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Civil Fraud and Summary Judgement

Author: Nicola Sharp  23 May 2023
3 min read

Nicola Sharp of Rahman Ravelli examines the judicial treatment of summary judgment in civil fraud claims

The issue of fraudulent misrepresentations inducing a party to enter into a share purchase agreement once again came before the court in Clearcourse Partnership & Anor v Jethwa & Ors [2023] EWHC 1122 (Ch)

On 11 May 2023, the High Court handed down its decision on an application for summary judgment and strike out for deceit or fraudulent misrepresentation.

The case

The claimant, ClearCourse Partnership AcquireCo Limited (CPA), entered into a share purchase agreement (SPA) with the defendants on 30 September 2020. The defendants and sellers were Mr and Mrs Jethwa and Palymrya Holdings Management Limited. Pursuant to the SPA, CPA acquired the entire share capital of E-Novations (London) Limited (ENL).

ENL sells sophisticated electronic tills and Emperium Software for use in retail businesses. The claimants said that the defendants misrepresented that ENL owned the intellectual property (IP) in the Emperium Software when they did not. The IP in the Emperium Software was in fact owned by Epos Direct Europe Limited (EDE), a company in which Mr Jethwa was the sole director.  

The claimant’s case was that if ENL did not have the requisite IP rights in respect of Emperium Software, then Mr and Mrs Jethwa must be in breach of warranty. The breaches were deceitful in nature because Mr Jethwa knew the warranties were untrue and sought to ‘lull CPA into a false sense of security’. CPA sought summary judgment, or that the relevant paragraphs of the defence be struck out.

CPA said that ENL had conducted its business on a fundamentally flawed basis if it had no ownership or other rights in respect of the Emperium Software. ENL could not grant the licence to the customer to use the software. On that construction, certain warranties in the SPA were untrue.

The defendants’ position was that CPA had in fact acquired a list of customers under the SPA. ENL did not need any licence in respect of the relevant IP to supply machinery with the relevant software embedded therein and could freely change manufacturer if it wished.

Were the breaches deceitful?

The essence of the claimant’s case was that, in the course of the due diligence process, Mr Jethwa clearly represented that ENL owned the IP in Emperium Software. The representations came in the form of documents in the data room and communications that sought to clarify technical and general information.

The claimants alleged that the pre-SPA documents all pointed to the fact that ENL owned the IP. In all the pre-SPA documents there is not, they said, a single document that states or even suggests that the Emperium Software is not ENL’s, that ENL does not own the IP or that EDE does. It was argued that Mr Jethwa caused responses to be provided to the technical and general requests that were formulated on the basis that ENL did own the relevant IP – which were, as he must have known, wholly inconsistent with it being owned by EDE.

The defendants said that they told CPA that the IP was owned by EDE. Allegedly, the defendants disclosed this information in conversations with people from CPA. These conversations were determined by the judge to be lacking in particularity and too vague to hold weight. In any event, the technical and general requests were consistent with the claimant’s position that they thought ENL owned the IP. They would not have asked such questions if they were already aware that EDE owned the IP.

The court held that it was ‘simply not credible’ that CPA was informed in any operative way that EDE owned the IP, and ENL did not. The court recognised that it should act with caution before making a finding of deceit or fraudulent misrepresentation on an application for summary judgment or an application to strike out. However, on the hypothesis that ENL did not, and does not, own the relevant IP, the court was satisfied that there was no real prospect of Mr and Mrs Jethwa successfully defending the deceit/fraudulent misrepresentation allegation against them.

Analysis

Awarding summary judgment in cases that involve fraud is fairly unusual. Normally, it will take a full trial to uncover the fraud and to establish the requisite dishonesty. However, we have seen a few instances lately of the court’s willingness to award summary judgment in civil fraud cases.

The first was an application brought by a defendant in the case of Complete Facilities Solutions Ltd v Livingstone Consulting Ltd & Ors [2023] EWHC 571 (Ch). The allegations of fraud were struck out for lack of merit. Secondly, in Gupta & Anor v Shah & Ors [2023] EWHC 540 (Ch), accusations of illegality were “so woefully short of particularisation in respect of a very serious matter that it should not be allowed to stand.”

As HHJ Cawson KC alluded to in the present case, caution should be taken in awarding summary judgment and strike out in cases involving fraud, as “experience teaches us that on occasion apparently overwhelming cases of fraud and dishonesty somehow inexplicably disintegrate.” (Sir Igor Judge PQBD in Wrexham Association Football Club v Crucialmove ITD [2006] EWCA Civ 237)

But in these cases, the High Court has demonstrated its willingness to take bold decisions for summary judgment and strike out, where it can see a clear rationale. 

Nicola Sharp C 09983

Nicola Sharp

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nicola.sharp@rahmanravelli.co.uk
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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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