Can fraud prevent enforcement of an adjudicator’s decision?

The Court of Appeal has provided helpful guidance on when enforcement of an adjudicator’s decision can be refused on the basis of fraud.

Background

Bester Generacion (Bester) engaged PBS Energo A.S (PBS) as sub-contractor in relation to a power plant in Wrexham. Following a dispute, PBS terminated the sub-contract. Various proceedings followed, including an adjudication by PBS to recover termination losses. PBS also launched a parallel claim in the Technology and Construction Court (TCC).

PBS succeeded in the adjudication and commenced enforcement proceedings against Bester. At the enforcement hearing, Pepperall J refused enforcement on the ground that Bester had an arguable case of fraud. In the adjudication, Bester had claimed PBS was obliged to mitigate its loss by selling large items of the plant it had manufactured under the contract. The adjudicator disagreed, saying that on PBS’s evidence, the plant it had manufactured was stored in factories and available to Bester to sell once the contract price was paid. It subsequently became clear by the time of the enforcement hearing that this was untrue – disclosure in the separate TCC proceedings revealed that most of the plant had already been sold by PBS.

Pepperall J found it was properly arguable that PBS had made false representations to the adjudicator about the plant, knowingly or recklessly. He was satisfied that this had a material effect on the adjudicator’s decision. Accordingly, he found that there was an arguable case of fraud and it was inappropriate to grant summary judgment.

Appeal 

PBS appealed that decision on four grounds, the first two being that Pepperall J erred in concluding that the alleged false statements were relevant to the adjudicator’s decision, and that the allegations of fraud could or should have been raised in the adjudication. Permission to appeal on these grounds was refused for the following reasons: (1) conclusions about whether the statements had influenced the adjudicator were evidential conclusions that Pepperall J had been entitled to reach, and (2) Pepperall J was entitled to find that evidence of fraud could not have been raised during the adjudication, because the documents revealing the fraud had not been discovered in the TCC proceedings until after the adjudication was almost over.

The appeal proceeded on the remaining two grounds.

One ground was purely procedural – that allegations of fraud must be properly pleaded in order to be raised. PBL argued that as Bester had not served a pleaded defence, the allegations could not be raised. This was rejected by the Court of Appeal. The accelerated procedure for adjudication enforcement in the TCC specifically allows for a summary judgment application to be made at the time of issuing the enforcement application. Separately, the Civil Procedure Rules provide that if a summary judgment application is made before a defendant files a defence, the defendant need not file a defence. Together, this meant that there was no requirement for Bester to file a pleaded defence, and therefore no requirement for the allegations of fraud to be specifically pleaded.

The final ground of appeal was that Pepperall J should have granted summary judgment, but could have ordered a stay of execution if he had been concerned about fraud. The Court of Appeal disagreed. Given that Pepperall J was satisfied that fraudulent representations had a material effect on the outcome of the adjudication, he was entitled to refuse the application for summary judgment.

Comment

The Court of Appeal’s decision serves as a useful reminder of how allegations of fraud can interact with adjudication enforcement. The case provides a helpful summary of the current law as follows:

1. If allegations of fraud are made in the adjudication, they will be deemed to have been considered by the adjudicator, and will not be a reason to refuse enforcement.
2. The same principle applies if the allegations of fraud were not made, but could and should have been made.
3. If the adjudicator’s decision was arguably procured by fraud, or where evidence on which the adjudicator relied is shown to be both material and arguably fraudulent (as in this case), then on the assumption that the allegations of fraud could not have been raised in the adjudication, enforcement may be refused.

Procedurally, the case is also helpful confirmation that while it is advisable for defendants to serve a formal defence if they want to allege fraud in resisting an adjudication enforcement, they are not obliged to do so.