Friday, June 28, 2019

Nobiskrug GmbH v Valla Yachts Ltd

[2019] EWHC 1219 (Comm)

The claimant, a German shipyard, Nobiskrug GmbH (“Nobiskrug”), was engaged by Valla Yachts Limited (“Valla”), as a main contractor in the project to build a super yacht. Under the contract, Nobiskrug was to “plan, execute, organise and project manage the Works in order to achieve the Target Delivery Date”

Nobiskrug, under the contract, was responsible for management of the subcontractors. As the works progressed, some of the main subcontractors issued substantial invoices for additional works such as acceleration or overtime. The subcontractors threatened to cease works or commence legal proceedings if the invoices were not settled. One, Ismotec, which was responsible for engineering and cabling, actually issued proceedings. Nobiskrug denied any responsibility for payments and argued that under German law, Ismotec had no right to additional payments. As Ismotec’s involvement was critical to the completion of the project and the works were suspended, Valla decided to make the payment in order to avoid further disruption and breakdown of business relations with Ismotec. Similar claims followed from other sub-contractors, which were also settled by Valla. These payments were made under various conditions and reservations with Valla expressly reserving their right to recover the payment from Nobiskrug.

Nobiskrug claimed that they were not responsible to repay these sums as the contract between the parties did not contain a direct payment clause.  A direct payment clause protects the employer in instances where monies are owed by the main contractor to the subcontractors – it enables the employer to pay the subcontractor directly and then request or deduct the payment from the main contractor. Valla found themselves in a difficult position as the payments they had made were in excess of €3,500,000. Consequently, Valla referred the matter to arbitration in order to recover the sums paid to the subcontractors. 

The Arbitration Tribunal noted that under the contractual arrangement between the parties, Nobiskrug was not liable for the repayments as the payments made by Valla were made on a voluntary basis. Further any claim in restitution failed as it was excluded by the contract. However, the Tribunal still found in favour of Valla, putting an emphasis on Valla’s reservation of rights and the fact that Nobiskrug had acted negligently in their management duties. Even though Valla had failed to demonstrate how the alleged failures in project management led to delays and subcontractor costs, the Tribunal found that Nobiskrug breached their contractual obligations by insufficient day to day project management.

Nobiskrug appealed to the court, in accordance with section 69 of the 1996 Arbitration Act, on the basis that the Tribunal had made an error in law in its finding, as Valla was unable to prove causation between subcontractor claims and Nobiskrug’s poor management. Mr Justice Cranston held that the fact that there existed a reservation of rights by Valla of sums paid to the subcontractors did not create an automatic right for recovery of sums from Nobiskrug. Valla was not entitled to recover payments made to suppliers on a purely voluntary basis unless it could establish that Nobiskrug was obliged to make them. Such right would only exist if Valla could establish that Nobiskrug was obliged to make the repayment under the contract. Here, the court recognised that Nobiskrug had failed in their management duties and had been unjustly enriched at Valla’s expense. Moreover, the court noted that Nobiskrug’s poor management and lack of reporting restricted Valla from “forming a proper assessment of whether the payments demanded were due and to manage their resolution effectively so as to minimize any disruption caused to the build”.  

However, the difficulty was that any analysis in unjust enrichment was not spelt out completely on the face of the Award. There was no finding that Nobiskrug’s project management failures caused Ismotec and some of the other suppliers, additional costs. The Tribunal said that Valla would be entitled to damages provided that it could show that the project management failures were an effective cause of any particular item of the costs claimed and that it would return to the issue as necessary. However, the Tribunal did not find it necessary to do so. As a result, because of the complexity and lack of clarity, the matter was referred back to the Tribunal for further consideration and assessment.

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