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Why would a court uphold an adjudication determination awarding money to a fraudulent contractor?

The Court of Appeal decision in Builders Hub Pte Ltd v JP Nelson Equipment Pte Ltd [2024] SGHC(A) 28 sheds light on this question, and highlights limits to the operation of the “fraud unravels all” principle under the Building and Construction Industry Security of Payment Act 2004 (SOP Act).

A.  Background

Facts

JP Nelson Equipment Pte Ltd (JP Nelson) engaged Builders Hub Pte Ltd (Builders Hub) as the main contractor for a construction project.

Builders Hub submitted Payment Claim No. 37 (PC 37) for $2,287,156.69. JP Nelson responded with Interim Valuation No. 37 (IV 37), certifying only $329,284.98 as payable to Builders Hub.

Adjudication Proceedings

Builders Hub disputed JP Nelson’s certification and applied for adjudication under the SOP Act. Builders Hub’s adjudication application claimed disputed variation works in PC 37. The adjudicator’s determination awarded Builders Hub the sum of $847,381.92.

Thereafter, JP Nelson sought an adjudication review. The review adjudicator reduced the award to $518,096.94, correcting a double count amounting to $329,284.98.

The Setting Aside Application and Discovery of Fraud

JP Nelson filed an application in court to set aside both the adjudicator’s determination and the review adjudicator’s determination.

After filing the application, JP Nelson discovered that Builders Hub had created fake documents (Fake Documents) to falsely represent payments (that were not in fact made) to a subcontractor for air-conditioning equipment. JP Nelson had relied on these Fake Documents to certify payment of $155,160 to Builders Hub in earlier interim valuations issued several months before PC 37.

The High Court decision

The High Court judge ruled that Builders Hub had fraudulently submitted the Fake Documents to deceive JP Nelson. However, the judge found that the adjudicator’s determination and the review adjudicator’s determination were not affected by the fraud.

Nonetheless, the High Court judge reduced the amount awarded to Builders Hub by $155,160, being the sum that the High Court found that Builders Hub had unlawfully gained by its fraud. The High Court judge reasoned that Builders Hub should not be allowed to hold onto the fruits of its fraud – given the “fraud unravels all” principle – and that this was something that the court had the power to interfere with.

B.  The Law: Setting Aside Adjudication Determinations on the Basis of Fraud

The section of the SOP Act allowing a party to set aside adjudication determinations on the basis of fraud is Section 27(6)(h) of the SOP Act. Section 27(6)(h) provides that a party may apply to set aside an adjudication determination if “the making of the adjudication determination was induced or affected by fraud or corruption”.

The Court of Appeal decision in Facade Solution Pte Ltd v Mero Asia Pacific Pte Ltd [2020] 2 SLR 1125 (Facade Solution) established a two-stage test for setting aside an adjudication determination on the ground of fraud:

• Step 1: The adjudication determination must be based on facts which the party seeking the claim knew or ought reasonably to have known were untrue.
• Step 2: The court assesses whether the facts in question were material to the issuance of the adjudication determination.

C.  The Court of Appeal decision

Builders Hub appealed against the High Court judge’s decision to reduce the amount awarded. The Court of Appeal considered the following issues on appeal:

1. whether JP Nelson satisfied the test in Facade Solution to set aside the adjudication determinations; and
2. if not, whether the High Court judge had the power to reduce the amount awarded.

Whether the test in Facade Solution was satisfied

The Court of Appeal agreed with the High Court judge that the adjudication determinations were not affected by the fraud perpetrated by the Fake Documents. Accordingly, the test in Facade Solution was not satisfied.

First, the fraud had nothing to do with PC 37 or IV 37. While PC 37 stated a reference period for the duration of the entire works, the Court of Appeal took into account the substance of both PC 37 and IV 37, and considered it “obvious that PC 37 is a progress claim for one month and not for that entire period”.

Second, the Fake Documents related to claims under the original contract and not variation works, whereas the adjudication determinations only concerned variation works. Thus, the adjudication determinations were not affected by the fraud.

Whether the judge had power to reduce the amount awarded

While the Court of Appeal understood “the sense of justice underpinning the judge’s decision”, it held that the scheme under the SOP Act did not allow the judge to reduce the amount awarded.

Under the SOP Act, an adjudication determination has temporary finality and can only be set aside or varied if it is affected by fraud. If a judge is allowed to reduce the amount awarded even though the adjudication determination is not affected by fraud, the words in Section 27(6)(h) of the SOP Act would be rendered otiose.

In the circumstances, while the Court of Appeal expressed its disapproval of Builders Hub’s fraud, it allowed Builders Hub’s appeal and set aside the High Court judge’s decision in respect of the reduction. The Court of Appeal also observed that JP Nelson remained entitled to pursue a separate claim for overpayment due to the fraud, and that this is not a case where a fraudulent person is allowed to retain the fruits of the fraud.

D.  Commentary

The Court of Appeal decision in Builders Hub Pte Ltd v JP Nelson Equipment Pte Ltd makes clear that fraud alone is not enough to unravel all. A court will be compelled to uphold an adjudication determination awarding money to a fraudulent contractor if the adjudication determination is not affected by the contractor’s fraud. Further, the decision highlights that the court does not have the power to reduce any amount awarded to the contractor when the adjudication determination has not been affected by the fraud.

While the Court of Appeal’s ruling may appear to have unfairly resulted in a fraudulent contractor obtaining a windfall, the decision provides more clarity and certainty regarding the scope of the court’s powers to set aside or vary adjudication determinations under the SOP Act.

The decision also pays more heed to the overall objective of the SOP Act – which is to facilitate cash flow in the construction industry with a “quick and dirty” adjudication process and adjudication determinations bearing temporary finality. Such temporary finality means that adjudication determinations are final and binding unless and until the parties’ dispute is conclusively determined by a court or arbitral tribunal.

By disallowing setting aside courts from reducing amounts under adjudication determinations unaffected by fraud, the Court of Appeal’s decision provides more effect and certainty to the principle of temporary finality in adjudication determinations. Affected parties would, in such circumstances, be left to recover any overpayments induced by fraud in more appropriate proceedings.

Contributed by:

Lesley Fu - Partner, WongPartnership LLP