Fraud Unravels Some More

Fraud Unravels Some More

The Increasing Importance of Fraud in Security of Payment Cases

Robert Fenwick Elliott, Barrister

The recent decision in Sugar Australia v Southern Ocean Pty Ltd [2013] VSC 535, a decision of Justice Vickery on 15 October 2013, sheds some vivid light on the potential importance of fraud in security of payment cases. This paper considers how the law stands in this area, how this case develops the detailed application of the relevant principles, and what the potential avenues are for parties seeking to challenge adjudicators’ determinations on this ground.

A starting point is not hard to find; the statement of principle that has been repeatedly cited is that of Lord Denning in Lazarus Estates Ltd v Beasley [1956] 1 QB 702, 712:

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…

The reference to “all transactions whatsoever” needed be treated with some caution, for example in the context of real estate transactions affecting third parties, but it is well established in Australian law that fraud is a ground for certiorari; SZFDE v Minister for Immigration and Citizenship [2007] HCA 35.

It will be necessary to consider in more detail below what “fraud” means in this context, but it might be noted at the outset that dishonesty is hugely common in the area of construction claims. Those of us who have practised in the field for many years will have seen many cases where a party who has done work will knowingly exaggerate the quantity of work done for the purpose of interim payment applications, or exaggerate the impact of some event such as the ordering of a variation has had on his work, or support his application for payment with a statutory declaration saying that all subcontractors have been paid, when he knows full well that that is not the case[1]. In many cases, the party in question might well feel that such conduct is normal practice or even appropriate: for example he may feel that he owes it to his own subcontractors to pass on claims even if he does not personally think they are accurate, on the basis that it is for the next party up the contractual chain to knock the application down.

For the purpose of illustrating the point, suppose a contractor puts in his first monthly claim for a number of items including the laying of 500 bricks. In fact, he knows that he has laid less bricks than that, because the first pallet delivered to site of 500 bricks is still sitting beside the site hut, and there are still some unlaid bricks on the pallet. On more or less any test, that is fraud. The contractor would be liable in the tort of fraud (deceit) if anyone took the trouble to so allege, but in practice such allegations are rare because they are typically pointless. If the issue were to come to trial, judges and arbitrators rarely characterise such behaviour as fraudulent: instead they are much more likely to deal with the matter as neutrally as possible, deciding whose evidence to prefer on how many bricks were in fact laid, and perhaps forming a view as to the creditworthiness of the various witnesses. No different or better result is achieved by the other party pleading fraud.

But suppose now that the contractor’s claim is being advanced, not in court, but by way of an adjudication under one of the Security of Payment Acts? The respondent might simply challenge the number of bricks laid in her payment schedule and adjudication response, but if the adjudicator nevertheless finds in favour of the claimant, is there any mileage in a challenge based on fraud? It seems that there might well be.

The early steps by the court in this area were cautious. Thus in Multiplex Constructions Pty Ltd v Luikens and Anor[2], Palmer J said at [34]:

34 It seems clear enough that relief will be granted where the adjudicator’s determination is the result of jurisdictional error: see Musico at paragraphs 42ff. Jurisdictional error will arise where, for example, the adjudicator’s decision:
– was given in bad faith or was procured by fraud…

But that hardly took matters anywhere: fraud was not in fact in issue in that case, such that the remark was obiter, and in any event, did not expand on what “procured by fraud” means.

In Brodyn Pty Ltd. t/as Time Cost and Quality v Davenport & Anor[3], Hodgson JA was more specific (albeit again still strictly obiter on this point):

60 If there is fraud of the claimant in which the adjudicator is also involved, the determination will be void because the adjudicator has not bona fide attempted to exercise the power. If the determination is induced by fraud of the claimant in which the adjudicator is not involved, then I am inclined to think that the determination is not void but voidable; and it is liable to be set aside by proceedings of the kind appropriate to judgments obtained by fraud.

Fraud in which the adjudicator is involved will be very rare; the much more common case will be where the determination is induced by fraud in which the adjudicator is not involved. But what does “induced by” mean? It now appears clear from Sugar Australia that a determination may be induced by a fraud in the commencement of the claim process, such as by the subsequent doctoring of a payment claim so as to include an endorsement that was not originally on the document. But does it also include our hypothetical case, where the fraud consists simply of the claimant making a claim on the basis of facts that he knows to be untrue?

In 2008, the Supreme Court of the Northern Territory considered the point in Trans Australian Constructions Pty Ltd v Nilsen (SA) Pty Ltd and Ford[4]. Southwood J said:

[67] In my opinion the essential requirements of a valid payment claim are as follows:

1. …

3. The payment claim must be a bona fide claim and not a fraudulent claim…

That would appear to be clear. Our hypothetical case is a case of a fraudulent claim, and so the logic of this decision is that the determination made following a fraudulent claim is void, there never having been a valid payment claim. It is immediately to be noted that this conclusion is not the same as that suggested by Hodgson JA in Brodyn, that such a determination is not void, but merely voidable. It is also to be noted that, although there seems to be no difference in principle as to why the position under the West Coast Model (which applies in the Northern Territory) should be any different in this respect from the East Coast Model, yet there appear to be no cases outside the Northern Territory where Southwood J’s formulation as to fraud has been considered. Conversely, there has been a good deal of attention on the East Coast given to the question of whether a payment claim, to be valid, must be bona fide. After a little flirting with the answer “yes”[5], the authority is now clearly “no”[6].

