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“Fraud unravels everything”

The title of this post comes from Lord Denning’s infamous statement in Lazarus Estates Ltd v Beasley that:

“No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever…”

Lazarus was a landlord and tenant case, where one of the issues was whether the landlord had carried out repairs to the value that was being claimed from the tenant.

In my view, there are certainly parallels to be drawn with some of the adjudications that I’m seeing nowadays, where parties are arguing that an otherwise valid payment notice should not be complied with because of fraud.

Fraud unravels everything

I’m increasingly seeing parties claiming that interim payment notices contain amounts that relate to works that have not been completed, or to goods that have not been supplied, as alleged. This raises the question of whether this amounts to fraud or fraudulent misrepresentation. Although it is Lord Denning that is often quoted (as above), I think the words of Parker LJ are just as pertinent:

“… the real question in any case is whether repairs to the value specified have in fact been done, and that proof of fraud in the making of the declaration is merely proof of the quality of the act or its motive. Nevertheless, that quality, if proved, vitiates all transactions known to the law of however high a degree of solemnity.”

Let’s take an example

For ease, I’m going to suggest a simple example. In its interim application for payment number four, out of the total of £100,000 applied for, the contractor included a sum of £20,000 for works it had not finished. The employer and the contract administrator were unaware of this (please don’t question why this is) and so a payment notice was issued for the full £100,000 (less the usual deductions). No pay less notice was issued and the employer paid what was due.

We all know that section 110A of the Construction Act 1996 requires a payment notice to include the sum that the employer “considers to be or to have been due at the payment due date”. It is the same for a default payment notice under section 110B. In my example, can we truly say that the Act has been complied with if the contractor knows incomplete works are included in the interim application? And can we go so far as to say that the inclusion of the £20,000 is fraud or fraudulent misrepresentation?

What is fraud and fraudulent misrepresentation?

Fraud covers a wide range of activities involving dishonest or criminal conduct. In most cases, I’m sure it is obvious, once you know where to look. However, fraudulent misrepresentation may be more difficult to spot. It was defined more than 100 years ago in Derry v Peek as being a false representation that was made knowingly, or without belief in its truth, or recklessly as to its truth.

An action for fraudulent misrepresentation is founded on the tort of deceit. The Court of Appeal summarised the ingredients of that tort in Eco 3 Capital Ltd v Ludsin Overseas Ltd as:

  • The defendant makes a false representation to the claimant.
  • The defendant knows that the representation is false, alternatively, he is reckless as to whether it is true or false.
  • The defendant intends that the claimant should act in reliance on it.
  • The claimant does act in reliance on the representation and, in consequence, suffers loss.

Taking my simple example, it is certainly arguable that these four ingredients are present, and so you can see why parties are raising the issue.

But it’s not so easy, in practice

The burden of proving fraud is a high one and a number of cases have looked at what is necessary. This includes Akenhead J in SG South Ltd v King’s Head Cirencester LLP, where he made it clear that you can allege fraud in adjudication proceedings, just like in arbitration or court proceedings, and set out a number of basic propositions:

  • Fraud or deceit can be raised as a defence in adjudication provided that it is a real defence to the claim.
  • If fraud is raised to avoid enforcement, or to support an application to stay execution of the judgment, it must be supported by clear and unambiguous evidence and argument.
  • There is a distinction between allegations of fraudulent behaviour, acts or omissions that were or could have been raised as a defence in the adjudication and allegations that emerge afterwards. In the former case, if the allegations were adjudicated upon, the adjudicator’s decision is enforceable.
  • If allegations of fraud emerge afterwards, there is a difference between fraud that:
    • directly impacts on the subject matter of the decision (for example, if the certificate that an adjudication decision was based on was issued by a certifier who was fraudulently misled by the contractor into issuing the certificate by a fraudulent valuation); and
    • is independent of the subject matter of the decision (for example, a fraud on another contract or cross claims arising on the contract that can only be raised by way of set off or cross claim).
  • Allegations of fraud that directly impact on the subject matter of the decision can be raised but, generally, those that are independent should not be. The court should not permit enforcement of fraudulent or fraudulently induced claims, that is, enforcement should not be used to facilitate fraud. Equally, fraud should not generally be argued to prevent enforcement.

It is what he said at paragraph 21 that is really interesting:

“In formulating and applying these propositions, courts need to be aware and take into account what goes on construction sites up and down the country. On numerous occasions, contractors and subcontractors and even consultants will submit bills or invoices which are or are believed by the recipient to overstate the entitlement. Whilst there are some “cowboy” and fraudulent builders who prey on the public, it will only rarely be the case that one can presume fraud to have taken place where an invoice or bill is overstated. The claiming party may believe that it is entitled to what it is claiming; there may be a simple and honest mistake in the formulation of the claim; the claim may be based on a speculative but arguable point of law or construction of the contract. In none of these cases can it be said that there was fraud on the part of the claiming party. The Court should be astute and cautious on adjudication enforcement applications in assessing pleas of fraud by the party against whom the adjudication decision has been made. I doubt very much whether there will be any significant number of challenges to enforcement on the basis of fraud.”

Fraud allegations in adjudication enforcement

In GPS Marine Contractors Ltd v Ringway Infrastructure Services Ltd, it was argued that in the adjudication, GPS had “acted recklessly” as to the truth of statements it had made, rather than “with deliberate dishonesty”. However, Ramsey J held that the adjudicator’s decision had not been obtained by fraud. In doing so, he considered Akenhead J’s propositions from SG South.

In ISG Construction Ltd v Seevic College, Edwards-Stuart J held that lack of a pay less notice meant the employer had agreed the value of the works the contractor claimed in an interim certificate. He went on to say that:

“Absent fraud, in the absence of a payment or pay less notice issued in time by the employer, the contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out.”

Akenhead J also looked at the issue in Henia Investments Inc v Beck Interiors, where he suggested that:

“Although fraud would probably unravel a fraudulently prepared Interim Application, no fraud is alleged here and there is often room for sometimes widely differing assessments of value and proportions of work completed.”

What does this mean?

I don’t think there is a clear answer. As is so often the case, each situation is different and will turn on its own facts (when doesn’t it?). I can’t say whether, by claiming £20,000, the contractor in my simple example has committed a fraudulent act or is guilty of fraudulent misrepresentation. As Akenhead J said, it could be “a simple and honest mistake in the formulation of the claim”. I would need to investigate the circumstances further.

MCMS Ltd Matt Molloy

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