Australia: Ten key principles of fraud and the requirement of specificity: Nadinic v Drinkwater [2017] NSWCA 114

Last Updated: 10 July 2017
Article by Andrew Probert


The New South Wales Court of Appeal judgment in Nadinic v Drinkwater [2017] NSWCA 114 again highlights the importance of specifically pleading and particularising fraud if such a case is to be relied upon by a party to proceedings. In doing so, it adopted a similar finding to the Court of Appeal's earlier decision of Sgro v Australian Associated Motor Insurers Ltd [2015] NSWCA 262 in which the Court was critical of the manner in which the allegations of fraud had been pleaded in the insurer's defence. (See our September 2015 article Fraudulent claims case shows difficulties insurers face: Sgro v Australian Associated Motor Insurers Ltd [2015] NSWCA 262.)

In Drinkwater v Nadinic [2016] NSWSC 1364, no specific allegations of fraud were pleaded. However, the trial judge still made findings in this regard. The Court of Appeal was critical of this, stating that, as a matter of principle, the findings of fraud were not available to be made.


The appellant, Mr Nadinic, was a co-director and co-shareholder with Ms Drinkwater of Brooks Parade Pty Ltd, a company involved in property development and which had contracted with a builder to develop land in Belmont, New South Wales. Broadly, Ms Drinkwater had supplied the Belmont land and Mr Nadinic had supplied the construction and building services (through a company of which he was the sole director).

After a "falling out", they executed a deed of settlement by which Ms Drinkwater agreed to buy Mr Nadinic's one half share in the development company. Ms Drinkwater granted a second mortgage over the Belmont land in favour of Mr Nadinic to secure her obligation to pay the settlement sum. Mr Nadinic also resigned as a director of the company. Ms Drinkwater did not pay the settlement sum within the time required and when Mr Nadinic had sought to enforce the mortgage, she issued proceedings seeking interlocutory orders to restrain Mr Nadinic from doing so. The trial proceeded without pleadings on an expedited basis (although statements of issues, written submissions and affidavits were filed).

At first instance, his Honour Pembroke J found in favour of Ms Drinkwater and set aside the mortgage and part of the deed of settlement on the basis that Mr Nadinic had participated in a dishonest scheme to manipulate the GST system to the benefit of a third party and had engaged in "naked dishonesty" (Drinkwater v Nadinic [2016] NSWSC 1364 at [23]). The alleged scheme involved the builder rendering inflated invoices to the development company which then paid input tax credit refunds to a third party. His Honour determined that Mr Nadinic had deliberately concealed this scheme from Ms Drinkwater and that had she known of the dishonest scheme, she would not have entered into the deed of settlement, part of which was set aside.


The Court of Appeal (comprising Beazley P, Leeming JA and Sackville AJA) unanimously allowed Mr Nadinic's appeal and has ordered a retrial. In doing so, they held that the findings of fraud were not available to the trial judge.


Helpfully, the lead judgment of Leeming JA sets out a summary of some ten key principal concepts relevant to a claim of fraud in common law and in equity:

