Introduction
The interrelation between criminal and civil litigation is becoming ever more apparent. In two recent decisions the High Court deals with the tension between ensuring that finality of litigation is preserved whilst recognising that "fraud unravels all". At the heart of this tension is the question of whether in order to successfully set aside a judgment for fraud, it is necessary to show that the evidence of fraud was unavailable and could not have been obtained with reasonable diligence at the original trial?
In May 2015, two High Court Judges gave apparently conflicting answers to this question.
Balber Kaur Takhar v Gracefield Developments [2015] EWHC 1276 (Ch)
Background to the Case
The background to the case is unfortunately familiar to anyone working in property litigation. It was alleged by Mrs Takhar that various properties in Coventry of which she had been the registered proprietor had been unlawfully or unconscionably transferred out of her name. It was alleged by Mrs Takhar that the transfer of the properties to a company called Gracefield was strictly on the basis that she would still own the properties but that the defendants would be able to recover the expenses of carrying out refurbishment work on the properties.
It was alleged by the Defendant that the agreement was that the properties forming part of the company would have an attributed price of £300,000.00 which would be repaid to Mrs Takhar, but the surplus profit would be split 50/50.
The case was peculiar in that Mrs Takhar, whilst having some suspicions that certain documents which alleged to have her signature may have been forged or doctored, did not advance a positive case and at the time advanced the case that she could not remember signing certain documents. One key document was a Profit Share Agreement which apparently bore Mrs Takhar's signature. Mrs Thakhar made an application for permission to rely on expert evidence, however she had not denied that she signed the document and therefore the judge ruled against her on both the application for permission to call expert evidence and her claim.
Post Judgment
After the trial the Claimant and her son went through an exercise of comparing signatures on the Profit Share Agreement with other signatures within the trial bundles. What was discovered was a precise match of a signature on a letter and the Profit Share Agreement. The Claimant accordingly obtained expert evidence. In a trait which is becoming more common in these types of cases, the expert supported the conclusion that Mrs Takhar never physically signed the Profit Share agreement but rather that in his opinion the signature had been lifted from the letter and superimposed on the Agreement. The report apparently also cast doubt on several other documents relied on by the Defendants.
It is interesting to note that, the allegations against the Defendants could, if substantiated by evidence, amount to criminal offences such as (i) Fraud by false representation, contrary to section 2 of the Fraud Act 2006 (ii) Conspiracy to defraud at common law and contrary to section 1 of the Criminal Law Act 1977 (iii) Perverting the course of Justice, a common law offence.
There seems to have been a missed opportunity to identify these matters at the time by drawing the Court's attention to the similarities in the signatures at the time and seeking to instruct an expert.
The 2013 Proceedings
On 20 December 2013, the Claimant issued proceedings asking that the previous judgment be set aside on the basis that it was obtained by fraud. Further the Claimant sought to amend and introduce a claim for damages for conspiracy/deceit.
The Court examined the legal principles governing applications to set aside judgments for fraud which were summarised in The Royal Bank of Scotland v Highland Financial Partners LP and others [2013] EWCA Civ 328:
- There has to be a "conscious and deliberate dishonesty;
- The relevant dishonesty must be "material"; and
- Materiality is assessed by the impact the fresh evidence would have had on the original decision (rather than if the claim were to be retried).
Reasonable Diligence
Mr Justice Newey considered a key issue in dispute between the parties; whether for a judgment to be set aside on the grounds of fraud, there is a further requirement that new evidence could not reasonably have been obtained in time for the original trial.
Two key cases considered were the House of Lords in Owens Bank Ltd v Bracco [1992] 2 AC 443 and that of the Privy Council in Owens Bank Ltd v Etoile Commerciale SA [1995] 1 WLR 44.
The concept of reasonable diligence in order for a judgment to be set aside was considered in the speech of Lord Bridge at Owens Bank Ltd v Bracco [1992] 2 AC(at 483-484):
"...But it is submitted for the bank that the language of section 9(2)(d) must be construed as qualified by the common law rule that the unsuccessful party who has been sued to judgment is not permitted to challenge that 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."
