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Fraud unravels all… or does it?

Definition of fraud Print publication

18/05/2017

Walker Morris’ Head of Banking Litigation, Andrew Beck, reviews a recent case in which the Court of Appeal has provided clarification of the interaction between the competing principles of finality of litigation on the one hand; and fraud unravels all, on the other.

Finality of litigation v fraud

Res judicata is the fundamental legal and public interest principle which states that there should be finality to litigation and that defendants should not face repeated litigation in respect of the same set of circumstances.

The courts also have the power to strike out claims which amount to an abuse of process. Although there is no specific definition of ‘abuse of process’ in this context, it is clear that this covers (non-exhaustively) re-litigation situations; advancing a case or issue that is inconsistent with an earlier judgment [1]; and advancing claims or arguments that could and should have been made in earlier proceedings [2].

Res judicata and the rules against abuse of process exist for the protection of all. The certainty and finality of litigation; the authority and supremacy of a judgment of the court; and the cost-efficiency of the court process for individual parties and for the public as a whole, all depend upon these important principles…

… but what is the position if an earlier judgment has been obtained by fraud?

Under English law, there is no defined cause of action of civil or commercial ‘fraud’. Instead, the term is used to cover a range of legal options, including deceit or fraudulent misrepresentation; claims arising out of conspiracy, bribery, forgery, breach of fiduciary duty and breach of trust; and inducing breach of contract.  As mutuals will know, many of these elements are often found in lender litigation.  The common theme is deliberate action on the part of the wrongdoer which generally involves dishonest conduct.  The law sees any such action as being so serious that the maxim ‘fraud unravels all’ is now well established.  The presence of a fraud might therefore invalidate a contractual agreement or carve-out, or it might lift the bar on re-litigation which would otherwise exist.

In the recent case of Takhar v Gracefield Developments Ltd & Ors [3], the Court of Appeal has provided important clarification of the interaction between the apparently competing principles of res judicata and abuse of process on the one hand; and fraud unravels all, on the other.

Facts and key points

In 2008, a claim which the claimant had issued against the defendant was rejected because, despite the claimant maintaining in those proceedings that she did not remember signing key documentation disclosed by the defendant, she did not have a positive case to assert and she did not have any evidence that her signature had been forged.  Following the court’s judgment against her, however, the claimant went on to obtain evidence of forgery and, in 2013, the claimant issued a fresh claim against the defendant.

The defendant argued that the 2013 claim should not be allowed to proceed pursuant to the rules against re-litigation; particularly in circumstances where evidence of the fraud was not new and could, with reasonable diligence, have been discovered by the claimant before the 2008 trial.  The claimant countered that ‘fraud unravels all’, such that the rules against re-litigation should not apply and/or it would be wrong to impose this ‘due diligence condition’ in the case of fraud.

The case went to the Court of Appeal, which confirmed that, for a judgment to be set aside on the basis of fraud:

  • there has to be a conscious and deliberate dishonesty in relation to evidence given, action taken, statement made or matter concealed, which is relevant to the judgment in question;
  • the dishonest evidence, action, statement or concealment must be material in causing the judgment to have been obtained in the terms that it was [4]; and
  • the party seeking to set aside the earlier judgment must establish that evidence of the fraud was not available at the time of the original trial and could not, with reasonable diligence, have been discovered.

WM Comment and practical advice

The Court of Appeal’s decision represents a balancing exercise between protecting the finality of litigation and preventing the prevailing of a fraud.  That is achieved by the clarification that an allegation of fraud does not dis-apply the obligation on the party making the allegation to exercise due diligence in seeking to advance a positive case and to adduce evidence of fraud in the initial proceedings.

The best practical advice for any mutual involved in litigation who suspects the commission of a fraud is to take diligent steps to obtain evidence of any dishonesty or wrongdoing and to bring it to the attention of the court at the earliest possible time.

If it is not possible to do that before an initial judgment is obtained, an application to set aside will have to be made, and will have to be supported with clear evidence as to how and when the fraud came to light and the steps that were taken by the applicant, both prior to the original trial and since, to prove that the fresh application does not amount to an abuse.

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[1] This abuse tactic is often referred to as ‘collateral attack’
[2] This is known as the rule in Henderson v Henderson (1843) 3 Hare 100
[3] [2017] EWCA Civ 147
[4] Points 1 and 2 derive from the earlier case of Royal Bank of Scotland plc v Highland Financial Partners LP & Ors [2013] EWCA Civ 328

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