Summary Judgment In Fraud Claims – Update

Nevertheless, cases during 2001 have raised new issues and have clearly illustrated the differences between the regimes under the CPR and the old Rules of the Supreme Court. The Courts have begun on occasion to assert their power to award summary judgment of their own motion, and have made increasing reference to the objectives of the CPR. Furthermore, in many of the recent cases which have discussed the meaning of Part 24, it has been the defendant to a fraud claim who has applied for summary judgment – something which was impossible under the old rules. The question in those cases has been whether there is no real prospect of an allegation of fraud being established. As in cases where it is the claimant seeking summary judgment, a real factual or legal dispute will mean that the defendant’s application is unlikely to succeed. For example, in Clarke v. Marlborough Fine Art (London) Ltd (The Times, 5 July 2001), the defendant was refused summary judgment because there was a serious question as to whether a fiduciary relationship had developed over a period of several years.

The scope of the Courts’ power to award summary judgment has also been considered by the House of Lords, in Three Rivers District Council v. Bank of England (No. 3) [2001] 2 All ER 513, a case concerning the Bank of England’s role in the regulation of BCCI. The claim was not for fraud but for misfeasance in public office. However, the cause of action depended on establishing bad faith or dishonesty on the part of the Bank, and the decision is relevant to other types of claim involving dishonesty. The case divided the House of Lords, who dismissed the defendant’s application for summary judgment by a bare 3-2 majority, the leading judgments being those of Lords Hope and Hutton.

The Three Rivers case raised a number of important issues. First, the defendant had originally applied to strike out the claim under CPR 3.4 on the ground that it "disclosed no reasonable cause of action" and only sought summary judgment under CPR 24.2 when the case came before the House of Lords. Lord Hope held that, where a party had applied to strike out, an appeal court had the power to treat the application as one for summary judgment. Conversely, in Sinclair v. Chief Constable of West Yorkshire (Court of Appeal, 12 December 2000), where the defendant had applied for summary judgment under Part 24, the Court of Appeal held that it would have been prepared to strike out the claim of its own motion under CPR 3.4. These statements suggest that applications for summary judgment and strike-outs may be treated interchangeably.

Secondly, Lord Hope considered the legal test for granting summary judgment. He noted that the question on an application for summary judgment was whether a party had "no real prospect of success", whereas a strike-out would only be ordered if the party was "bound to fail". However, he held that it was not easy to see the difference between the two tests, and that in many cases their practical effect would be the same. (Indeed, in a few recent decisions, judges have appeared to regard the tests for disposing of cases under Parts 3 and 24 as the same e.g. Sinclair v. Chief Constable.) Instead, Lord Hope stressed the need to give effect to the overriding objective of dealing with cases justly, which meant that cases with no reasonable prospect of succeeding at trial should be stopped before great expense was incurred. In complex and difficult cases, attention to that principle was likely to be more important than searching for the precise meaning of "real prospect of success".

An interesting example of how these considerations may arise on an application for summary judgment is Partco Group Ltd v. Wragg (Leveson J, 25 September 2001). Claims were brought against former company directors for negligence, breach of fiduciary duty and fraud. The defendants applied for summary judgment on the claims for negligence and breach of fiduciary duty, but not on the allegations of fraud. Leveson J refused the applications, on the ground that even if the applications were granted the trial judge would still have to consider exactly the same issues of fact in order to determine the fraud claims. It was unlikely that any time or expense would be saved by granting summary judgment.

The third important aspect of Lord Hope’s judgment in the Three Rivers case is the significance he attached to the complexity of the case. It has been established for some time that if an application to strike out would involve "prolonged and serious argument" the judge should refuse to hear it unless he has doubts about the soundness of the pleaded case and is satisfied that hearing the application would save time later in the proceedings (Williams and Humbert Ltd v. W & H Trade Marks Jersey Ltd [1986] AC 368; also Sinochem International Oil (London) Co Ltd v. Mobil Sales and Supply Ltd, Aitkens J, 24 May 2001). Lord Hope held that in simpler cases it would be easier to conclude that the claim was fanciful and to grant summary judgment. However, it was unlikely that more complex cases could be resolved in that way without conducting a "mini-trial" on the documents. As Lord Woolf noted in Swain v. Hillman, that is not the purpose of summary judgment, which is designed to dispose of cases that are not fit for trial at all, without extensive examination of evidence and documents.

In the Three Rivers case the factual issues were particularly complex, since they related to the activities and states of mind of large numbers of Bank of England officials over a long period of time, and there were also complex questions of law. Furthermore, the claimants’ pleaded case as to the state of mind of the Bank’s officials depended on drawing inferences from the available documents. It was this aspect of the case which divided the House of Lords. The minority (Lords Hobhouse and Millett) would have granted summary judgment on the ground that there was nothing in the documents to suggest that the claimants would be able to establish wrongdoing by Bank officials. However, Lord Hutton held that it was not necessary for the claimants to have direct evidence of officials’ states of mind, and took account of the fact that further material might become available to the claimants before trial. Lord Hope held that the Court would not normally reach a conclusion about a party’s mental state without seeing and hearing the relevant witnesses at trial. As a result, the case was unsuitable for summary disposal. To the same effect, Colman J has recently held that, where a claim depends on inferences to be drawn from primary facts, summary judgment will only be granted against the claimant if the judge is confident that there is no real prospect that a Court will be able to make the necessary inferences after hearing witnesses at a full trial (De Molestina v. Ponton, 16 May 2001; Glowrange Ltd v. CGU Insurance plc, 29 June 2001).

Fraud cases frequently require investigation of complicated sets of transactions and of people’s mental states. Therefore, although the House of Lords regarded the Three Rivers case as exceptionally complex, fraud claimants should be able to rely on the principles set out in that case in order to defeat defendants’ applications for summary judgment. As these cases indicate, the Courts will be reluctant to grant summary judgment in any but the clearest of cases.

"© Herbert Smith 2002

For more information on this or other Herbert Smith publications, please email us."