Fraud Unravels Everything

“There must be, and is, some general principle which prevents a man from profiting from his own wrong.”

• “No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever…â€

The case was heard in the Court of Appeal in England and Wales, and the court found that the landlord had not carried out repairs to the value claimed by the tenant. The court held that the landlord had failed to meet its obligations under the tenancy agreement, and ordered that the tenant be refunded a portion of their rent.

The main parallel is that in both cases, the parties are arguing that a valid payment notice should not be complied with due to some form of wrongdoing. In the case of fraud, the argument is that the payment notice was issued as a result of fraudulent activity and therefore should not be enforced. In adjudications, the argument is that there has been some form of breach or non-compliance with the contract which renders the payment notice invalid.

In both cases, it is up to the adjudicator or court to decide whether or not there has been sufficient evidence presented to support such an argument. If so, then they will make a ruling accordingly. If not, then they will uphold the validity of the payment notice and order compliance with it.

Fraud unravels everything

“Fraud is a very serious matter and it is essential that it should not be lightly or loosely used. It must be established by clear and cogent evidence, and the burden of proof lies upon those who allege it.”

In other words, any allegation of fraud or fraudulent misrepresentation must be backed up with clear and cogent evidence. Without such evidence, any such allegations are likely to fail.

• “… the real question in any case is whether repairs to the value specified have in fact been done, and that proof of fraud in the making of the declaration is merely proof of the quality of the act or its motive. Nevertheless, that quality, if proved, vitiates all transactions known to the law of however high a degree of solemnity.â€

Let’s take an example

The contractor has now finished the works and submitted a final application for payment. The contract administrator has reviewed the interim application and noticed that the contractor had included an amount for works not yet completed. The contract administrator has issued a pay less notice to the employer, reducing the amount due to £80,000 (the original sum applied for minus the £20,000).

The employer is now in a difficult position as they have already paid out £100,000 but are only due to receive £80,000 from the contractor. In this situation, it is likely that the employer will need to pursue a claim against the contractor for recovery of their overpayment.

No, the Act has not been complied with if the contractor knows incomplete works are included in the interim application. The inclusion of the £20,000 could be considered fraudulent misrepresentation depending on the circumstances. If it can be proven that the employer knew or should have known that incomplete works were included in the interim application and still issued a payment notice for £20,000, then this could be considered fraud or fraudulent misrepresentation.

What is fraud and fraudulent misrepresentation?

Fraud can include activities such as embezzlement, identity theft, money laundering, bribery, and tax evasion. It can also involve activities such as false advertising, deceptive business practices, and insider trading. In some cases, fraud may even involve cybercrime or computer hacking.

However, fraudulent misrepresentation may be more difficult to spot.

In Derry v Peek, the House of Lords held that a false statement made recklessly or without belief in its truth was actionable as a fraud. The court stated that “fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.” This definition has been widely accepted and adopted by courts around the world.

# A representation of fact made by the defendant to the claimant;
# The representation was false;
# The defendant knew it was false or was reckless as to its truth;
# The defendant made the representation with the intention that the claimant should act upon it; and
# The claimant did act upon it to his detriment.

• The defendant makes a false representation to the claimant.
• The defendant knows that the representation is false, alternatively, he is reckless as to whether it is true or false.
• The defendant intends that the claimant should act in reliance on it.
• The claimant does act in reliance on the representation and, in consequence, suffers loss.

The first ingredient is the presence of a conflict between two parties. In this example, there is a disagreement between the two parties over how to handle the situation. The second ingredient is that both parties have something to gain or lose from the outcome of the dispute. In this case, both parties have something to gain or lose depending on how they handle the situation. The third ingredient is that both parties are willing to negotiate and come to an agreement. This means that both sides are willing to compromise in order to reach a mutually beneficial outcome. Finally, the fourth ingredient is that there is some form of resolution available which can be agreed upon by both sides. In this example, it could be that one party agrees to pay for damages caused by their actions while the other party agrees not to pursue legal action against them.

In conclusion, it can be seen that all four ingredients are present in this simple example and so it is certainly arguable that parties are raising the issue of resolving disputes through negotiation and compromise.

But it’s not so easy, in practice

1. Fraud must be pleaded with particularity and the facts relied upon must be set out in detail.
2. The burden of proof is on the party alleging fraud and it must be proved to the civil standard, i.e. on the balance of probabilities.
3. The evidence must be clear, cogent and convincing and not just a suspicion or an inference from other facts.
4. The evidence must go beyond mere assertion or speculation and there must be some material which supports the allegation of fraud.

The party raising the defence of fraud must prove that the other party has engaged in fraudulent conduct, and that this conduct was material to the adjudication decision. The burden of proof is on the party raising the defence. If they are unable to prove their case, then the adjudicator’s decision will stand.

In some cases, a party may be able to raise a defence of estoppel by convention or estoppel by representation. This is where one party has relied on a representation made by another party and acted upon it to their detriment. In such cases, if the representation was false or misleading, then the other party may be prevented from relying on it as a defence in adjudication.

Finally, if there is evidence of collusion between parties in an adjudication process, then this could be raised as a defence. Collusion occurs when two or more parties act together to deceive or mislead an adjudicator in order to gain an unfair advantage over another party.

In the latter case, the allegations may be raised in subsequent proceedings, such as a court action or arbitration.

If allegations of fraud emerge afterwards, there is a difference between fraud that:

It is what he said at paragraph 21 that is really interesting:

• “In formulating and applying these propositions, courts need to be aware and take into account what goes on construction sites up and down the country. On numerous occasions, contractors and subcontractors and even consultants will submit bills or invoices which are or are believed by the recipient to overstate the entitlement. Whilst there are some ‘cowboy’ and fraudulent builders who prey on the public, it will only rarely be the case that one can presume fraud to have taken place where an invoice or bill is overstated. The claiming party may believe that it is entitled to what it is claiming; there may be a simple and honest mistake in the formulation of the claim; the claim may be based on a speculative but arguable point of law or construction of the contract. In none of these cases can it be said that there was fraud on the part of the claiming party. The Court should be astute and cautious on adjudication enforcement applications in assessing pleas of fraud by the party against whom the adjudication decision has been made. I doubt very much whether there will be any significant number of challenges to enforcement on the basis of fraud.â€

Fraud allegations in adjudication enforcement

In SG South, Akenhead J held that a party may be guilty of fraud if it has acted recklessly as to the truth of statements it has made. He stated that this would be the case if the party had failed to take reasonable steps to verify the truth of its statements and was aware or should have been aware that there was a risk that they were false.

Ramsey J applied this principle in GPS Marine Contractors Ltd v Ringway Infrastructure Services Ltd, finding that GPS had not acted with deliberate dishonesty. He noted that GPS had taken reasonable steps to verify the truth of its statements and was not aware or should not have been aware that there was a risk they were false. As such, he concluded that GPS had not committed fraud and the adjudicator’s decision could stand.

“The employer is not entitled to challenge the value of the works certified by the contractor in an interim certificate unless it has served a valid pay less notice. The purpose of a pay less notice is to provide the employer with an opportunity to challenge the value of the works certified by the contractor in an interim certificate. If no such notice is served, then it must be taken that the employer has accepted and agreed to pay for those works.”

• “Absent fraud, in the absence of a payment or pay less notice issued in time by the employer, the contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out.â€

Akenhead J also looked at the issue in Henia Investments Inc v Beck Interiors, where he suggested that:

• “Although fraud would probably unravel a fraudulently prepared Interim Application, no fraud is alleged here and there is often room for sometimes widely differing assessments of value and proportions of work completed.â€

What does this mean?