Articles

Abstract

Having a judgment against a contractor for breaches of construction contract, including abandonment of the project site, may not always result in collecting payment pursuant to the judgment. This article will examine the current case law with regard to enforcement of judgment through garnishee applications against main contractors, and an unreported case wherein the authors were the lead counsel in obtaining a final garnishee order against the judgment debtor’s main contractor.

Introduction

1. The garnishee application is a form of execution for the purposes of a successful plaintiff to enforce his judgment against debts owed by third persons to the defendant. A third person who owes debts to a defendant is then designated as the garnishee in a garnishee application.
2. After obtaining judgment against a defendant, a plaintiff may have difficulty in obtaining payment of the judgment sum from the defendant owing to a myriad of reasons. In a garnishee application, the plaintiff steps into the shoes of a defendant, and claims against the debtors of the defendant.
3. This article will examine the legal burden of proof required to be discharged in order to convince the Court to make a provisional garnishee order ("PGO") into a final garnishee order and order for payment to be made from the garnishee to the plaintiff.

Background to unreported case High Court case

4. For ease of reference, the parties in the unreported High Court case shall be named Plaintiff A, Defendant B, Garnishee C.
5. Plaintiff A had obtained a judgment against Defendant B, and was unsuccessful in the enforcement of the judgment against Defendant B by way of garnishee applications against banks in respect of defendant B’s credit balance.
6. Plaintiff A had knowledge that Defendant B was the sub-contractor of Garnishee C for separate construction contracts and sought to garnish Garnishee C for debts owing to Defendant B pursuant to progress claims for the work done by Defendant B.
7. Plaintiff A successfully applied to Court for a PGO against Garnishee C, compelling Garnishee C to Court.
8. Plaintiff A served the PGO on Garnishee C on 25 July 2019. This date was deemed to be key to the eventual determination by the Court, which will be elaborated on later.
9. At the first show cause hearing, Garnishee C admitted that they had several construction contracts with Defendant B, and some outstanding payment certificates which had yet to be paid. However, according to Garnishee C, these contracts with Defendant B were already terminated and Garnishee C had set-off the damages due to the termination against the outstanding payment certificates, resulting in Defendant B owing a debt to Garnishee C, instead of Garnishee C owing a debt to Defendant B
10. The Court then ordered for the following issues (amongst other issues) for trial:

10.1.  Whether there were any debts due or accruing due as at the date of service of the PGO (the “Debts Due”); and

10.2.  Whether the Garnishee made any deductions and/or set-offs against the Debts Due, and if any, were these deductions and/or set-offs legally permissible.

Debts due or accruing due

11. A garnishee application is essentially to ask the Court to “order the garnishee to pay the judgment creditor the amount of any debt due or accruing due to the judgment debtor from the garnishee”¹. Any debt due or accruing due, would also include debts which are existing now and payable in the future.²
12. A debt due or accruing due, does not include amounts which are contingent debts, which are debts that become “payable only when the contingency happens, and ex hypothesi that may or may not happen”.³ Essentially this would mean that debts that are reliant on a certain factual matrix to arise would not come under the category of “any debt due or accruing due”. There is thus a distinction, “between contingent debts on the one hand and debts which are presently existing though payable in the future on the other, of which only the latter are captured within the meaning of the phrase “any debt due or accruing due”.⁴
13. The key issues to determine would then be:

13.1. Whether an amount is a contingent debt (i.e. requiring a further step to be taken by either party); or

13.2.  Whether an amount is a debt due or accruing due (i.e. presently due and, or presently existing though payable in the future).

14. This would require referencing the clauses in the contract between the garnishee and the defendant, against the time at which the PGO is served.
15. If there were indeed amounts in the form of debts due or accruing due as at date of the service of a PGO, the next step would be to examine whether there were any legally permissible set-offs.

Law of set-off

16. The law of set-off may be generally examined in terms of:

17.1. Legal set-off;

17.2. Contractual entitlement to set-off; and

17.3. Equitable set-off.

Legal set-off

17. A legal set-off is a tool which allows for claims entirely unconnected to each other to be set-off against each other. This, however, would not be helpful to a garnishee in garnishee proceedings, as it is not a self-help remedy.⁵
18. The legal set-off is a defence which is only brought about when a court determines it as such, upon the determination that the conditions of a legal set-off have been satisfied. A legal set-off would also have no effect prior to such a determination by the court.
19. A legal set-off would thus not have affect the determination in whether there were any debts due or accruing due from the garnishee to a defendant as at the date of service of a PGO.

Contractual entitlement to set-off

20. A contractual entitlement to set off debts due or accruing due from a garnishee to a defendant would differ on a case-by-case basis. In the unreported case, for different contracts between Garnishee C and Defendant B, there were different requirements for a contractual entitlement to set-off to be met before that entitlement could be successfully invoked.
21. By way of example, in the unreported case, there were contractual clauses to the effect whereby the garnishee must establish the following requirements before the contractual set-off could be invoked:

21.1.  There must be a sum due or owing from Defendant B to Garnishee C, including the amount of any claim for loss and/or expense and/or damage which has been incurred by Garnishee C by reason of any breach of or failure to observe the provisions of the construction contract between Defendant B and Garnishee C;

21.2. The amount of set-off must have been quantified with reasonable accuracy; and

21.3. Garnishee C must have given Defendant B notice in writing specifying its intention to set-off the amount quantified and the grounds on which such set-off was claimed to be made.

