When is it good to call out on fraud in adjudication proceedings?

Almost everyone on the receiving end of an adjudication has a fundamental fear: that the other party will win cash and be paid, then that cash evaporate before an in-depth trial can begin. That’s what worried cladding firm Aygun Aluminium UK Ltd, when its labour-only installation contractor came at it for £553,995 and won. Aygun hesitated in obeying the adjudicator’s award. So Gosvenor London Ltd came to court to seek enforcement. It’s hardly surprising: 28-day adjudication is really only an interim solution to fathom who will have the cash in their bank until a more solid decision is made. 

And there was nothing in the straightforward adjudication to worry the court. It was only after the adjudication was all done that Aygun poked a stick at Gosvenor. During the subsequent enforcement application proceedings it uttered the F-word: “fraud”. It alleged to the court that Gosvenor had fraudulently invoiced for at least £300,000. What’s more, Aygun claimed there was a real possibility that Gosvenor would dissipate the £553,995, if paid over by Aygun, so it asked the court to please not order payment.

Can fraud or deceit be run as a defence in front of an adjudicator? Yes. Dishonest behaviour allegation is completely open to any party to argue

The work was for a new facade on the Ocean Village hotel in Southampton: Aygun designed and supplied the facade; Gosvenor was installing the stuff. Its price was £440,000. Delay occurred, and Gosvenor invoiced for £554,000. Fraud was not argued in the adjudication, nor the risk of the booty disappearing. But when it came to enforcement in the High Court, Gosvenor said nothing to rebut the allegation of fraud. It did, however, resist the idea of a stay on the payment. The key principles on stay of payment, taken from Wimbledon vs Vago, are widely agreed and applied. But the judge in Gosvenor vs Aygun added to that guidance, and ordered that while Gosvenor was entitled to summary judgment, Aygun was entitled to a stay. 

This additional piece of guidance said: “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.” The case then went to the Court of Appeal, where counsel for Gosvenor objected that this additional point was not part of the well-known Wimbledon vs Vago principles for a stay. 

The Court of Appeal ruled that a stay is a matter for the judge in each case to weigh the evidence. It noted Gosvenor’s 2016 accounts showed a marked difference from its 2017 accounts: debt was seemingly upped by £580,000 – about the same as the award figure. That might point to money coming in from the award then going swiftly out. On top of that, it was alleged that the boss of Gosvenor had said in 2017 that if Gosvenor were to face a claim from Aygun, he would “immediately wind up the company” and Aygun “would never get a penny out of him”. The judge in the original enforcement hearing said: “It all adds up to the air of suspicion over the financial affairs and probity of the company.” The Court of Appeal upheld this, saying the additional guidance was correct in principle and fact so there would be no money paid over to Gosvenor.

Now, what of the allegations of fraud? Can fraud or deceit be run as a defence in front of an adjudicator? Yes. Dishonest behaviour allegation is completely open to any party to argue. And if the adjudicator finds the allegation untrue, that is a binding decision and the allegation cannot be used in the High Court to avoid enforcement. Nor can it be used in enforcement if the dishonesty point could have been raised in the adjudication, but was not. Of course, it is possible to bring the whole argument back to court to litigate afresh – but that’s quite different from enforcement of the adjudicator’s pro-tem award. But what’s the score if circumstances show the potential fraud could not have been discovered during or prior to the adjudication?  The Court of Appeal said: “A distinction has to be made between fraudulent behaviour, acts or omissions which 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 emerge afterwards. In the former case, if the behaviour, acts or omissions are in effect adjudicated upon, the decision […] is enforceable. In the latter case, it is possible that it can be raised but generally not in the former […]

“The logic of this is that it is the policy of the 1996 act that 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 which does not impact on the claim made upon which the decision was based should not generally be deployed to prevent enforcement.”

The court decided that the allegation of fraud could have and should have been made in the adjudication. Therefore this new allegation would not stand in the way of enforcement. A stay on payment was nevertheless ordered for fear that Gosvenor would dissipate money ordered via enforcement.

I confess I am uncomfortable about high-speed rough and ready adjudication process deciding fraud cases – fraud can’t be decided on the hoof. It needs a trial. Clear, unambiguous evidence and an argument won’t come out otherwise.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple