FRAUD AND THE SOP ACT

One of the less commonly relied upon grounds for challenging an adjudication determination under the Building and Construction Industry Security of Payment Act (the “SOP Act”) is fraud. In Facade Solution Pte Ltd v Mero Asia Pacific Pte Ltd [2020] SGCA 88 (“FS v MA”), the Court of Appeal had occasion to consider an appeal against the High Court’s decision to set aside an adjudication determination on the ground of fraud. This update highlights some of the key points raised by the Court of Appeal.

Brief facts. The appellant sub-contractor commenced adjudication proceedings against the respondent main contractor on the basis of no payment response ([5] FS v MA) and obtained an adjudication determination in its favour on 15 November 2019 ([5] FS v MA).

Before the adjudicator, the appellant claimed that it was entitled to payment as it “had completed all of the supply works” and effectively, that it had “control over all the undelivered panels and was hence, willing and able to perform the Sub-Contract” ([7] FS v MA).

However, after the adjudication determination was issued, it transpired that the appellant had, throughout the adjudication proceedings, faced difficulties in securing delivery of 169 of the undelivered panels from its suppliers ([8] FS v MA). This was due to disputes between the appellant and its supplier in China ([8] – [10] FS v MA).

On 9 December 2019, the respondent applied to set aside the adjudication determination on the grounds of fraud and breach of natural justice ([9] FS v MA).

Before the High Court. The High Court set aside the adjudication determination on the ground of fraud ([11] FS v MA). The appellant appealed against the Judge’s decision ([14] FS v MA).

Fraud is a ground for setting aside adjudication determinations. While FS v MA fell to be decided on the basis of the SOP Act prior to the amendments of December 2019, the Court of Appeal agreed with the High Court (and the parties as well) that fraud is an accepted ground for setting aside adjudication determinations under common law ([22] – [23] FS v MA).

This is rightfully so, for no court would allow or assist a person to retain an advantage that has been obtained by fraud.

What is important to note, however, is the refinement made by the Court of Appeal to the test in setting aside an adjudication determination on the ground of fraud.

Step 1: Firstly, the party seeking to set aside the adjudication determination must establish that the adjudication determination “was based on facts which the party seeking the claim (“the claimant”) knew or ought reasonably to have known were untrue. This objective test of knowledge would encompass constructive knowledge and would apply to every stage of the adjudication proceedings.” ([29] FS v MA).

In particular, at [30] FS v MA, the Court of Appeal highlighted that the innocent party must establish that:

“…

(a)  the facts which were relied on by the adjudicator in arriving at the AD;

(b) that those facts were false;

(c) that the claimant either knew or ought reasonably to have known them to be false (see [29] above); and

(d) that the innocent party did not in fact, subjectively know or have actual knowledge of the true position throughout the adjudication proceedings.”

Element (d) was singled out by the Court of Appeal at [31] FS v MA, where the Court of Appeal was careful to emphasize that “there is no requirement on the innocent party to show that the evidence of fraud could not have been obtained or discovered with reasonable diligence during the adjudication proceedings.”

However, if the innocent party subjectively knew or had actual knowledge of the fraud, then the claim for setting aside based on that fraud would fail per [30] FS v MA.

In this regard, it is unlikely that the December 2019 amendments would substantively change the above test. The current s. 27(6)(h) SOP Act simply makes clear that one of the grounds for setting aside is if the “making of the adjudication determination was induced or affected by fraud or corruption.“

Step 2: Secondly, the innocent party must “… establish that the facts in question were material to the issuance of the [adjudication determination]” ([34] FS v MA).

In this regard, materiality is established “… if there is a real prospect that had the adjudicator known the truth, the outcome of the determination might have been different. In other words, the facts must have been an operative cause in the issuance of the AD.” ([35] FS v MA).

It is important to note that the Court of Appeal rejected the requirement that the innocent party had to show that “It is reasonably clear that the fresh evidence would have provided an opposite verdict”, because such a test requires the supervisory court to consider the merits of the adjudication determination ([36] FS v MA).

Severance generally not available. Importantly, the Court of Appeal emphasized at [61] FS v MA that while an adjudication determination that has been obtained by fraud may be severed, it would only be severed in exceptional circumstances, as the court would generally be unsympathetic to a claimant who obtained an adjudication determination by fraud.

So, when would severance be allowed? At [61] FS v MA, the Court of Appeal suggested that severance may apply where the fraud was de minimis both in nature and quantum.

While the Court of Appeal then referred to the Queensland Supreme Court decision of Hansen Yuncken Pty Ltd v Ian James Ericson trading as Flea’s Concreting [2011] QSC 327 (“Hansen Yuncken”) at [62] FS v MA as an example to illustrate what de minimis fraud might mean, it is important to note that the Court of Appeal also made clear that it had doubts whether it would have severed the impugned portions of the adjudication determination in Hansen Yuncken, given that the fraud impacted approximately half of the applicant’s total claim.  

Application of Chuang Long. It also bears highlighting that the Court of Appeal also dealt with how Chuang Long Engineering Pte Ltd v Nan Huat Aluminium & Glass Pte Ltd [2019] 4 SLR 901 (“Chuang Long”) should be interpreted.

The Court of Appeal made clear at [56] FS v MA that Chuang Long “did not stand for the proposition that a subcontractor was entitled to payment for fabricated materials even though it was not able to deliver them under the contract”. The Court of Appeal highlighted that if this was accepted, then “subcontractors [would] be paid for materials so long as they are fabricated and in existence, regardless of whether actual delivery can take place.”

Takeaway. While fraud is a rare ground for setting aside an adjudication determination, the case of FS v MA sheds light on how parties should approach this issue if it does arise.

Practically, if a party files a payment claim involving some claims that are based on the wrong facts, that party should seriously consider if there is a need to either abandon those claims that are based on the wrong facts or to file a fresh payment claim.

This is because if that party persists in pursuing such a claim based on the wrong facts, even if the party obtains an adjudication determination in his favour, the other party may potentially challenge the adjudication determination obtained on the basis of fraud and set the entire adjudication determination aside.

This is, of course, fact-dependent, as wrong facts alone may not amount to fraud. But knowingly presenting a false claim would certainly amount to fraud.

We highlight that fraud is not common, and that a very high threshold is needed to establish fraud. Cogent evidence is needed to succeed in a claim for fraud.

Further, given the seriousness of any allegation of fraud, parties should never allege fraud lightly. Parties must make sure that any such allegation is justifiable.

As such, parties should not view FS v MA as opening a door to allow disgruntled respondents to challenge adjudication determinations by simply alleging fraud without cogent evidence.

Tags: Building and construction law; Building and Construction Industry Security of Payment Act; Setting Aside; Fraud; Severance

This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.

Xian Ying Tan