FRAUD UNRAVELS ALL

As the saying goes, fraud unravels all. But how much does fraud actually unravel in relation to adjudication proceedings under the Building and Construction Industry Security of Payment Act 2004? This issue is addressed in the recent case of JP Nelson Equipment Pte Ltd v Builders Hub Pte Ltd [2023] SGHC 186.

 

Background facts. JP Nelson Equipment Pte Ltd (“JP Nelson”) engaged Builders Hub Pte Ltd (“Builders Hub”) as its main contractor for a building project (the “Project”) ([2]).

Builders Hub commenced an adjudication under the Building and Construction Industry Security of Payment Act 2004 (“SOPA”) against JP Nelson claiming for the sum of $1,500,623.51 (including GST), which was registered as SOP/AA 009 of 2022 ([6]).

The Adjudication Determination was issued on 4 August 2022, and the Adjudicator determined that JP Nelson was liable to pay Builders Hub the sum of $847,381.92 (including GST) ([8]).

JP Nelson filed for an Adjudication Review on 11 August 2022 ([9]). The Review Adjudicator reduced the adjudicated amount payable by JP Nelson to Builders Hub ([11]).

JP Nelson then applied via HC/OA 616/2022 (“OA616”) to set aside the Adjudication Review Determination and the Adjudication Determination ([12]).

According to JP Nelson, it was only after JP Nelson filed OA616 that JP Nelson discovered the alleged fraud committed by Builders Hub ([13]).

 

The alleged fraud. In gist, the alleged fraud pertained to five documents sent by Cappitech Engineering Pte Ltd (“Capitech”) to Builders Hub (the “Five Cappitech Documents”).

These Five Cappitech Documents were received by JP Nelson from Builders Hub between 22 November 2021 – 8 March 2022 ([18]), and they were sent to JP Nelson as proof that Builders Hub had paid Cappitech for the supply of air-conditioning equipment ([20]).

Pertinently, it was not disputed by Builders Hub in its 16 November 2022 email to Cappitech that the Five Cappitech Documents were false ([17], [20]).

 

The argument. Given the above, JP Nelson argued in OA616 that the Adjudication Determination was tainted by fraud and hence should be set aside, as “… Builders Hub had fraudulently created the Five Cappitech Documents and delivered them to JP Nelson in order to deceive JP Nelson into making a total downpayment of $155,160 to Builders Hub (the “Downpayment”). This sum amounted to 45% of the contract price (being $344,800) between JP Nelson and Builders Hub for air-conditioning systems. …” ([23]).

 

The finding. Lee Seiu Kin J agreed with JP Nelson that Builders Hub had fraudulently submitted the Five Cappitech Documents to deceive JP Nelson ([69]). Lee J also found that the Five Cappitech Documents induced JP Nelson to make the downpayment of $155,160.00 to Builders Hub ([71]).

However, Lee J declined to set aside the Adjudication Determination and the Adjudication Review Determination, because the facts of the fraud were not relied upon by either the Adjudicator or the Review Adjudicator in arriving at the respective adjudication determinations ([76]).

We set out [77] – [79] below where Lee J explained why the fraud was not relied upon by the Adjudicators:

“77 According to JP Nelson, the Adjudicator relied on the facts of the fraud because he relied on Interim Valuation 37, which provided the Response Amount of $329,284.98. It is undisputed that the Adjudicator found that JP Nelson was liable to pay the Response Amount of $329,284.98 (as set out at paragraph 221 of the Adjudication Determination). The connection to the fraud was that in Interim Valuation 37, JP Nelson certified that Builders Hub was entitled to 75% of the contract sum for Items H(1)(a)(i) and H(1)(a)(ii) on “Air-conditioning system”. This certified amount of 75% was inclusive of the 45% Downpayment that had been tainted by fraud through the fraudulent Five Cappitech Documents. Further, in PC 37, Builders Hub had claimed an additional 5% of the contract sum for Items H(1)(a)(i) and H(1)(a)(ii), and this was certified by JP Nelson, therefore forming part of the Response Sum payable to JP Nelson. Therefore, the Adjudicator relied on Interim Valuation 37, which in turn relied on the Five Cappitech Documents, to issue the determination.

78 In the Adjudication Review Determination, the Review Adjudicator reduced the amount that JP Nelson had to pay Builders Hub by $329,284.98. This was to avoid a double count because JP Nelson had paid the sum of $329,284.98 earlier on 1 July 2022. However, according to JP Nelson, Builders Hub was still retaining the fruits of its fraud as it retained the $329,284.98 paid by JP Nelson. Builder’s Hub should not be entitled to the Response Amount as it was made by Builders Hub’s fraud.