Something much closer to our hypothetical case came before the Supreme Court in Queensland in 2010 in Hansen Yuncken Pty Ltd v Ian James Ericson trading as Flea’s Concreting[7]. The applicants were seeking to challenge an adjudicator’s determination on the grounds of breach of natural justice (nothing surprising there) and also fraud. The first respondent, being the party in whose favour the determination had been made, sought to strike out that part of the challenge claim. As at the time of the strike out application, an interim injunction had been obtained restraining enforcement. McMurdo J set the scene:

[4] The applicant’s other ground for challenging the adjudicator’s decision is that it was procured by the fraud of Mr Ericson. It is alleged that he put evidence before the adjudicator which he knew was untrue. In particular he provided documents to the adjudicator, which were not copied to the applicant, which on their face proved Mr Ericson’s employees had worked a certain number of hours and at certain rates. The applicant alleges that the actual hours worked and paid for by Mr Ericson were less than he represented, as were the hourly pay rates which Mr Ericson paid.

[5] For Mr Ericson it is argued that an adjudication determination is not invalid by reason that it was procured by fraud, save where the adjudicator is also involved in that fraud. There is no suggestion that this adjudicator was fraudulent. The applicant’s case is that the adjudicator was himself defrauded by Mr Ericson.

So, the court had to consider the doctrine that “fraud unravels everything”. Well, plainly not everything: the courts are not at all keen to have their own decisions unravelled, even if induced by fraud. Justice McMurdo summarised these principles:

[16] This jurisdiction to impeach a judgment obtained by fraud is “equitable in origin and nature”, as Kirby P said in Wentworth v Rogers (No 5). But because of the importance of the finality of a judgment, any attempt to re-open litigation on the ground that a judgment was obtained by fraud, must to be confined within “very restrictive limits”, as Lord Bridge of Harwich said in Owens Bank Ltd v Bracco. In Cabassi v Vila, Williams J said that it was only in “very exceptional cases” that perjury would be a sufficient ground for setting aside a judgment and that he had been unable to find any case in which a judgment had been set aside “where the only fraud alleged was that the defendant or a witness or witnesses alone or in concert had committed perjury”. That was cited by Windeyer J in McDonald v McDonald and in the joint judgment in SZFDE v Minister for Immigration and Citizenship. The history and nature of this jurisdiction were extensively discussed by the Full Court of the Federal Court (Spender, Gummow and Lee JJ) in Monroe Schneider Associates (Inc) v No 1 Raberem Pty Ltd (No 2). The Full Court said that an application to set aside a judgment on this ground must be based upon evidence which was

i.  discovered only after the trial,

ii.  could not have been found by the time of trial by the exercise of reasonable diligence,

iii.  was so material that its production at the trial would probably have affected the outcome and

iv.  must be so strong that it would reasonably be expected to be decisive at a rehearing and if unanswered would have that result.

In Wentworth v Rogers (No 5) Kirby P said that it must also be shown that

v.  the successful party was responsible for the fraud which taints the judgment under challenge.[8]

In this case, all of these five elements had been pleaded out, and having dismissed the argument that the jurisdiction to impeach for fraud is ousted by the policy of the Security for Payment legislation, it was an easy step for the court to refuse the strike out application:

[18] If there is a jurisdiction to set aside a judgment which might have resulted from this adjudication decision, it is apparently accepted in the argument for Mr Ericson that there would be a like jurisdiction to give relief against the consequences of an adjudication decision obtained by fraud, such as by setting aside that decision and restraining any step to enforce it.

[19] In my conclusion, the basis argued for striking out the fraud case (which is pleaded in paragraphs 37 to 51) cannot be accepted.

The Hansen Yunken case thus wedged the door for fraud challenges somewhat further open, but it was another three years before the issue returned to the Supreme Courts stage, in Sugar Australia v Southern Ocean, a decision of Vickery J in Victoria on 15 October 2013. In a sense, the subject matter is a step further back from our hypothetical case, because the challenge was not based on fraud in the subject matter of the claim, but rather that on the basis that the purported payment claim put before the adjudicator had been altered to add the necessary endorsement that it had been made under the Act. That said, the decision wedges that door yet further open in more than one respect.

First, the “very restrictive” fivefold test that was assumed to apply in Hansen Yunken was dismissed wholesale in this context. Vickery J said:

53. Mr Andrew, who appeared for Southern Ocean, referred to the principle, which has received considerable judicial attention, that an unsuccessful party that is being sued to judgment, is not permitted to challenge the judgment on the ground that it was obtained by fraud unless he is able to prove that fraud by fresh evidence, which was not available to him and could not have been discovered with reasonable diligence before the judgment was delivered. For present purposes, I do not find this principle to be directly applicable to an application for the issue of certiorari founded upon jurisdictional error alleged to arise from a fraud. When and under what circumstances the applicant comes across the evidence which may justify relief in the nature of certiorari on the ground of jurisdictional error, is arguably not relevant, except possibly to the extent that it may bear upon the exercise of the discretion as to whether or not to grant the relief sought, in the event of excessive delay, for example.

Vickery J, having rejected the fivefold test, then demonstrated that the test that instead applies to adjudicators’ determinations is significantly less restrictive.

The requirements that the fraud be discovered only after the trial, and could not have been found by the time of trial by the exercise of reasonable diligence, do not apply, at any rate where the fraud goes to jurisdiction, and probably in any event.