REUTERS |

Fraud and adjudication: a new front

Anyone with a substantial adjudication practice will have experience of a lay client asking these questions (or some version thereof):

“Why can’t we call them crooks? They [the other party] are clearly fraudulent. Why can’t we say so?”

As a legal practitioner you have to patiently explain that fraud can only be pleaded on specific instructions and must be supported by prima facie evidence. However, despite the reluctance of lawyers to plead fraud, it is a fact that fraud has always been an issue in adjudication and in these days of the “smash and grab” adjudication, Coulson J’s (as he then was) decision in Grove Developments Ltd v S&T (UK) Ltd notwithstanding, alleging fraud is an increasingly attractive argument of last resort to avoid making payment following an unfavourable adjudication decision.

In Gosvenor London Ltd v Aygun Aluminium UK Ltd, Fraser J had reason to consider the relationship between fraud and adjudication. In a case with some extraordinary facts, he restated established principles and also made some new law by expanding the ways in which allegations of fraud can be deployed in an attempt to avoid paying sums awarded by  an adjudicator to a party suspected of questionable behaviour.

Gosvenor London Ltd v Aygun Aluminium UK Ltd

This case is typical in many respects in that it required the court to resolve the tension between the legislative policy behind the introduction of statutory adjudication, the rendering of a quick and temporarily binding decision and the long established public policy of not allowing a party to receive the benefits of fraudulent activity.

Gosvenor and Aygun were parties to a contract entered into in May 2016 for Gosvenor to perform certain cladding and other associated works for the installation of a facade at the Ocean Village Hotel in Southampton. Aygun was itself a sub-contractor to the main contractor for the project (Bouygues (UK) Ltd). The contract was described as a “Secondary Sub-Contract” and was for installation only, with the design of the installation and supply of all necessary materials being provided by Aygun. The contract sum was approximately £440,000 and the works were intended to run from 20 June 2016 to 11 November 2016.

Disputes arose between the parties, which Gosvenor referred to adjudication on 29 September 2017. Gosvenor requested the appointment of an adjudicator from TECBAR and Mr Whitfield was nominated and confirmed his willingness to act to the parties. Mr Whitfield confirmed that no jurisdictional objections were taken by the parties. He conducted the reference and gave his decision deciding that the amount due to Gosvenor in respect of the sum claimed was £553,958.47 plus VAT.

Fraud allegations raised for first time

During the course of the adjudication Aygun did not raise any issues regarding fraud. However, at enforcement it served a Defence in which allegations of fraud were raised for the first time. FraserJ addresses these allegations at paragraph 8 of his judgment:

“The allegations of fraudulent invoicing were set out in a great number of paragraphs between paragraphs 23 and 43 of the Defence. There is no one particular section of that pleading that sets out ‘Particulars of Fraud’ or something similar, which in the usual way is to be expected, if fraud is being alleged. Fraud must be properly particularised. However, upon analysis, the complaints are clear and are that the sums invoiced by Gosvenor for operatives simply could not reflect the amounts due as a result of an ‘enormous discrepancy’ in sums invoiced to Aygun, and works actually done or labour actually provided. A valuation assessment had been performed by Aygun that showed that the very maximum of £100,000 of labour costs could and/or should have been invoiced, rather than the figure of over five times that. Indeed the sums claimed in the adjudication were for the period from 12 November 2016. range of ‘proper’ labour costs is said to have been between £20,000 and £100,000. By 15 May 2017 (the date of the Completion Agreement) the works were 97% completed. It was said by Aygun that Gosvenor ‘deliberately slowed progress of the works to further increase its opportunity to overcharge Aygun’ and that Mr Popa, the controlling mind of Gosvenor ‘was entirely aware that was the position but intended to obtain as much illicit profit from the remaining months of the Ocean Village Project as he could’. The competence of the Gosvenor operatives was said to have been misrepresented – this was said to be an additional or aggravating factor in the fraud. The conclusion was stated to be that ‘Aygun must have been fraudulently invoiced for at least £300,000’.”