79 In my view, Interim Valuation 37 had not been tainted by fraud. In PC 37, under Items H(1)(a)(i) and H(1)(a)(ii) on “Air-conditioning system”, Builders Hub only claimed an additional 5% of the contract sum from the previous payment claim. The percentage increase was from 70% in payment claim 36 to 75% in PC 37. Subsequently, in Interim Valuation 37, JP Nelson certified the 5% claimed under Items H(1)(a)(i) and H(1)(a)(ii). This 5% then formed part of the Response Amount of $329,248.98. To be clear, however, the remaining 70%, had been claimed in previous payment claims, and was therefore not part of the 5%. Further, in Interim Valuation 37, Builders Hub stated that the “Reason for Difference” from the previous valuation was “Based on Workdone”. Even on JP Nelson’s case, by Interim Valuation 37, Builders Hub had completed 5% of the works. Therefore, none of the Downpayment tainted by fraud formed part of the 5% certified in Interim Valuation 37. As such, when the Adjudicator relied on the Response Amount set out in Interim Valuation 37 to award that sum to Builders Hub, it was untainted by fraud.”

 

Impact of fraud. While the case did not pass the test for setting aside an adjudication determination as set out in Facade Solution Pte Ltd v Mero Asia Pacific Pte Ltd [2020] 2 SLR 1125 ([23]), Lee J cited with approval Denning LJ’s statement in Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712 that “… 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 …” ([80]).

Lee J then found that Builders Hub was still “holding onto the fruits of its fraud” ([81]).

After hearing from the Parties, Lee J found that JP Nelson had overpaid Builders Hub due to the fraud and Builders Hub had secured a substantive benefit in the form of securing an early payment in the form of the downpayment. As such, Lee J held that the Review Adjudicated Amount should be reduced by the amount that Builders Hub had “unlawfully gained as a result of its fraud, ie, $155,160”.

See [83] – [84] as set out below.

“83 Both parties had tendered further submissions on the 75% valuation for the air-conditioning works in Interim Valuation 37. JP Nelson argued that the costs of the air-conditioning units would far exceed the 25% of the contract price that Builders Hub had quoted, and therefore there had been overpayment. Based on Builders Hub’s computations, which relied on Cappitech’s fake quotation sum of $310,990, the air-conditioning equipment cost roughly 54% of the contract sum, and the piping and cable tray works cost about 46% of the contract sum. In contrast, Builders Hub concluded that the air-conditioning equipment costs amounted to $91,740.73, ie, 26.61% of the total contract price of $344,800 for air-conditioning works. This also exceeded the 25% allocation for air-conditioning units installation that Builders Hub had claimed. Therefore, on both parties’ cases, Builders Hub had been overpaid for the air-conditioning works contract. Taking Builders Hub’s case at its highest, it had been overpaid by a sum of $5,540.73.

84 By the end of their contractual relationship, JP Nelson had overpaid Builders Hub, and this was a result of the Downpayment that had been induced by fraud. These monies continued to remain in the hands of Builders Hub. Further, by virtue of its fraud, Builders Hub also acquired another substantive benefit – it secured an early payment in the form of the Downpayment. Conversely, when JP Nelson made early payment, it was exposed to risk of losing the Downpayment, especially if Builders Hub became insolvent. The court takes a serious view towards fraud, and there is no public interest in allowing a litigant who had acted fraudulently to retain the fruits of its fraud. According to Builders Hub, this amounted to about $5,540, and JP Nelson was unable to provide a figure that was substantially higher. As Denning LJ said, “fraud unravels everything” The question then is, what constitutes “everything”? In my judgment, to simply order Builders Hub to repay the sum overpaid would be an inadequate expression of the court’s disapprobation towards fraud. Builders Hub would hardly be worse off, and this order would not account for the early payment received by Builders Hub. Such a lenient view would be insufficient to deter fraudulent conduct. On the other hand, to invalidate the entire Payment Claim would unfairly punish Builders Hub as the amount claimed was far in excess of the $155,160 which was the subject of the fraud. In the circumstances of the case, I held that the Review Adjudicated Amount should be reduced by the amount that the Builders Hub had unlawfully gained as a result of its fraud, ie, $155,160.”

(our emphasis added)

As can be seen from the highlighted portion, the amount by which the Review Adjudicated Amount was reduced was more than the amount of actual overpayment because Lee J found that if Builders Hub was ordered to repay just the sum overpaid, it would not be an adequate expression of the court’s disapprobation towards fraud.

 

Conclusion. While it is difficult to prove fraud, once fraud is proven, it unravels all.

In this regard, Lee J’s decision does not change the test for setting aside an adjudication determination, which remains as set out in the Court of Appeal decision of Facade Solution Pte Ltd v Mero Asia Pacific Pte Ltd [2020] 2 SLR 1125.

However, Lee J’s decision is interesting as it opens the door to arguments that setting aside is not the only recourse that an innocent party can avail itself of in court. As such, even when an innocent party cannot set aside the adjudication determination due to fraud, the innocent party can now argue, or attempt to argue, that the court hearing the setting aside application should register its disapprobation of the fraudulent conduct and act to “unravel” the fruits of the fraud. In this regard, it is important to note that the amount which Lee J reduced the adjudicated amount by is not the amount of overpayment due to the fraud, but the amount of payment induced by the fraud.

Of course, it remains to be seen how Lee J’s decision and reasoning will be applied in future cases. Nonetheless, this decision makes clear that Court takes a dim view of fraud and will act to prevent a party from retaining the fruits of its fraud.

 

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