25 July 2019 | Comment | Article by Jade Zelko

When can fraud be considered as a valid defence to enforcement proceedings?

Background 

In 2016, Equitix ESI CHP Wrexham Limited engaged Bester Generacion UK Limited (“Bester”) to design and construct a biomass-fired energy-generating plant in Wrexham (“the Main Contract”).  Bester subsequently entered into a subcontract with PBS Energo AS (“PBS”) for the engineering, procurement, construction and commissioning of the plant (“the Sub-Contract”).

In 2017, the parties fell into dispute and both the Main and Sub-Contract were terminated.

The first adjudication concerned the validity of the termination of the Sub-Contract. In the second adjudication, which this blog relates to, PBS sought a valuation of the sum alleged to be due to it upon termination of the Sub-contract.  One of the issues included the value of equipment which had been manufactured for the project. 

Bester’s position during the adjudication was that PBS was required to mitigate its loss by selling the equipment. The adjudicator rejected Bester’s argument on the basis that it had caused PBS to manufacture the plant items which he had found were held to Bester’s order in its premises in the Czech Republic. PBS alleged that these would be released to Bester upon payment. 

As a result, the adjudicator decided that Bester was liable to pay PBS £1.7 million.

Bester failed to make payment of the adjudication award and therefore, PBS issued proceedings to enforce the adjudicator’s decision. Bester resisted on grounds that the decision was procured by fraud.

Fraud

At the summary judgment hearing, Bester alleged, for the first time, that the adjudication decision had been procured by fraud.  Bester alleged that assertions made by PBS during the adjudication that it was holding certain pieces of bespoke equipment, which it would hand over once paid, were untrue.

The documents which Bester relied upon to evidence this had come to light during the disclosure process during the underlying Technology and Construction Court proceedings.  During these separate proceedings, some 57,000 documents were disclosed.

The decision

The court considered that it was “properly arguable on credible evidence” that a number of representations made in the adjudication by PBS were false.  The court found that:

-       Certain equipment was not stored in the Czech Republic and had been sold and installed on another power plant; and

-       PBS had not paid for nor obtained the title from its supplier to certain equipment.

The court was satisfied that Bester could not have raised the fraud allegations during the adjudication as disclosure of the relevant documents in the underlying litigation had not been given to Bester in time for the fraud to be identified in the adjudication.

Commentary

This decision provides a clear distinction as to when fraud will be considered a valid defence to enforcement proceedings. 

Parties will not be able to rely on vague fraud allegations or matters which they were or should have been aware of at the time of adjudication.  However, fraud can be raised as a defence provided the point could not, and should not, have been taken in the adjudication itself.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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