Courts as the instrument of fraud

9 April 2019

A guest post by Paul Marshall, who practises from Cornerstone Barristers

Marshall: Tale behind the case is a modern take on Jarndyce v Jarndyce

Lord Briggs described the Supreme Court decision Takhar v Gracefield Developments Ltd and ors[2019] UKSC 13 last month as a “bare knuckle fight” between competing principles of public policy, viz that ‘fraud unravels all’ and ‘there must come an end to litigation’.

This characterisation does not quite capture the true competition of interests and is apt to skew that contest. In truth, the issue is more fundamental: in what circumstances will the court permit itself to be an instrument of fraud?

The Court of Appeal ([2017] EWCA 147) unanimously held that, unless the innocent losing party had shown that in not unearthing the fraud it had nevertheless acted with reasonable diligence, it would allow the fraudulently obtained judgment to stand. A seven-judge Supreme Court unanimously reversed the Court of Appeal.

Takhar may be seen as a collision between the courts’ zeal for disciplining parties, in the name of the efficient use of court resources, with its raison d’être – doing justice (as opposed to effecting injustice) between the parties.

It also shows the harmful effect of judicial disbelief of fraud, when raised in civil proceedings, manifested by the placement of any number of obstacles in the path of a litigant asserting it.

In part, this is because the effect of fraud is substantively and procedurally so corrosive that it “unravels all”. And so, even when confronted with the incontrovertible fraud, engagement can be begrudging, as shown by the judgments of Lord Briggs and Lady Arden. (Lady Arden’s suggested amendments to the CPR are at odds with both section 49 of the Senior Courts Act 1981 and section 1 of the Civil Procedure Act 1997.)

The story of Takhar v Gracefield Developments is a modern take on Jarndyce v Jarndyce.

The unfortunate Mrs Takhar issued proceedings in 2008, claiming various properties were put in the name of Gracefield as trustee for her. She claimed this was the consequence of undue influence and that the transfers were not properly executed.

In late 2009, Mrs Takhar made a statement asserting that she knew nothing of a profit share agreement exhibited to a witness statement served by the defendants. In March 2010 she applied for permission to adduce handwriting evidence. She believed that her signature on several copy documents was not hers and may have been forged.

Judge Purle QC was having none of this. He said that handwriting analysis would not assist the court and the timing of the application was late. Further, Mrs Takhar (very properly) did not assert positively that she didn’t sign the relevant documents, she simply had no recollection.

A financial adviser, who had advised Mrs Takhar in 2008, had suspected fraud but at trial, in July 2010, he conceded he had no proof.

Judge Purle dismissed Mrs Takhar’s claim. He recorded that Mrs Takhar’s case was that she didn’t sign the profit share agreement and that she had never seen it until the dispute arose, but he noted that “no case of forgery is advanced” and that Mrs Takhar could provide no “coherent explanation” of how her signature came to be on the scanned copy of the profit share agreement.

While he considered some documents relied upon by the defendants “unworthy and wholly inappropriate”, he nonetheless found the evidence to “point unerringly in the one direction of beneficial transfer to Gracefield in return for a joint venture agreement”.

In 2013, Mrs Takhar issued fresh proceedings to set aside Judge Purle QC’s judgment on the basis that it had been obtained by fraud.

She had obtained a forensic report expressing the opinion that her purported signature on the profit share agreement was indisputably derived from a letter signed by her in 2006 that had been transposed on to the copy profit share agreement.

Mrs Takhar explained that it was only after trial that her son went through the exercise of comparing the signature on the profit share agreement with signatures known to be genuine.

The question for Mr Justice Newey ([2015] EWHC 1276) was whether Mrs Takhar’s new claim should be dismissed as an abuse of process on grounds that Mrs Takhar had failed to act with reasonable diligence.

She had, after all, entertained doubts about her having signed the profit share agreement in the 2008 proceedings and unsuccessfully sought to adduce expert evidence.

Newey J distinguished an array of English authority and preferred Handley JA’s analysis in Toubia (2002) 54 NSWLR 46 and other Commonwealth decisions. He concluded that there was no substantive legal rule requiring an unknowing victim of fraud who had lost an earlier claim to have acted with reasonable diligence in that claim before being able to set aside that judgment on the ground of it having been obtained by fraud.