  1. There are two senses in which "fraud" is used in civil litigation. At common law the position is set out in Derry v Peek [1889] UKHL 1 and in equity in Nocton v Lord Ashburton [1914] AC 932, the difference turning on the state of mind of the person said to have committed the fraud. At common law, fraud is proved when it is shown that a false representation is made knowingly, without belief in its truth or recklessly careless as to whether it be true or false. In equity, establishing fraud does not require an actual intention to cheat to be proved (at [22]).
  2. Save in the special case of insurance (which is governed by the provisions of the Insurance Contracts Act 1984 (Cth)), a contract may only be rescinded at common law for fraudulent misrepresentation. In equity, rescission is available for innocent misrepresentation (which does not involve a finding of fraud in the "ordinary sense") (at [23] and [24]).
  3. His Honour then developed the principle of rescission and restoring parties to their pre-contractual position, making reference to the equitable principle of restitutio in integrum and noting that the validity of a purchaser's rescission for fraudulent misrepresentation in Alati v Kruger (1995) 94 CLR 216 depended upon whether restitutio in integrum was possible (at [27]-[29]).
  4. Rescission in equity is discretionary and may be declined if an equitable defence is established (at [32]).
  5. Rescission in equity for fraud, in the sense of dishonesty or reckless indifference to the truth, differs from cases of rescission where such fraud has not been made out (at [34]). In cases of fraud, equity has power to include an indemnity for loss directly caused by the fraud (at [35]).
  6. Fraud does not "unravel everything", despite the legal proposition to that effect (at [37]).
  7. An allegation of fraud in the sense of deliberate falsehood or reckless indifference to the truth must be pleaded specifically and particularised (at [45]). "A pleading of fraud will necessarily focus attention upon what it was that the person making the statement intended to convey by its making. And the pleading must make plain that it is alleged that the person who made the statement knew it to be false or was careless as to its truth or falsity" (at [46], citing Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486).
  8. The finding of fraud is a serious one such that the strict evidentiary requirements of Briginshaw v Briginshaw [1938] HCA 34 as enacted in section 140 of the Evidence Act 1995 (NSW) must be met (at [47]).
  9. The seriousness of a finding of dishonesty or reckless indifference to the truth will ordinarily mean that it may not be made without an opportunity being given to deal with the criticism (at [48]).
  10. It is important to remember what was said by her Honour Beazley P in Sgro v Australian Associated Motor Insurers Ltd namely: "The seriousness of a finding of fraud, including statutory fraud, does not permit of other than a specific finding that the fraud, or the contravening conduct, has in fact occurred" (at [49]).


Even in the absence of pleadings, neither the statement of issues nor written submissions provided the required detail to sustain a claim in fraud. Ms Drinkwater swore no fewer than five affidavits in which she complained of an absence of awareness in relation to the GST refunds. Importantly, however, she made no specific allegations of fraud or dishonesty. Nor was it alleged that Mr Nadinic had deliberately concealed information from Ms Drinkwater (at [54] and [58]).

His Honour Leeming JA identified that the essential elements of fraud were not identified in the sense of dishonesty, reckless indifference to truth and Mr Nadinic's state of mind (at [102]). He continued that the seriousness of such allegations requires them to be put in a way which is procedurally fair (at [108]). Importantly, in the absence of any cross-examination on the point, his Honour held (at [109]) that "fairness dictated that the primary judge refrain from making findings of dishonesty".


Each of the judges of the Court of Appeal agreed that, as a matter of principle, it was not open to the primary judge to make a finding of fraud in circumstances where Ms Drinkwater had not pleaded or formulated a case founded on fraud (at [1], [105], [155]).

Further and importantly, Sackville AJA noted that no allegations of fraud were put to Mr Nadinic in cross-examination except in the form of one broad question, which the primary judge had in fact stated was outside the case advanced by Ms Drinkwater (at [153]). The result was that the primary judge's findings of fraud lacked specificity and did not precisely identify which aspect of the "fraudulent" conduct in fact caused Ms Drinkwater to execute the deed of settlement (at [155]).


Although not an insurance case, the decision in Nadinic v Drinkwater is a timely reminder, including for insurers, that given the serious nature of fraud, allegations must be clearly pleaded and properly particularised. Some attempt must be made to put the party on notice that the impugned conduct is beyond just misleading and deceptive conduct, but in the realms of fraudulent misrepresentation, dishonesty and deceit. Importantly, clear and cogent evidence of fraud is necessary to prove the allegation. It is insufficient for such allegations to be supported by inexact proofs, indefinite testimony or indirect inferences (at [121]).

As Leeming JA identified (at [113]), there are often occasions when a party consciously does not plead fraud or dishonesty as to do so may affect a claim under an insurance policy (for example if there is a fraud exclusion) or an indemnity.

Accordingly, given the serious nature of fraud, Nadinic v Drinkwater makes it clear that:

  • there must be a conscious decision to plead fraud or dishonesty before a Court can make a finding
  • a party must be given procedural fairness by having the allegations properly articulated, and the opportunity to respond
Andrew Probert
Insurance and reinsurance
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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