance with the contractual provisions. I add that the figure of £8.5 million paid by the employer to the contractor does not, of course, include the judgment sum because the judgment sum had not been paid by the employer to the contractor.
- To finish the story, I will refer – but only briefly – to a third adjudication "Adjudication No.3". This time it was the employer which referred a dispute to an adjudicator. The adjudicator was the same person who decided the second adjudication. In summary, the employer had raised disputes resulting in a claim by the employer for damages for defects in the work carried out by the contractor. The nature of the dispute required the adjudicator to form a view as to whether the contractor was liable for breach of contract and, if liable, to form a view as to two matters. One was the appropriate cost of remedial work to put right the defects and the second was the question of consequential losses resulting from the presence of defects in the building.
- I have been shown various parts of Adjudication No.3, where the decision runs to some eighty pages. I think it is sufficient for present purposes to go to the decision, which begins at para. 364 of the decision. Between paras.364 and 379 the adjudicator identifies a number of claims, one claim per paragraph, which had been put forward by the employer and holds that the employer is not entitled to any sum in relation to that claim. For present purposes, I need not go more deeply into the considerable detail involved in that decision.
- I have already referred to the outcome of Adjudication No.1 and the judgment, and I have made the point that the judgment debt is due and payable, has not been stayed and cannot be said to be in dispute as a judgment debt. The employer ought to have complied with the court order but has failed to do so. It is on that basis, indeed, that the contractor (as petitioner) has petitioned for the winding up of the employer. The employer, the company which is the respondent to the petition, however, raises two matters by way of response. The first matter is to say that the result of Adjudication No.2 is that if the employer were to pay the judgment debt the employer would immediately become entitled in the law of restitution to be repaid that sum so that there is a cross-claim, which Mr Chivers QC, who appears with Ms Rogers for the company, says is a nascent cross-claim and therefore one which makes it inappropriate to wind-up the company by reason of non-payment of the judgment debt.
- The second claim, said to be a cross-claim, is a claim for unliquidated damages by the company for the alleged breaches by the contractor of the building contract. It is said by the company that the damages recoverable for those breaches are measured by the cost of remedial works and consequential losses, admittedly not suffered by it as then owner of the hotel (the building site), but suffered by an associated entity, a trading entity known as Viking Hotels (London) Limited. As will be seen in the remainder of the judgment, I will concentrate on the first cross-claim which is advanced.
- I now need to explain in a little more detail the basis of the cross-claim based upon Adjudication No.2. My task in doing has been made very much easier by the decision of Coulson J (as he then was) in Grove Developments Ltd v S&T (UK) Ltd.  EWHC 123 (TCC). This decision discussed a number of issues arising as to adjudication under the 1996 Act and under the standard forms of contract. One issue in particular, which the judge called "Issue C", is pertinent to the arguments before me. Indeed, the present case is stronger from the employer's point of view than was the issue considered by Coulson J. In summary, the issue considered by Coulson J was in relation to a case where a contractor had served an interim application. That had gone to adjudication and, without a valuation of the works in accordance with the contract, the first adjudicator had determined that a certain sum was due and payable under the relevant provisions. Coulson J made it clear that when that happened the employer was obliged to pay the figure determined by the first adjudicator. The issue would then arise: could the employer ask for a second adjudication in which he asked the second adjudicator to carry out a valuation of the work which had been done in accordance with the contractual provisions? And, as a corollary to that, if the employer could ask for a second adjudication of that kind, what would happen if the second adjudicator determined that the valuation done that way resulted in a smaller figure being due by way of interim payment to the contractor?
- After a thorough review of the earlier authorities, both at first instance and in the Court of Appeal, and after considering the various elaborate arguments raised before him, the judge held that in the case I have hypothesised that the employer could ask for a second adjudication. He then said, starting at para.133 of his judgment, that if the figure determined in the second adjudication by way of interim payment was a smaller figure than had earlier been paid, in particular in accordance with the first adjudication, the employer would be entitled to ask for repayment of the figure appropriately calculated. That was, as I say, a case where there were two adjudications in relation to a single interim payment application, with one adjudication turning on the formal documents that had been exchanged, the other involving what was described as a "true" valuation of the same matter.