Were there to be such a requirement, a fraudster could obtain judgment on forged documents and perjured evidence and be imprisoned for fraud and perjury.

The fraudster could nevertheless enforce that judgment unless the innocent victim could satisfy the court on a claim to set aside that, although he or she had not unearthed the fraud, he or she had conducted those earlier proceedings diligently. The court could thereby be used to facilitate fraud.

The judgment of Newey J was in stark contrast with that of Snowden J in Ackerman v Thornhill QC and Ors [2017] EWHC 99. The man on the Clapham omnibus reading the report of the Bar Disciplinary Tribunal and then the judgment of Snowden J might well ask what trip the court was taking in reasoning this conclusion.

The Court of Appeal disagreed with Newey J ([2017] EWCA Civ 147) and endorsed the reasoning of Snowden J in Ackerman. Heavy reliance was placed by the court on some oft-cited obiter dicta (Owens Bank [1992] 2 AC 443, Owens Bank [1994] UKPC 27) and a misreading of a proposition by Goff LJ in McIlkenny v Chief Constable of the West Midlands Police [1980] QB 283, affirmed sub nom Hunter v CC West Midlands Police [1982] AC 529 (Hunter).

Those judgments concerned the convictions for the Birmingham pub bombing – an inauspicious foundation for a novel proposition of law. No matter that Hunter was not a fraud case anyway.

Another decision relied upon by the Court of Appeal was Phosphate Sewage Co v Molleson(1879) 4 App Ca 801 that concerned not an application to set aside a judgment for fraud, but the commencement of new proceedings, the plaintiffs having uncovered additional evidence of fraud, i.e. an instance of the principle in Henderson v Henderson.

In short, not the shiniest star in the Court of Appeal’s jurisprudential firmament.

Apart from McIlkenny/Hunter, there is no English decision to support the proposition that, in a claim to set aside a judgment obtained by fraud, a claimant is required to show that the evidence must not have been obtainable by reasonable diligence in the earlier proceedings.

The High Court of Australia (the country’s supreme court), having analysed the authorities, both English and domestic, has held there to be no such requirement: McCann v Parsons(1954) 93 CLR 418 and McDonald v McDonald (1965) 93 CLR 529“If by any means it be proved affirmatively that the earlier judgment was tainted by fraud, it will, without more, be set aside.”

The majority in the Supreme Court, like Newey J, preferred the Commonwealth authorities to Hunter.

The High Court in Australia earlier re-stated the correct position in Clone Pty Ltd v Players Pty Ltd (in liq) [2018] HCA 12, noting Takhar as recent English Court of Appeal authority to contrary effect but the dicta relied upon by the court were held wrong in principle.

The High Court traced the origin of the applicable legal principle to Chancery bills in (i) the bill of review and (ii) an original bill to impeach a decree for fraud – progenitors of the post-Judicature Act actions.

For (ii) there was no need, in contrast with (i), for a petitioner to show reasonable diligence: Mitford, A Treatise on the Pleadings in Suits in the Court of Chancery by English Bill, 5th Ed. (1847). Perhaps to some arcane, but tracing the common law and adherence to established principle would have avoided the Court of Appeal falling into error.

Takhar renders a number of reported judgments unstable: [1999] EWHC (Comm) (Sphere Drake), [2003] EWHC 31 (Comm) (Kuwait Airways), [2010] EWHC 3172 (Ch) (Surety Guarantee), [2015] EWHC 1428 (Comm) (Chodiev) and of course Snowden J’s judgment in Ackerman v Thornhill.

Takhar is another instance of the Australian High Court identifying the applicable common law principle before the Supreme Court has arrived at a similar conclusion, q.v. the masterly exposition of the Hedley Byrne doctrine in Perre v Apand Ltd (1999) 198 CLR 180, anticipating the Supreme Court’s strictures on confusion in applying it in Robinson v Chief Constable of West Yorkshire [2018] UKSC 4.

Perhaps judges at all levels should pay more attention to Lord Jessel MR’s observation in Wallis v Smith (1882) 21 ChD 243: “I distrust dicta in all cases.”

Underneath all of this analysis, the basic point shines through – the role of a judge is to do justice between the parties. And to that, all matters of procedure are subordinate.

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