Lord Templeman, in the Privy Council in Owens Bank Ltd v Etoile Commerciale SA put matters as follows(at 48):
"An English judgment is impeachable in an English court on the ground that the first judgment was obtained by fraud but only by the production and establishment of evidence newly discovered since the trial and not reasonably discoverable before the trial: see Boswell v. Coaks (No. 2) (1894) 86 L.T. 365n."
Applying such reasoning to the present case would present a real difficulty for Mrs Takhar. The evidence which triggered her call for expert evidence was within the trial bundle. She had previously raised the issue of expert evidence and correspondence in the case showed clearly that fraud had been raised, if not formally in the pleadings. It is certainly arguable that the evidence of fraud could have been reasonably discovered before the trial.
The judgment provides a careful exploration of the relevant case law of the UK and further afield including Australian and Canadian cases.
Mr Justice Newey concluded that a party seeking to set aside a judgment simply has to comply with the requirements in The Royal Bank of Scotland v Highland Financial Partners LP and others [2013] EWCA Civ 328 and does not also have to show that the new evidence could not reasonably have been discovered in time for the original trial. He ruled at 37
"37. To my mind, the reasoning in the Australian and Canadian cases is compelling. Finality in litigation is obviously of great importance, but "fraud is a thing apart". Supposing that a party to a case in which judgment had been given against him could show that his opponent had obtained the judgment entirely on the strength of, say, concocted documentation and perjured evidence, it would strike me as wrong if he could not challenge the judgment even if the fraud could reasonably have been discovered. Were it impossible to impugn the judgment, the winner could presumably have been sent to prison for his fraudulent conduct and yet able to enforce the judgment he had procured by means of it: the judgment could still, in effect, be used to further the fraud".
The judge went on to dismiss the application for permission to amend the claim on the basis that it did not stand a real prospect of success and was more likely than not statute barred.
The judgment presents careful examination of the conflicting case law in this area. In this particular case the judge was concerned with an application to strike out the case as an abuse of process and therefore the test was whether there was a real prospect of success for Mrs Takhar and on the facts he found that there was. In this case the scales of justice swayed against finality of litigation, or at least against finality of litigation which may be tainted by fraud.
This was in contrast to the court's treatment of the same issue in the case of Chodiev & others v Stein [2015] EWHC 1428
Chodiev & others v Stein [2015] EWHC 1428
Contrasting Takhar with that of Chodiev reveals potentially where the Court will draw the line, when impeaching on the principle of finality of litigation.
Background to the Case
In the original proceedings Mr Stein, a qualified lawyer, banker and corporate financier brought a claim against 3 billionaire oligarchs who had founded a business which became ENRC Plc, a natural resources company which was listed on the London Stock Exchange in December 2007. Mr Stein who had been appointed as a consultant on behalf of the Defendant claimed money owed to him pursuant to an oral agreement with the Defendants in respect of an entitlement to a success fee of 0.5% relating to his work in raising US$1.48 Billion in trade finance and US$3.1 Billion from an Initial Public Offering ("IPO").
It is common ground that in January 2006 after initial discussions, the Claimant and Defendant reached an oral agreement in respect of 0.5% success fee for the Claimant (the January Agreement). The Defendants told the Claimant this agreement must be kept confidential.
In September 2006 two service agreements were executed between two companies associated with the Claimant and the Defendants relating to parts of his remuneration and a contract was executed between a company called Auderley, described in the judgment as a "consultancy company which employs" the Claimant and a company called Darcon Marketing, described as "an entity obviously emanating from the Defendants". The 'Darcon Contract' picked up the balance of the Claimant's unpaid retainer and the guaranteed minimum bonus. It was common ground that there had been included in a previous draft agreement the Defendant's entitlement to a 0.5% success fee and that this had been removed from the Darcon Contract as executed.
The Defendants alleged that although a success fee of 0.5% had been agreed (albeit only in respect of the trade finance), it had been taken out of the executed agreement because it was discretionary. Mr Stein on the other hand contended that the Defendants insisted on the clause being taken out because, although agreed, they said it must remain confidential.