Aygun also served several witness statements that provided the factual basis for the allegations of fraud. Gosvenor did not respond to the pleading or the witness statements and did not address the issue of fraud at all until after receipt of the draft judgment when it sought to adduce evidence for the first time.

In addition to resisting enforcement, Aygun also sought a stay of execution in the event that Gosvenor was successful in enforcing the decision.

In dealing with Aygun’s allegations and the extent to which they could be relied upon to resist enforcement, Fraser J reviewed the case law. He quoted the four principles identified by Akenhead J in SG South Ltd v Kingshead Cirencester LLP, principles that were applied and followed by Ramsey J in  GPS Marine Contractors Ltd v Ringway Infrastructure Services Ltd  and were expressly approved by Jackson LJ in Speymill Contracts Ltd v Eric Baskind:

  • Fraud or deceit can be raised as a defence in adjudication provided that it is a real defence to whatever the claims are. It is open to parties in adjudication to argue that the other party’s witnesses are not credible by reason of fraudulent or dishonest behaviour.
  • If fraud is to be raised in an effort to avoid enforcement or to support an application to stay execution of the enforcement judgment, it must be supported by clear and unambiguous evidence and argument.
  • A distinction has to be made between fraudulent behaviour, acts or omissions that 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 emerged 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.
  • Addressing this latter case, one needs to differentiate between:
    • fraud which directly impacts on the subject matter of the decision (for example, where it is later discovered that the certificate upon which an adjudication decision is based is discovered to have been issued by a certifier who has been bribed or by a certifier who has been fraudulently misled by the contractor into issuing the certificate by a fraudulent valuation); and
    • that which is independent of it (for example, fraud on another contract or cross claims arising on the contract in question that can only be raised by way of set off or cross claim).

While 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 Construction Act 1996 policy that adjudicators’ 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. Put another way, enforcement should not be used to facilitate fraud. Fraud that does not impact on the claim made (and upon which the decision was based) should not generally be deployed to prevent enforcement.

Applying those principles to Aygun’s attempt to resist enforcement, Fraser J determined that Aygun’s allegations of fraud could have been raised during the adjudication or that it did not directly impact on the subject matter. Therefore, it was not open to it to rely on such allegations to resist enforcement.

Allegations sufficient to allow stay of execution

However, that was not the end of the matter. FraserJ determined that Gosvenor’s conduct was sufficiently suspect to justify granting Aygun’s application for a stay. The conduct was not just the allegations of fraud. Fraser J referred to Gosvenor’s failure to respond to the allegations of fraud until after the publication of the draft judgment and the inadequate explanations provided by Gosvenor for the discrepancies in its accounts.

In what is the ground breaking part of the decision, Fraser J expanded the list of factors to be considered when considering whether to grant a stay of execution in respect of the enforcement of an adjudicator’s decision. He added a seventh factor, which he described in the following way:

“If the evidence demonstrates that there is a real risk that any judgment would go unsatisfied by reason of the claimant organising its financial affairs with the purpose of dissipating or disposing of the adjudication sum so that it would not be available to be repaid, then this would also justify the grant of a stay.”

Fraser J made it clear that consideration of this factor is only likely to arise in a very small number of cases, and in exceptional factual circumstances. Furthermore a high test, comparable to the test applied to the granting of freezing orders, will be applied.

Conclusion

This judgment is ground breaking in extending consideration of fraud to an application to stay the execution of a judgment, and for this reason it is an important decision. In addition, the judgment is worthy of reading because it addresses a number of issues including:

  • The “almost routine” practice of seeking to alter the court’s conclusions following the publication of draft judgments.
  • The importance of serving evidence as directed by the court in enforcement proceedings.

These matters are beyond the scope of this post, but it is recommended that practitioners consider carefully Fraser J’s comments.

Keating Chambers Abdul Jinadu

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: