Can’t pay or won’t pay – Court confirms insolvency proceedings are not appropriate for enforcing debts due under construction contracts
5th June 2017
Parties should settle construction disputes through adjudication or Court proceedings, according to High Court Judge
Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division, has provided further clarification on the appropriate avenue for parties to contest debts arising from construction contracts. In his Judgment in the recent decision, Breyer Group plc v RBK Engineering Ltd  EWHC 1206 (Ch) (19 May 2017), Alexander QC stated that it would constitute “an abuse of process” for a party to pursue a winding-up petition against a debtor in circumstances where it is “not a case of can’t pay, but won’t pay.” The proper place to settle such a dispute is either through adjudication or Court proceedings.
Origins of the dispute
Breyer Group plc (“Breyer”) was a contractor on a building project and had appointed RBK Engineering Ltd (“RBK”) in May 2015 as a sub-contractor to carry out certain refurbishment and electrical works. The appointment was formalised at the time by a contract between the parties containing standard terms and conditions, including terms relating to payment (including interim payment) and an express dispute resolution clause.
The work performed by RBK continued beyond the term of the contract, late into 2016. However, although a subsequent draft contract was never signed by either Breyer or RBK, it was clear both parties considered the relationship to be governed by the terms of the original contract.
By the end of 2016, a dispute had arisen between the parties with Breyer contesting the contents of RBK’s payment applications and alleging that RBK had carried out defective works, which Breyer would have to remedy at its own cost. In December 2016 the parties entered into a settlement agreement, which included provisions setting out a number of payments to be made by Breyer to RBK. Ultimately, however, on 1 March 2017, when the final payment was due, Breyer served a Pay Less Notice on RBK, which in fact required RBK to settle a small balance to Breyer arising from the defects which had been disputed between the parties.
The winding-up petition
The parties failed to reach an agreement and on 22 March 2017, RBK filed a winding-up petition against Breyer, claiming the contractor was indebted to it in the sum of £258,729.16. However, following the application of Breyer and an assessment of its finances, the Deputy Judge elected to strike out the winding up petition.
Alexander QC’s Judgment
In his Judgment, Alexander QC concluded that Breyer was “plainly not insolvent in the sense of being unable to pay the alleged debt.” Rather, a “genuine dispute” had arisen between the parties, to which Beyer had arguable defences and substantial cross-claims of its own. Breyer’s position was predicated on its concerns regarding the quality of RBK’s electrical works, together with a dispute about which contract terms were operative. To, therefore, continue insolvency proceedings in such circumstances would be “oppressive” and an inappropriate forum for settling the dispute. Instead, Alexander QC held, the dispute could be readily resolved either through adjudication or Court proceedings.
In conclusion, where a dispute is purely about money and late payment, issuing a statutory demand for payment can be a cost-effective and straightforward way to seek to extract a timely settlement. However, should a dispute resulting in unpaid monies actually concern “won’t pay” issues, as was the case in Breyer, then the Court has made clear that the proper forum to seek resolution is adjudication or litigation. It appears as though the Court has one eye on seeking to dissuade parties from using the commercial threat of a winding-up petition in circumstances where there are more substantive issues to be ventilated.
Adjudication is a prescribed “fast track” procedure designed to settle disputes arising from a construction contract. Adjudication is available to all parties to a construction contract unless one of the contracting parties is a residential occupier or another exclusion is applicable. Statutory adjudication was introduced by the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”), with the Scheme for Construction Contracts Regulations 1998 (the “Scheme”) providing the procedural fall back in the event that the construction contract in question does not contain all of the adjudication provisions of the Construction Act.
Pursuant to the Construction Act, any party to a construction contract has the right to refer a dispute to adjudication. Typically, adjudication will last only 28 days, although it is possible for the parties to extend this period by agreement.
Under the Scheme, the parties appoint an adjudicator to consider the issues in dispute, with the decision treated as interim-binding (unless the construction contract provides otherwise), meaning an adjudication decision is binding until finally determined by legal proceedings, arbitration or agreement. A successful party will most commonly seek to enforce an adjudicator’s decision in the Technology and Construction Court.
Rosenblatt offers expertise on all forms of construction disputes, including adjudication and arbitration, as well as court proceedings in complex and multijurisdictional litigation, supported by its Dispute Resolution team. The firm has extensive experience in the Technology and Construction Court. Rosenblatt’s Construction and Projects team also provide expert advice on non-contentious construction matters, working closely with its Real Estate department. For more information, please contact Rosenblatt’s Construction and Projects team.
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