By virtue of what the Defendant's accepted was excellent work on the part of the Claimant, the Defendants received US$1.48 Billion from trade finance in March 2007 and in September 2007 the IPO was completed raising US$3.1 Billion. The Defendants did not, however, pay the Claimant the full 0.5% success fee he expected and after several complaints he issued proceedings for the money he claimed was owed to him.
The central issue for Burton J to determine was whether the Defendants had agreed to engage the Claimant on the basis of a fixed percentage success fee of 0.5% for both the trade finance and the IPO, and whether that had been compromised by subsequent agreements between the parties. Burton J also needed to determine who the contract was with, but this issue was limited to the question as to with whom the Claimant made the contract, it being denied that the contract was made with the Defendants personally.
Burton J determined all the central issues in favour of the Claimant and accordingly gave judgment against the Defendants. Whilst acknowledging that much depended on his assessment of the witnesses, Burton J made it clear that in reaching his conclusions he relied on corroboration from contemporaneous documentation, independent witnesses and the inconsistent and dishonest evidence of the Defendants on the central issues.
Post Judgment
After the trial, the Defendants obtained from a court in Cyprus an order for disclosure of documents by Abacus Limited, a corporate services company responsible for administering Auderly. These documents appeared to show that the Claimant was the beneficial owner of Auderly (Not Mr Zakharov as the Claimant had said during the trial).
It is interesting to note that the details of Abacus openly appeared on at least two of the agreements providing the Claimant's services to the Defendants referred to during the original proceedings.
Similar to the situation in the Takhar case there is an argument that a reasonably diligent legal team would have been able to find out the desired information as to the identity of the owner of Auderly and to have obtained all the other documents relating to Auderly which were subsequently obtained after the trial.
The 2015 Proceedings
The Defendants issued fresh proceedings seeking to set aside the judgment on the ground that it had been obtained by fraud because the Claimant had been dishonest in his evidence. In particular the proceedings were based on the assertion that the Claimant dishonestly told lies during the trial by stating that Auderly was owned by Mr Zakharov, when in fact the Claimant himself beneficially owned Auderly.
As Newey J had done in the Takhar case, Burton J examined the legal principles governing applications to set aside judgments for fraud but he arrived at a different conclusion.
In addressing the issue of whether there must not only be evidence that was not before the first court but evidence which could not have been obtained by reasonable diligence (the "Reasonable Diligence requirement") Burton J referred to Dicey, Morris & Collins, The Conflict of Laws, 15th ed (2012), para 14–138:
"a party against whom an English judgment has been given may bring an independent action to set aside the judgment on the ground that it was obtained by fraud; but this is subject to very stringent safeguards, which are found to be necessary because otherwise there would be no end to litigation and no solemnity in judgments. The most important of these safeguards is that the second action will be summarily dismissed unless the Claimant can produce evidence newly discovered since the trial, which evidence could not have been produced at the trial with reasonable diligence,[my underlining] and which is so material that its production at the trial would probably have affected the result, and (when the fraud consists of perjury) so strong that it would reasonably be expected to be decisive at the rehearing and if unanswered must have that result".
Mr Justice Burton considered the authorities in the House of Lords and the Court of Appeal, Hunter v Chief Constable of the West Midlands Police[1982] AC 529 and Owens Bank Ltd v Bracco [1992] 2 AC 443, 483 provided clear and compelling evidence of the (binding) proposition that actions to set aside a judgment as obtained by fraud required the satisfaction of the reasonable diligence requirement.
Hunter was a case where the decision of a criminal Court was sought to be reopened by way of a challenge in a subsequent civil action where Lord Diplock expressed himself in full agreement with the judgment in the Court of Appeal of Goff LJ, who had concluded that the challenge failed in limine because the "so called 'fresh evidence' on which they seek to rely on the civil action was available at the trial, or could by reasonable diligence have been obtained then".
He approved that proposition, and also Goff LJ's adoption of the test "as to the character of fresh evidence which would justify departing from the general policy by permitting the plaintiff to challenge a previous final decision against him by a court of competent jurisdiction" as being new evidence must be such as "entirely changes the aspect of the case".
