Fraud and its impact on adjudication enforcement

PBS Energo A.S. v Bester Generacion UK Limited [2019] EWHC 996 (TCC)

Where an adjudication decision is procured by fraud which later comes to light, the court is unlikely to enforce it by way of summary judgment.

Facts

In April 2016, Bester Generacion UK Limited (Bester) entered into a contract with Equitix ESI CHP Wrexham Limited (Equitix) to design and build a biomass-fire energy-generating plant in Wrexham (the Project).

In May 2016, Bester then entered into a sub-contract with PBS Energo A.S. (PBS) for the engineering, procurement, construction and commissioning of the plant for a price of £14,230,000 (plus VAT).

The first adjudication

An adjudication was held in January 2018 (the First Adjudication) after the parties fell into dispute regarding the termination of the sub-contract. In June 2017, PBS had given Bester notice of its intention to terminate the sub-contract, which Bester initially resisted.

Bester then later terminated the sub-contract resulting in Equitix calling on Bester's performance security. This in turn triggered the counter-guarantees provided by PBS. Equitix also terminated the main contract with Bester.

The adjudicator ultimately held that PBS was entitled to terminate the sub-contract and had validly done so in June 2017. Bester was then ordered to repay the performance security of £2,709,277.99 to PBS. When Bester failed to pay, PBS commenced further proceedings to enforce the adjudicator's decision.

In April 2018, the TCC gave summary judgment in favour of PBS. Stuart-Smith J was unimpressed with Bester's conduct relating to the adjudication, and said "Bester's conduct has been unreasonable at almost every turn." Despite this, Bester still failed to pay the judgment sum or the adjudicator's fees with PBS only receiving full payment in July 2018.

The second adjudication

As the First Adjudication only dealt with questions of liability and the repayment of the payment security, PBS served notice of adjudication in November 2018 (the Second Adjudication), seeking the valuation and payment of its claims under the sub-contract with Bester.

The adjudicator ordered Bester to pay £1,701,287.22 (plus interest) to PBS. PBS brought summary judgment proceedings when Bester failed to make payment. Bester sought to resist enforcement on the ground that this adjudication decision was procured by fraud.

TCC trial and allegations of fraud

In the Second Adjudication, PBS alleged that the equipment manufactured for the Project was "stored to Bester's order and would be available to Bester upon payment of the sums found to be due". Bester argued this was untrue and pointed to evidence that PBS had cancelled its order for some equipment resulting in its claim in the Second Adjudication being overstated.

Further, late disclosure of documents by PBS demonstrated that the sum claimed in the Second Adjudication did not take into account the value of equipment that had been fully manufactured and in fact sold by PBS. Bester therefore alleged that PBS' statements were false or, at the very least, reckless and had directly influenced the second adjudicator's decision.

PBS conversely asserted that there was no fraud and in any case that PBS still had an outstanding claim in the main action in excess of £3.9 million.

Judgment

Pepperall J dismissed PBS's application for summary judgment and found credible evidence that the decision in the Second Adjudication was obtained by fraud on the basis that:

• PBS made a number of representations during the Second Adjudication as to the existence of a number of specialist/bespoke parts and equipment manufactured pursuant to the sub-contract with Bester for use on the Project. These parts were made out to be held to Bester's order and were to be made available to Bester upon payment.
• There was "credible evidence" that PBS made those representations "knowing them to be false, alternatively without belief in their truth or recklessly, not caring whether such statements were true or false".
• As a result, PBS obtained an advantage in the adjudication.
• Bester could not have reasonably discovered the alleged fraud or raised this to the adjudicator before the conclusion of the Second Adjudication, as disclosure in the TCC proceedings was not made until after submissions closed in the Second Adjudication.

Comment

Whilst it is unusual for an adjudication decision to be procured by fraud which later comes to light, Pepperall J confirms that "where, exceptionally, it is properly arguable on credible evidence that the adjudication decision was itself procured by a fraud that was reasonably discovered after the adjudication, the court is unlikely to grant summary judgment."

The TCC also helpfully distinguished between two types of cases, those being:

• where fraud is apparent or is raised in the adjudication itself
• where the alleged fraud only came to light following the adjudication.

In terms of the former, the fraud is taken into consideration in the adjudication and so the decision will be enforceable.

However in the latter case, such as on these facts, enforcement of the adjudication decision can be successfully resisted on the basis of fraud that was not, and could not reasonably have been, known about before issue of the adjudication decision.