Pleading fraud – some reminders from the courts

19th February 2016

In two recent cases, the Commercial Court has provided some important reminders to parties looking to allege and plead fraud in civil proceedings.

Fraud is, by its very nature, wide-ranging and constantly evolving. The courts are wise to this and have long recognised the need for a flexible, non-restrictive approach, in order to be able to confront fraudulent behaviour in whatever form it may appear.

Under English law, there is no defined cause of action of civil or commercial fraud. Instead, there is a range of options available depending on the factual circumstances of the particular case, including deceit or fraudulent misrepresentation, claims arising out of conspiracy, bribery, breach of fiduciary duty, breach of trust and inducing breach of contract. The common theme is deliberate action on the part of the wrongdoer, often involving dishonest conduct.

Each cause of action has its own constituent parts which the claimant must plead and prove.

Advantages

There are a number of advantages to pleading fraud, including:

• the courts are more willing to adopt an expansive approach to the measure of losses suffered by the claimant and damages are not restricted to losses which are “reasonably foreseeable” (so there is wider scope for recovery)
• there is no defence of contributory negligence available for fraud
• the usual limitation period for bringing a claim may be postponed, with time starting to run instead from the date of discovery of the fraud (or from when the claimant could, with reasonable diligence, have discovered it)
• parties cannot limit or exclude liability for fraud (the principle that “fraud unravels all” [1])
• company directors may be held personally liable in certain cases.

Disadvantages

On the flip side, fraud allegations are serious and they can have far-reaching and damaging consequences for defendants. There is a stigma attached to the word “fraud”. For this reason, the courts will subject a fraud plea to a rigorous degree of scrutiny. The level of seriousness afforded to fraud allegations is reflected in the provisions of the respective codes of conduct for solicitors and barristers.

The need for clarity – identify the relevant cause of action, the relief claimed and what has to be proved

In McEneaney and others v Ulster Bank Ireland Ltd and others [2], various investor claimants applied to the court for permission to introduce claims of fraud against the defendant bank and investment banking firm involved. Broadly, the litigation concerned investments in a company owning property at London’s Canary Wharf (the property had declined considerably in value and the claimants lost their investments). The application was refused on the basis that the fraud claims were made out of time.

The Judge went on to say, however, that he would also have accepted the defendants’ argument that permission should be refused because the claims were not adequately pleaded. He provided the following reminders:

• Allegations of fraud must always be properly particularised: “…the more serious the allegation of misconduct, the greater is the need for particulars to be given which explain the basis for the allegation. This is especially so where the allegation that is being made is of bad faith or dishonesty. The point is well established by authority in the case of fraud.” [3];
• An allegation of fraud is not supported by an allegation that the defendant made a representation that he knew or ought to have known to be untrue [4].

In other words, allegations of fraud must be clear and express and pleaded separately from (and before) any allegations of negligence, even where they are based on similar lines of argument. A “rolled-up plea” is unacceptable. This will be the case where the cause of action requires proof that the defendant had knowledge of a particular fact or matter. In McEneaney, the revised claim did not clearly allege knowledge on the part of the bank or distinctly plead any representation made by the investment banking firm that could support a claim in deceit.

Drawing inferences

One area of particular difficulty for claimants is proving the subjective state of mind of the defendant. In an attempt to get around this, claimants will often ask the court to draw inferences from the circumstances of the case.

In JSC Bank of Moscow v Kekhman and others [5], the claimant had pleaded a fraudulent conspiracy involving the first defendant and applied to the court to amend its pleading to include allegations of fraudulent misrepresentation. The first defendant argued that the claimant had failed to properly plead fraud in relation to both pleas, submitting that the primary facts must necessarily lead to the inference that the defendant is guilty of fraud and there is no proper fraud plea unless the particulars pleaded are consistent only with the defendant’s dishonesty.

The court disagreed – this was overstating what is required for a valid plea of fraud. The claimant does not have to plead primary facts which are only consistent with dishonesty. The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. There must be some fact “which tilts the balance and justifies an inference of dishonesty” [6]. The Judge went on to explain that, when the court is considering whether the plea of fraud is a proper one, it is concerned only with whether facts are pleaded which would justify the fraud plea. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge.

Higher standard of proof?

The relevant standard of proof in a civil claim (including in respect of fraud) is “balance of probabilities”. In reality, due to the nature of a fraud allegation, the evidential burden on the claimant is likely to be amplified. This is because, since fraud is usually less likely to occur than negligence, for example, stronger evidence will be required to establish, on the balance of probabilities, that a fraud occurred.

Is it necessary?

While there may be circumstances in which it is necessary to plead fraud, parties should be mindful of the possibility that other types of claim may deliver the results they are looking for and will, on the whole, be easier to plead. Examples include negligent misstatement and claims under the Misrepresentation Act 1967.

______________________

[1] Referred to by Lord Bingham in the House of Lords case HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6.
[2] [2015] EWHC 3173 (Comm)
[3] Observed by Lord Hope in another House of Lords case – Three Rivers District Council v Governor and Company of the Bank of England [2001] UKHL 16.  Paragraph 8.2 of the Practice Direction to Part 16 of the Civil Procedure Rules provides that the claimant must specifically set out any allegation of fraud in his particulars of claim where he wishes to rely on it in support of his claim.
[4] Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340
[5] [2015] EWHC 3073 (Comm)
[6] Lord Millett in Three Rivers