Upon considering the evidence Burton J found that there was an arguable case that, contrary to what he had said in cross examination, the Claimant was the beneficial owner of Auderly. Importantly Burton J determined that had he known, and found that the Claimant had lied in relation to the beneficial ownership of Auderly, he would have addressed it, but it would have made no difference whatever to his conclusion.
Burton J made it clear that the alleged lies relating to the Claimant's ownership of Auderly were plainly collateral issues. The case he was actually deciding was whether the Defendants had agreed to engage the Claimant on a fixed percentage success fee for both Trade Finance and the IPO and whether that had been compromised. Burton J stated that even if the lies had been established it would not have caused him to come to a different conclusion given (i) the support and corroboration from contemporaneous documents (ii) support and corroboration of the Claimant's case by reference to convincing evidence from independent witnesses (iii) the inconsistent and, in important respects, dishonest evidence of the Defendants on central issues.
In any event, Burton J stated that 'fresh evidence' was required and crucially he considered that this required the satisfaction of the Reasonable Diligence requirement. In determining whether the Defendants had satisfied the Reasonable Diligence requirement Burton J referred to the fact that the Defendants always knew about Auderly. The Claimant provided his services through Auderly as the Defendants knew. Contracts and agreements including the Darcon contract were entered into with Auderly between 2007 and 2011 and two of these agreements contained the details of Abacus, a corporate services company responsible for administering Auderly. The case was based upon information obtained by the Defendants pursuant to the order of the Cypriot court against Abacus obtained after the conclusion of the trial. Burton J concluded that it was plain that the Defendants could have obtained the information prior to the trial. Burton J stated that reasonable or any diligence would have enabled the Defendants to access Abacus to find out the desired information as to the identity of the owner of Auderly, and to obtain all the other documents which were subsequently obtained by order after the trial.
After writing the judgment, but before distributing it, Burton J received a note from counsel for the Defendants drawing his attention to the judgment of Newey J in Takhar v Gracefield Developments Ltd [2015] EWHC 1276 (Ch), in which he had concluded that the reasonable diligence requirement did not have to be satisfied.
Burton J respectfully disagreed with Newey J's decision, by which he was not bound and noted that Newey J had not been referred to Hunter's case, which Burton J considered was binding on him and which Newey J might well have also concluded bound him. In any event, Burton J made it clear that he reached his decision, not to set aside the original judgment, independent of the Reasonable Diligence requirement.
Comparing the facts of these two cases, an important distinction can be made between the alleged frauds which instigated the losing party's decision to apply to set aside the original judgment. In the Takhar case the allegation that the Defendants had superimposed Mrs Takhar's signature onto various key agreements, including a crucial 'profit share agreement' went to heart of the issues in dispute in the case. It is certainly arguable that if the evidence of forgery had been established during the original trial then it is likely that this would have had a material effect on the outcome of the case.
On the other hand, in the Chodiev case the allegation that the Claimant had lied about his beneficial ownership of Auderly was plainly a collateral issue and Burton J made it clear that even if the lies had been established it would not have caused him to come to a different conclusion.
In both cases it could be said that the evidence of the alleged frauds could, through reasonable Diligence, have been discovered and put before the court during the original trials. Had Newey J been referred to Hunter's case and considered it binding upon him then the result in the Takhar case may have been different; it is possible that the Defendant's application to strike out the Mrs Takhar's Application to set aside the previous judgment may well have been successful on the basis that it is unlikely Mrs Takhar would have satisfied the Reasonable Diligence requirement.
In the light of these two conflicting decisions the position is uncertain and we can expect these issues to be examined by the appellate courts soon.
If parties suspect that the other is relying on fraudulent means to advance its case, they should take diligent steps to gather evidence of such fraud, and if appropriate, advance a positive case to reduce the risk of finding themselves bound by a judgment in the other party's favour.
Another alternative for the victims of alleged fraud would be to bring parallel criminal proceedings either by convincing the Crown or Statutory Prosecuting Authorities to prosecute or to bring a private prosecution. Although less well known, section 6(1) Prosecution Offences Act 1985 provides the right for individuals and companies to bring a private prosecution which can often prove quicker, more focussed and more efficient than public prosecutions, especially in cases involving fraud.
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.
