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

IN BRIEF - FRAUD ALLEGATIONS MUST BE CLEARLY PLEADED AND PROPERLY PARTICULARISED

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.

FIRST INSTANCE JUDGE SATISFIED OF FRAUDULENT CONDUCT

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.

COURT OF APPEAL OVERTURNS FIRST INSTANCE JUDGMENT

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.

TEN KEY PRINCIPLES OF FRAUD AT COMMON LAW AND IN EQUITY

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]).

PLEADING FRAUD REQUIRES SPECIFICITY

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".

FRAUD FINDING OF COURT MUST ALSO PROVIDE SPECIFICITY

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]).

IMPLICATIONS FOR PARTIES, INCLUDING INSURERS, INTENDING TO PLEAD FRAUD

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Andrew Probert
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.