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Direct payments to sub-contractors and the routes to recovery

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In Nobiskrug GmbH v Valla Yachts Limited [2019] EWHC 1219 (Comm), the Commercial Court considered the attempt of an owner to recover payments that it had made directly to a third party supplier (that had contracted with the yard) during the construction of a superyacht. The Commercial Court stressed the importance of establishing that the sums claimed by the third party suppliers were a result of a breach of Nobiskrug’s obligations and remitted the case back to the arbitration tribunal for further consideration.

Background

This case concerned an appeal to the Commercial Court from an arbitration award relating to claims and counterclaims arising out of a construction agreement for a superyacht (the “Yacht”) between a German shipyard, Nobiskrug GMBH (the “Builder”) and Valla Yachts Limited (the “Owner”) dated 29 March 2012 (the “Agreement”). The Yacht was delivered on 27 January 2017.

Under the Agreement, the Builder was responsible for the co-ordination, project management and supervision of third party suppliers (the “Suppliers”). Various claims were made by the Suppliers to the Builder for extra payments and a number of these were rejected by the Builder. With the threat of the Suppliers downing tools and stopping work on the construction, the Owner paid various sums (some of which were under reservation) to the Suppliers.

The Tribunal’s findings

In the arbitration, the Owner claimed that the Builder was in breach of its obligations to project manage the build and one of the issues was whether the Owner was entitled to recover the payments made to the Suppliers (either on the basis of a restitutionary claim for unjust enrichment, or for damages resulting from the Builder’s breach of its project management obligations).

The Tribunal found that:

  1. The Owner was not entitled to recover payments made to the Suppliers on a purely voluntary basis unless it could establish that the Builder was obliged to make the payment to the Suppliers; and
  2. Where payments were made by the Owner subject to a reservation of rights (in relation to the Builder’s liability for the payments to the Suppliers being established at a later date), the Owner was entitled to recover those amounts.

The Tribunal also found that the Builder was in breach of its project management obligations and that the Owner would be entitled to damages “provided that [the Owner] can show that the project management failures we have found were an effective cause…” of the additional sums claimed by the Suppliers.

Although the Tribunal did not go on to actually determine the Builder’s liability in relation to the sums claimed by the Suppliers, it did order the Builder to reimburse certain payments made by the Owner.

Commercial Court

Permission to appeal (applied for by the Builder) was granted on the question of law that “[i]n relation to payments made by the [Owner] to third party Suppliers, whether, where the [Owner] has failed to establish that the Builder was under a liability to make payment to the Suppliers, the [Owner] is entitled to recover those sums from the Builder in restitution, solely on the basis that it made those payments subject to a reservation of rights”.

The Builder argued that the Tribunal erred in its approach because it had not made a finding on the Builder’s liability to pay the Suppliers and, therefore, the mere inclusion of a reservation of rights by the Owner when paying sums to the Supplier could not give rise to an obligation for the Builder to simply repay the Owner (without a finding on the Supplier’s entitlement to such sums).

In considering the issues, Sir Ross Cranston (sitting as a High Court Judge) recognised the extremely difficult position that the Owner was put in by the claims from the Suppliers (and the threats to stop work) but also noted that issues of liability of such payments were never referred to dispute resolution.

Sir Ross Cranston considered that the premise of the question of law (for which permission was given) was false and he stated that: “In my view it cannot be said in light of the Tribunal’s findings that it determined that [the Owner] was entitled to payment of the sums it had paid [to the Suppliers] simply on the basis that it made them subject to a reservation of rights.” He went on to say that “What the Tribunal said…must be read in context. The Tribunal concluded…that [the Owner] was not entitled to recover payments made to Suppliers on a purely voluntary basis unless it could establish that [the Builder] was obliged to make them under an Approved Contract…However, that left open the Tribunal’s finding’s on [the Builder’s] liability.

In relation to whether the Owner had a valid restitutionary claim, it was noted that the Tribunal’s analysis on unjust enrichment was not spelt out completely on the face of the Award and that the Tribunal had not considered whether the project management failures were an effective cause of the sums claimed. Therefore, allowing the appeal, Sir Ross Cranston considered it appropriate for the issues to be remitted to the Tribunal for further consideration.

Comment

It is not unusual for disputes over the payment of sub-contractors to arise in construction and other projects and the owner of a newbuild vessel can find itself in a difficult position if a sub-contractor threatens to terminate or suspend work pending payment. This case highlights the perils of making direct payments to sub-contractors (engaged by a main contractor) during the course of a contract, in order to prevent any delay, and the potential difficulties in recovering sums paid.

However, although one of the reasons for remitting the award to the Tribunal was because the Tribunal’s analysis of the unjust enrichment claim was not clear on the face of the award, this case does provide some encouragement that a claim in unjust enrichment may be a possible way of recovering such sums.

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

David Choy

David Choy Managing Associate

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