Practical Law

In SG South v King’s Head Cirencester & Anor, the contractor sought enforcement of two adjudicators’ decisions under a JCT management form of contract. The subject matter of both adjudications was the enforcement of interim payment certificates in the absence of any withholding notices issued by the employer. In both adjudications, the employer raised a defence of set off that included an allegation of fraud against the contractor. The contractor denied that it was guilty of fraud. The adjudicator decided that the issue of fraud fell outside his jurisdiction and failed to deal with it.

The contractor’s employment under the management contract was terminated and the final account process began. The contractor submitted a final account that the employer claimed was grossly exaggerated and demonstrably fraudulent.

At the enforcement proceedings, the employer accepted that the adjudicators’ decisions were enforceable, but defended the proceedings on the basis that:

• A stay of enforcement should be granted due to the contractor’s parlous financial position.
• The final account process would inevitably overturn the effect of the adjudicators’ decisions.
• The contractor had behaved in a fraudulent manner and the court should not permit itself to be used as a vehicle to allow a party guilty of fraud to enforce the decisions.

In his judgment, Akenhead J rejected the application for a stay, applying the principles in Wimbledon v Vago. He said the employer had entered into the management contract with its “eyes open” to the financial status of the contractor. He also rejected the right to set off the sums said to be due from the final account process, applying the principles in William Verry v Camden, that is, the parties are required to comply with an adjudicator’s decision and “one does not comply with an adjudicator’s decision which requires payment by not paying”.

Can fraud be raised as a defence in adjudication?

The court acknowledged that there was no authority assisting it on how to approach the allegations of fraud.

The contractor didn’t deal with the allegations at all. It simply said they were not relevant to the enforcement of the adjudicators’ decisions; they related to a final account exercise, which was not linked to the subject matter of the dispute that was adjudicated (namely payment of interim certificates 8 and 14).

Akenhead J (at paragraph 20) set out a few principles for future guidance on this issue:

• Adjudicators do have jurisdiction to consider allegations of fraud if those allegations are raised by way of defence.
• If the adjudicator determines the issue of fraud, the decision will normally be enforceable.
• If it later transpires that the decision was procured by a fraud (for instance, it was based on a certificate that was based on a fraudulent valuation), then the courts should not enforce the decision.
• If the alleged fraud is unconnected to the subject matter of the decision (for example, it relates to a different contract or project), the decision will remain enforceable.

Fraud and natural justice

Interestingly, the employer did not raise the argument that the adjudicator’s error in failing to deal with the issue of fraud was a breach of natural justice. Had it done so, it is submitted that this argument would have been defeated on the facts of this case. However, the adjudicator’s refusal to consider a valid defence, merely because it was put on the basis of fraud, may be a good ground for resisting enforcement. After all, a party is entitled to raise any arguments it chooses in its defence (Quartzelec Ltd v Honeywell Control Systems Ltd).

Tom appeared on behalf of the contractor at the enforcement hearing.