- Mr Chivers says the case is stronger on the facts before me because there has not been a second adjudication on the same certificate. There has been a subsequent adjudication in relation to a later certificate in which the earlier one was subsumed. No one says that Adjudication No.2 was invalid or outwith the powers of the adjudicator. Mr Chivers says, therefore, now that the second adjudicator has done a "true" valuation in accordance with the contractual provisions, in relation to an application for an interim payment, although not for a final payment, it emerges that no sum is payable. Mr Chivers, building on para.133 of the judgment of Coulson J, makes the submission that if the employer in the case before me was to pay the judgment debt there would immediately rise up, upon payment, a cause of action for repayment of that figure. That, he says, is the cross-claim or, as he describes it, a nascent cross-claim which I should reflect in a decision to prevent the contractor winding up the employer for non-payment of the judgment debt. I think Mr Chivers is entitled to say, on the facts that I have described, that it is bad enough for the employer that it has paid some £8.5 million when Adjudication No.2 has determined that the correct interim payment would be of the order of £7 million; it will be worse still if the employer had to, to avoid winding up, pay the further sum by way of the judgment debt.
- I am not going to deal with the second alleged cross-claim. There was a very considerable body of evidence given to the adjudicator in Adjudication No.3 on the question of liability and the question of the cost of remedial works. There is also a far from straightforward point of law as to whether the respondent company in this case is entitled to claim as its damages loss of trading profits in relation to a trade not conducted by the company but by an associated company, the hotel operator. It would take a very considerable amount of time to engage with the many points that would have to be considered before I could form a proper judicial assessment of the strength or weakness of that second alleged cross-claim. I have considered whether I should simply take the view that there was just too much to be argued about so that I could hold, without more, that there was a bona fide cross-claim on substantial grounds. I fear I might not have been able to reach that view given that the adjudicator in Adjudication No.3 had examined the case, rightly or wrongly, and come up with such a negative conclusion as to its substance. So I will put that matter on one side.
- The next matter I need to deal with is the legal test which I should apply to the present application. Mr Chivers relies upon a number of well-known authorities which are principally concerned with the court's reaction to petitions based upon disputed debts. Where a debt is bona fide disputed on substantial grounds the normal response of the court is to treat the petition as inappropriate, as being an abuse of the process and as being one the court should dismiss, leaving the alleged creditor to pursue the alleged debt in the other ways available to it.
- This, of course, is not a case of a disputed debt. There is a judgment debt and it can be enforced immediately. However, Mr Chivers draws attention to Re Bayoil SA  1 WLR 147, which deals with a case not involving a disputed debt but involving a cross-claim by the company, the subject of the petition or the intended petition, where the amount of the cross-claim exceeds the petition debt. The headnote to Re Bayoil recites the essential facts. The petitioner claimed for freight. The established law is there is no defence of set-off available in relation to a claim to freight. The claim went to arbitration and the arbitrators made an award in favour of the petitioner. The petitioner then presented a petition on the basis of the sum determined by the arbitration award. The company applied for the petition to be dismissed or stayed on the ground that it had a genuine and serious counterclaim in an amount which exceeded the petition debt. It was a matter of detail in that case, which the company put forward to advance its case, that it had not been able to litigate that counterclaim. Later cases discussing Re Bayoil make it clear that the ability, or inability, to litigate the counterclaim is not of the essence of the principle in this case. So I put that on one side.
- The whole point in the Court of Appeal was to consider whether the established rule about disputed debts applied to disputed cross-claims also (where they exceed the petition debt). In the end the Court of Appeal held that the rule was essentially the same, although the Court of Appeal held that there could be exceptional circumstances where it would be appropriate to allow a petition to go forward even where there was a disputed cross-claim exceeding the disputed debt. Nourse LJ, who gave the first judgment, did discuss the question of special circumstances. He did so because counsel for the petitioner had submitted that the interim award, being final and unappealable, determining the liability of the company for freight, amounted to a special circumstance. Nourse LJ said, at p.155E to G, that the fact of an interim award in favour of the petitioner was not a special circumstance. In the course of his reasoning he used this sentence:
"The ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up."
