SG South Limited v Kings Head Cirencester LLP & Corn Hall Arcade [2009] EWHC 2645

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

summary

(1) There is a distinction between an adjudication taking place where an allegation of fraud is raised (or could be raised), and where fraud only comes to light after an adjudication has taken place.  In the latter case, fraud (or a strong allegation of fraud) could provide a basis for refusing to enforce an adjudicator’s decision.  In the former case it generally will not. (2) A stay of execution on grounds of the alleged impecuniousity of the recovering party will not be made where the financial position of the recovering party was the same or very similar to its financial position at the time the relevant contract was made or where the financial difficulties faced were due in significant part to the paying party’s failure to pay the sums that were awarded by the adjudicator.

Technology and Construction Court, Mr Justice Akenhead

Facts

The defendant developer (“King’s Head”) employed the claimant contractor (“South”) to carry out works at a site in Cirencester.  The parties fell into dispute.  South sought the enforcement of two adjudicators’ decisions, the cumulative outcome of which was a net payment of some £90,000 plus interest to South.  In their submissions relating to the second adjudication, King’s Head made allegations of fraud against South on the basis of which King’s Head claimed that abatements should be made from the sums that had been certified in favour of South.  The second adjudicator held that in the absence of withholding notices it was not open to King’s Head to resist payment of the certified amounts. King’s Head refused to pay out on the adjudicators’ decisions and South sought enforcement by way of summary judgment.  King’s Head resisted enforcement on the grounds of alleged of fraudulent conduct on the part of South, including the alleged fraud it had relied upon in the second adjudication.  In addition, King’s Head argued that the parties were in the process of agreeing the Final Account, and that this would show that South owed substantial sums to King’s Head.  King’s Head also alleged that South were in considerable financial difficulties.

The issues

The Court addressed the following issues:

  • Whether or not a credible case for fraud had been raised such as to prevent the enforcement of the adjudicators’ decisions.
  • Whether the possibility that the parties would within a few weeks reach an agreement that would show an aggregate balance due from the successful party to the adjudication to the paying party meant that enforcement of the adjudicators’ decisions should be deferred.
  • Whether, in any event, the financial position of South was such that there should be a stay of execution of any judgment against King’s Head. 

The judgment

The Court held:

  • Fraud or deceit can be raised as a defence in adjudications provided that it is a real defence to whatever the claims are.
  • If fraud is to be raised in an effort to avoid enforcement or to support an application to stay execution of the enforcement judgement, it must be supported by clear and unambiguous evidence and argument.
  • There is a distinction between an adjudication taking place where an allegation of fraud is raised (or could be raised) as a defence, and where fraud only comes to light after an adjudication has taken place.  In the latter case, fraud (or a strong allegation of fraud) could provide a basis for refusing to enforce an adjudicator’s decision.  In the former case it generally will not. 
  • In the case of fraud which comes to light only after the adjudication, a further distinction needs to be drawn between fraud which directly impacts on the subject matter of the decision and that which is independent of and has no effect upon it. Whilst matters in the first category can be raised, generally those in the second category should not be.  Fraud which does not impact on the claim made upon which the decision was based should not generally be deployed to prevent enforcement.
  • On the facts of this case, a credible case for fraud on any count had not been raised in evidence or argument such that it could be deployed to defeat enforcement.
  • There is no authority which permits the Court to defer enforcement because there is a possibility of an imminent resolution of other disputes between the parties which might alter the overall balance between the parties. Even if there was any such allowable practice, on the facts of this case, there was little chance of agreement regarding the final account within the next four to six months.
  • Summary judgment would therefore be awarded in favour of South.
  • With regard to the stay application, South was undoubtedly in some financial difficulty. Amongst other things:
    • There were no up to date management accounts. The latest draft accounts showed a modest profit after tax of £130,000 on a turnover of £1.6million. Cash at the bank was said to be less than £2,000 and the company had more than £90,000 of unpaid tax.
    • The other contracts or work which South said that it had were fairly minor or illusory. There was also evidence that another company had been set up with a similar name, which it was said by King’s Head suggested that SG South would be allowed to slip into dissolution.
    • There were two unsatisfied judgments against South, the largest of which was for £6,662 and was being repaid at only £100 per month.
  • However, the financial position of South was the same or very similar to its financial position at the time the relevant contract was made.
  • The financial difficulties faced were due, either wholly, or in significant part, to the unjustified failure of King’s Head to pay the sums awarded by the adjudicators. Having regard to all of the facts, the court said that the injection of some £90,000 plus whatever it had paid to its solicitors in relation to the enforcement proceedings into the cash flow would give a much greater chance of continuing with its business.
  • Accordingly there would be no stay of execution.

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

 

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