Debts in paradise

It is often the cases that do not raise complex legal issues, but illustrate the pitfalls that can be encountered in construction projects, that turn out to be the most interesting and illuminating. The Technology and Construction Court (TCC) decision in Harlequin Property (SVG) Ltd & Anor vs Wilkins Kennedy [2016] is a prime example. This is no ordinary case. Its stark and colourful facts provide an illustration of how developments can go horribly wrong in the absence of clear contractual arrangements and – crucially – proper financial controls.

Harlequin was a developer of a luxury resort at Buccament Bay in St Vincent and the Grenadines. This project was funded by deposits from investors. A total of 1,900 deposits were taken. Not only were these not ring-fenced, but the number of deposits, the judge found, substantially exceeded the number of properties that were realistically going to be built at the resort. The judge described the business model in frank terms: as one that “might be said to bear the hallmarks of a serious and significant scam”.

Other aspects of the development that emerge from the judgment are equally startling. The firm did not own, and had no permission to build on, parts of the intended site. Indeed, the owners of one key piece of land had refused to sell.

The judge described the business model in frank terms: as one that ‘might be said to bear the hallmarks of a serious and significant scam’

Harlequin had terminated the engagement of its first contractor in mid-2008 for various reasons. It then engaged ICE Group to complete construction of “phase 1” of the resort. For a project of this size and value it was a remarkably loose arrangement. At no stage was there any formal written contract and no detailed agreement was reached as to the scope of works, the monitoring of those works or their valuation. Instead, ICE received payment of a fixed amount every week, irrespective of the work it had actually carried out. This weekly amount escalated substantially: it rose from $125,000 (£101,200) per week in September 2008, to $364,245 (£ 293,900) per week by March 2009.

The judge found that a significant portion of the responsibility for this arrangement was due to Harlequin’s accountant and business adviser, Wilkins Kennedy, which negligently advised Harlequin not to have a contract with ICE and failed to advise that a contractually binding system of valuation was needed to clarify what the agreed scope of works was, and that the payments being made tallied with the value of the work. The judge found Harlequin itself was also partly to blame: it had received advice on the importance of proper valuation from another source, but failed to protect itself by ensuring there was a proper valuation process and that it was being followed.

In any project, the importance of clear, arms-length contractual arrangements also extends to professionals. That, too, was absent here. One unusual feature of the case was that Wilkins Kennedy, while acting for Harlequin, was advising ICE on same project. A close relationship developed between ICE’s principal and one of Wilkins Kennedy’s partners, culminating in a stag weekend in Monaco shortly before the relationship between Harlequin and ICE collapsed. WK was on both sides of this bitter dispute.

No doubt a trip to the sunny climes of St Vincent and the Grenadines was a great burden on the otherwise piña colada-less life of a TCC judge

Predictably, the project went horribly wrong. The judge found that, during the final disintegration of relations between Harlequin and ICE, the contractor no longer cared or was interested in completing the resort. Things ended with the termination of ICE’s engagement, ICE blocking access to the site with cranes and lorries and refusing to leave, and Wilkins Kennedy withdrawing its services from Harlequin before reporting it to the Serious Organised Crime Agency and the Serious Fraud Office.

By the time its appointment was terminated, ICE had been paid $52m (£42m) for work that the judge determined to be worth just $24.7m (£20m). This overpayment was attributable, in part, to Wilkins Kennedy’s failure to advise on the need for a written contract, and binding mechanism for valuing the works. But the judge decided the loss recoverable from Wilkins Kennedy should be reduced by 50% from $23.2m (£19m) to $11.6m (£9m) due to Harlequin’s contributory negligence in ignoring the advice of others. The judge also made no attempt to hide his concern that recovery might be for the benefit of the investors in the resort, who had lost significant sums. He proposed the sums awarded be paid into an escrow account while the competing interests of Harlequin, its liquidators and its creditors were resolved. This was a novel solution to a situation that must have caused investors considerable heartache.

The decision also demonstrates the great prowess and flexibility of the TCC. No doubt a trip to the sunny climes of St Vincent and the Grenadines (both for a site view and to take oral evidence from local witnesses) was a great burden on the otherwise piña colada-less life of a TCC judge, but the promise of a 900-paragraph judgment to write on his return will surely have lifted his spirits. Specialist knowledge of construction projects, and what leads them to go wrong, is essential in many large disputes. That knowledge, and its ability to master huge quantities of documents and complex facts efficiently, is what makes the TCC unique.

Sir Robert Akenhead is an arbitrator, mediator, DRB member and adjudicator at Atkin Chambers. From 2010-2013 he was judge in charge of the Technology and Construction Court. He was assisted in this article by Omar Eljadi, a barrister at Atkin Chambers