22. In the unreported case, Garnishee C’s set-off for damages due to the termination was found not to have been quantified with reasonable accuracy, owing to Garnishee C not knowing whether there were any defects with the works done by Defendant C as at the date of service of the PGO, amongst other reasons.
23. Further, the purported notice in writing specifying its intention to set off amounts in the form of a Statement of Final Account signed by both Garnishee C and Defendant B was only agreed to after the date of service of the PGO, and thus did not satisfy the requirements under the contract.
24. The defence of a contractual entitlement to set off thus failed in the unreported case.

Equitable set-off

25. An equitable set-off is a substantive defence, and may be used by a garnishee to set off sums due to a defendant which have crystalised before the date of service of a PGO.
26. The basis for an equitable set off is that “it is unconscionable for the creditor, even before judgment, to assert that moneys are due to it from the debtor, or to proceed on the basis that the debtor has defaulted in payment, if and to the extent that circumstances exist which support an equitable set-off.”⁶
27. To successfully invoke an equitable set-off, a debtor must show that the cross-claim:⁷

27.1. Is so closely connected with the creditor’s demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim;

27.2.  The right to equitable set-off is not excluded by contractual terms; and

27.3. It is not a claim for freight in voyage charters, actions on dishonoured bills of exchange and certain actions on bank guarantees.

28. Further, the party seeking to invoke the defence of equitable set-off must quantify their loss by means of a reasonable assessment made in good faith. The High Court in the case of Hiap Tian Soon Construction Pte Ltd and another v Ho/a Development Pte Ltd and another [2003] 1 SLR(R) 667 elaborated upon this requirement, at [38]:

29. In the unreported case, Garnishee C had successfully invoked an equitable set-off with regard to a cross-claim against Defendant B for materials and fittings Defendant B had used to complete certain works for Garnishee C. The amount was quantified in good faith because it reflected the actual sum paid by Garnishee C on Defendant B’s behalf for the materials and fittings. An important point that was taken into consideration by the Court in the unreported case was that the amount had already been crystalised before the date of service of a PGO.

Whether the Court should make the PGO final

30. The last defence that a plaintiff would have to overcome, is to convince the Court that making the PGO final is not unjust or inequitable “such as, if it would affect the interests of other persons, prejudice the rights of other creditors, or cause the judgment debtor to be liable for the same debt twice ⁸”.
31. According to the case of Yugoimport, the legal burden to show cause as to why the Court should exercise its discretion not to make the order absolute lies with the garnishee or the judgment debtor, and not the plaintiff:
32. It would be for a garnishee to show that:

32.1. making the order absolute would affect the interests of other persons;

32.2.  prejudice the rights of other creditors; or

32.3.  cause the judgment debtor to be liable for the same debt twice.

33. In the reported case, Garnishee C did not manage to show how any of the requirements in the case of Yugoimport was fulfilled. An example where a garnishee might succeed in showing how any of the Yugoimport requirements might be fulfilled, would be where a judgment debtor / defendant was in liquidation and/or had winding up proceedings brought against them. This will be elaborated below.

Insolvency of a defendant

34. Finally, a Court would generally be justified in exercising its discretion to refusing to make a PGO final if the defendant in question was insolvent.
35. The case of Asia Commercial Finance Ltd v Udai [1991] 2 SLR(R) 372 (“Asia Finance”) in affirming the case of Roberts Petroleum Ltd v Bernard Kenny Ltd (in liquidation) [1982] 1 All ER 685 on the seven principles for making a charging order absolute, and applying it in the course of analysing a whether to make a garnishee order absolute, at [14] stated:

36. In the unreported case, Defendant B was not insolvent, and it was open for Garnishee C to pursue a claim against Defendant B if it wished to.
37. The Court then made the PGO final, and ordered Garnishee C to pay the debts due or accruing due to Defendant C, to Plaintiff A.

Conclusion

38. Some practical points to note for would be plaintiffs, defendants and garnishees are as follows:

38.1. The date of service of PGO is key when garnishing a separate main contractor; and

38.2. Contractual clauses should be strictly adhered to if a party wishes to set off any amounts due or accruing due from another party.

39. In the current economic climate, it is even more imperative for successful plaintiffs to obtain the fruits of their litigation through the correct enforcement procedures allowed under law.
40. A successful plaintiff would thus have to weigh the chances of success amongst the different procedures of enforcement, and decide which procedure would have the highest chance of success. A garnishee application is a powerful tool for successful plaintiffs to enforce a judgment in their favour, and should be used with precision and after obtaining as much information as possible. Information about possible debtors of a judgment debtor, and the timing of the service of a PGO will prove key to obtaining a final PGO in favour of the plaintiff.

Contributed by:

Tay Yi Ru, Derek - Associate, Chong Chia & Lim LLC;

Gan Siu Min Cheryl - Associate, Chong Chia & Lim LLC