Construction

PBS v Bester [2019] EWHC 996 (TCC): Adjudication enforcement—Allegations of fraud

The decision of Pepperall J provides yet another stumbling block to the rapid procedure for enforcement of adjudication awards

The enforcement of an adjudicator’s award is carried out through a bespoke procedure developed by the TCC to ensure that only in very limited circumstances will the losing party not be required to pay over the amounts awarded in the adjudication. If a losing party is dissatisfied with the adjudicator’s decision, it retains the right to pursue the claim in litigation and get its money back.

The decision of Pepperall J in PBS v Bester [2019] EWHC 996 (TCC) provides yet another stumbling block to this rapid procedure and the overriding policy objective of giving parties to adjudication the intended quick “temporarily binding” resolution of dispute. The decision casts into doubt whether a party seeking to resist enforcement can re-run allegations previously alluded to (but not explicitly pursued) in the adjudication proceedings as a means of avoiding the requirement to pay on enforcement, and further potentially allows a party to rely upon allegations of fraud that have not been properly pleaded and particularised.

Background

Bester engaged a Czech contractor, PBS Energo, to design and construct a biomass power station in Wrexham. Due to various problems, the contract was terminated and the parties referred two key disputes to separate adjudications.

The first adjudication concerned which party had effectively and correctly terminated the contract between the parties. The adjudicator determined that PBS were entitled to terminate and not Bester.

The second adjudication was pursued based upon those findings about PBS’s lawful termination. It was PBS’s case in the second adjudication that it was entitled to certain milestone payments and payment in respect of works undertaken prior to completion but not delivered to Bester.

PBS relied upon Clauses 16.4 and 15.8 of the Contract and submitted that the task for the adjudicator was to determine the sum payable to PBS which represented “…the corresponding part of the Contract Price for the Works, including the Temporary Works” that had been completed by PBS at the date of termination.

Bester alleged that any final account process would have to give credit for any works not yet delivered to it under the contract and that as the works were not completed, no payment was due to PBS until such materials and works had been delivered to site or were certified as being Bester’s property.

The adjudicator agreed with PBS’s formulation and determined that PBS was entitled to £1.7 million in the relevant accounting process.

The adjudicator declined to give any credit for those materials which had not been transferred to Bester prior to termination, finding that it was a condition precedent that Bester pay all sums due before PBS was required to give any credit for any mitigation of its true loss.

Enforcement proceedings

PBS’ application for summary judgment to enforce the Decision was issued together with a Part 7 claim form, in accordance with the procedure set out in Section 9 of the TCC Guide, on 19 December 2018.

Directions for the summary judgment application including an abridged timetable for acknowledgment of service and filing of evidence were issued by Fraser J on 2 January 2019. Again, this was in accordance with the standard directions provided at Appendix F of the TCC Guide.

Following the court’s directions, Bester served witness evidence now alleging that PBS had been fraudulent in the adjudication and had made representations before the adjudicator that PBS was holding certain items produced for the purposes of the contract to Bester’s order and that no items produced under the contract had been sold on or otherwise disposed of by PBS to third-parties. It was agreed that those representations did not entirely or accurately reflect the true position as to the whereabouts of materials after termination.

Bester did not provide a defence to the TCC enforcement claim on the basis of the alleged fraud, either by way of draft or settled pleadings and instead relied on the witness evidence only at the summary judgment hearing.

In its skeleton argument and the witness evidence, Bester sought to resist enforcement of the decision, alternatively a stay of execution with or without a requirement that Bester pay money into court pending resolution of substantive TCC proceedings which were underway.

The application for summary judgment was heard by Pepperall J on 13th February 2019. Judgment was handed down on 17th April 2019. Pepperall J dismissed the application for summary judgment based upon what the judge considered to be an arguable case that the decision of the adjudicator had been procured by fraud.