That reference to levying execution appears to me to suggest that the Lord Justice had in mind a case where a petitioning creditor had a judgment which could be executed but, nonetheless, that did not equate to an entitlement to wind up the company, the subject of the judgment debt. Ward LJ agreed with Nourse LJ. He made some comments on a case where it is appropriate to have a stay of execution and a case where it is inappropriate to petition. Those comments are at p.156G to H. I do not find them as clear as the comments made by Nourse LJ but nor do I find them in any way undermining the conclusion I am about to reach.
- Mr Chivers says that Re Bayoil applies in the present case. There is a judgment debt. It can be executed but that is not a special circumstance (see Nourse LJ) and the general test, absent special circumstances, is that a petition should be dismissed if there is a cross-claim put forward bona fide on substantial grounds in an amount which exceeds the petition debt.
- Mr Shaw QC, who appears for the petitioner, does not agree with that reading of Re Bayoil. He points out that the case was one of an arbitration award not a judgment of a court in this jurisdiction. He draws my attention to an earlier decision, Re Douglas Griggs Engineering Ltd.  1 Ch. 19. On the facts of that case there was a judgment debt against the respondent to the petition. The respondent to the petition had a claim, actually in third party proceedings and other litigation, but a claim nonetheless, against the petitioner, and the respondent company asserted that the petition should not go forward until that third party claim had been determined and the ultimate state of the indebtedness between the parties was thereby established. The headnote in the report reads as follows:
"The petitioning creditor having obtained a judgment and being possessed of all the remedies of a judgment creditor, was prima facie entitled to a winding up order against the respondent company and that prima facie right was not to be displaced merely by showing that the respondent company had a disputed claim against the petitioning creditor which was the subject of litigation in other proceedings."
The headnote is based on a passage in the judgment of Pennycuick J at p.23. In that passage the learned judge referred to another line of authority based on the decision of Re Amalgamated Properties of Rhodesia (1913) Ltd.  2 Ch. 115, where Sargant J, and then the Court of Appeal, discussed the approach the court should take where there was a judgment debt, a petition based on the judgment debt but an appeal against the judgment which was pending. Another example of a case involving an appeal in similar circumstances which I was shown was the unreported decision of Neuberger J in James v The Silver Fund Investment.Com Ltd., judgment being given on 15 November 2001. That was a case, like the Rhodesia case, of an appeal against a judicial determination. It was not a case of a bona fide cross-claim on substantial grounds being advanced.
- My view is that the approach in Re Douglas Griggs Engineering Ltd can no longer stand with the decision of the Court of Appeal in Re Bayoil SA. That is consistent with one textbook I was shown, namely French on Applications to Wind Up Companies (3rd Ed), at paras.7.634 and 7.635. I consider that I ought to apply the decision of the Court of Appeal, as I have interpreted it, to the facts of this case.
- I therefore have to ask whether the nascent cross-claim, the claim in restitution which Mr Chivers has explained to me, is a bona fide cross-claim on substantial grounds. I have no doubt it is a bona fide claim. I have also no doubt it is on substantial grounds. At the moment it seems to me that it is a claim that would succeed but I need not go that far.
- As to special circumstances, I am not persuaded there are any special circumstances here to take this case outside the general rule. The general rule is an important rule which should be consistently applied and not departed from too readily. Indeed, Mr Chivers says, with force, that there are special circumstances fortifying rather than weakening the general rule. He points to the fact that the contractor has already received a substantial sum by way of interim payment in excess of the correct interim payment under the terms of the contract. Mr Chivers, as I have already described, says it would be quite wrong of the court to bring about the winding up of the employer company for its failure to pay a yet further sum.
- Nothing which I have said detracts in any way from the binding character of the judgment which has been made. It may appear to be 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, but it seems to me that that is the very thing which was considered to be appropriate in the Bayoil case and, on the facts of this case, I also consider it is a more just result than the alternative contended for by the petitioner.
- The result is that I will dismiss the petition.