SG South Limited v (1) King's Head Cirencester LLP, (2) Corn Hall Arcade Limited
Case reference:
[2009] EWHC 2645 (TCC)
Thursday, 29 October 2009
Key terms: Fraud – Stay – Insolvency
King’s Head employed SG South to do works at two sites. The contract was an amended JCT Standard Form of Management Contract, 1998 edition.
SG South had only been incorporated a few months prior to entering into the contract and had little or no trading record. An arrangement was reached whereby King’s Head would employ and pay some of the works contractors engaged on the project.
A number of disputes arose between the parties and SG South referred two disputes to adjudication. The first related to the extent to which SG South had in fact been paid the certified sum from Interim Certificate No. 8. The first adjudicator decided that SG South had been paid the certified sum, either directly or by virtue of payments made on its behalf to Works contractors. However, some interest was due to SG South because of late payments.
The second related to the non-payment of Interim Certificate No. 14. In its Response King’s Head raised allegations of fraud against SG South, which SG South denied. The second adjudicator found that in the absence of payment and adequate withholding notices issued by King’s Head, monies were due to SG South, and that to decide on the issue of fraud went beyond his jurisdiction.
King’s Head did not pay the amounts and resisted enforcement on the basis that:
1 There was a strong prima facie case that SG South had behaved fraudulently on this project and another;
2 The court should not permit itself to be used by a party that had behaved fraudulently to enforce claims under contracts;
3 Within a few weeks of the hearing the parties would be able to agree the final account that would show substantial monies owed by SG South to King’s Head, therefore it was inappropriate to allow SG South to enforce these decisions; and
4 A number of circumstances existed, including the aforementioned and the actual or impending insolvency of SG South, which should lead to a stay of execution on any judgment against King’s Head.
Mr Justice Akenhead identified in his judgment the basic propositions regarding fraud that can be formulated in the context of adjudication enforcement decisions:
“20. …
(a) Fraud or deceit can be raised as a defence in adjudications provided that it is a real defence…
(b) 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.
(c) A distinction has to be made between fraudulent behaviour, acts or omissions which were or could have been raised as a defence in the adjudication and such behaviour, acts or omissions which neither were nor could reasonably have been raised but which emerge afterwards. In the former case, if the behaviour, acts or omissions are in effect adjudicated upon, the decision without more is enforceable. In the latter case, it is possible that it can be raised but generally not in the former.
(d) Addressing this latter case, one needs to differentiate between fraud which directly impacts on the subject matter of the decision and that which is independent of it… Whilst matters in the first category can be raised, generally those in the second category should not be. The logic of this is that it is the policy of the 1996 Act that decisions are to be enforced but the Court should not permit the enforcement directly or at least indirectly of fraudulent claims or fraudulently induced claims… fraud which does not impact on the claim made upon which the decision was based should not generally be deployed to prevent enforcement.
The court considered and rejected King’s Head’s arguments on the basis that:
1 There was no clear and unambiguous evidence that the adjudicator’s decisions were procured by fraud. Both decisions related to allegedly unpaid certificates; the first adjudication was a case of SG South being unable to prove that it had not been paid; the second was that the unpaid certificate had to honoured because so-called “abatements” to the amounts certified had not been raised by way of an appropriate withholding notice. Furthermore, what allegations of fraud were made were not in relation to nor did they impact on the claims allowed by the adjudicators.
2 There was little or no prospect of the parties agreeing the final account within a few weeks of the hearing, or even at all. Furthermore, there was no authority permitting the court to defer enforcement on the possibility that some other disputes would imminently be resolved which might alter the balance due between the parties. It would be wrong, in principle, to permit this.
3 Following the principles of Wimbledon v Vago, whilst SG South was in financial difficulty, it was no worse off than when King’s Head took the risk of entering into the contract with it. Additionally, the present financial difficulties of SG South were more than likely to have been significantly caused or contributed to by King’s Head’s failure to pay the sums awarded by the adjudicators.