Procedure for adjudication enforcement and the need to plead fraud

It was held by Pepperall J that it was “entirely misconceived” for PBS to allege that Bester were required to plead a case in fraud in order to resist enforcement of an adjudicator’s decision. The witness evidence was deemed to be sufficient as there was no obligation imposed on a party facing summary judgment on a claim to file and serve a formal defence, if that application is made prior to the Defence having been filed (CPR 24.4(2)).

However, this finding runs contrary to the adopted procedure for seeking summary judgment enforcement set out in section 9 of the TCC Guide.

The TCC Guide requires a party seeking enforcement of an adjudicator’s decision to issue its claim form and application for summary judgment at the same time, therefore any suggestion that PBS should have simply awaited sight of Bester’s defence before issuing its summary judgment (as held at [62] of the judgment in PBS v Bester) is a practical and procedural impossibility.

This finding of the judge is contradictory to the recent decision of Fraser J in Gosvenor v Aygun [2018] EWHC in which it was specifically stated “…fraud can only be alleged if specifically pleaded”. This statement of principle went unremarked on in the Court of Appeal.

Fraser J also provided a policy justification for requiring a pleaded case in fraud in his decision in Gosvenor v Aygun in which he stated:

“ If all a party has to do to avoid summary judgment is to raise allegations that have to be resolved with oral evidence, the system of enforcement would become nigh on impossible to manage, and speedy conversion of adjudication decisions into actual payment received would be frustrated.”

In the view of this author, the approach taken by Pepperall J is contrary to both the workings of the TCC Guide and the primary purpose of the bespoke summary judgment procedure, which is for the Courts to support the adjudication process and ensure that it functions effectively as a rough and ready means of encouraging cash flow in the construction industry.

This underlying rationale should, in this author’s view, be applied to situations where a party wishes to allege fraud without providing any pleaded position as to how the alleged representations made by a party were fraudulent, and in any event how any such acts were relied on by the adjudicator in reaching their decision such as to vitiate the decision itself.

Practical issues arising from the judge’s findings on procedure and substance

By not requiring Bester to file and serve a pleaded case in fraud, the Court allowed Bester the opportunity to re-characterise shadowy allegations of dishonesty made in the adjudication as free-standing and new allegations of fraud.

Such an approach clearly runs directly contrary to the decision of Mrs Justice Jefford DBE, in Grandlane Developments Limited v Skymist Holdings Limited [2019] EWHC 747 (TCC) it was held that where a party has expressed suspicions of fraud at the time of the adjudication then those suspicions could and should have been pursued within the abdication – and not raised for the first time on enforcement.

Had there been a pleaded case put forward by Bester at the summary judgment hearing, it would also have been apparent that the alleged fraud relied upon was entirely irrelevant to the final determination made by the adjudicator outlined above.

It was patently obvious from the decision of the adjudicator that he decided it was entirely unnecessary to consider any allegations concerning mitigation of loss or dealings by the parties post-termination. In the adjudicator’s view, the only dispute that he was required to resolve was how much work had been carried out at the date of completion and the appropriate valuation for that work, without any deduction.

It should also be noted that the argument put forward by Bester in seeking to resist enforcement was that the question of fraud was not in issue in the adjudication itself and could not have reasonably been raised in the adjudication.

This is at odds with the course of the adjudication, in which it was clear that Bester had made several requests of inspection of documents and materials, a full request for information to which Bester stated within the adjudication that it had received an “unsatisfactory response” and that it was a key allegation within the adjudication that Bester stated PBS had carried out less work than it stated in its performance schedules.

Again, such inconsistencies within Bester’s attempt to resist enforcement would have been apparent had Bester been subject to a requirement to set out a pleaded case in fraud.

The judgment is presently subject to an application for permission to appeal and it is hoped that the Court of Appeal would take the opportunity to resolve the important issue as to when and how allegations of fraud can be raised to prevent enforcement.

Dr Tim Sampson and Ryan Turner act for the claimant/appellant PBS Energo on its appeal of the decision of Pepperall J, instructed by Keystone Law

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