Fraud cases in the courts
The last few months have seen a number of reported cases which, though not directly concerning matters concerning housing on their facts, do explain some important cause of action, evidential and procedural issues that are referable to this blog’s focus on social housing fraud. 4 of those cases are described below.
Use of evidence in civil proceedings for criminal prosecution
In Gilani v Saddiq & Ors  EWHC 3084 (Ch) the claimant applied for permission to use documents disclosed by the defendants in that civil claim as evidence for a private prosecution he had brought against the first and second defendants on charges of fraud arising out of the same matters that had given rise to the civil claim (though that claim had not pleaded fraud).
CPR r. 31.22 provides:
(1) A party to whom a document has been disclosed may use the document only for the purpose of the proceedings in which it is disclosed, except where –
(a) the document has been read to or by the court, or referred to, at a hearing which has been held in public;
(b) the court gives permission; or
(c) the party who disclosed the document and the person to whom the document belongs agree.
(2) The court may make an order restricting or prohibiting the use of a document which has been disclosed, even where the document has been read to or by the court, or referred to, at a hearing which has been held in public.
(3) An application for such an order may be made –
(a) by a party; or
(b) by any person to whom the document belongs.
(4) For the purpose of this rule, an Electronic Documents Questionnaire which has been completed and served by another party pursuant to Practice Direction 31B is to be treated as if it is a document which has been disclosed.
Lord Justice Aldous declared in Smithkline Beecham Plc v Generics (UK) Ltd  EWCA Civ 1109 at :
“The most important consideration must be the interest of justice which involves considering the interest of the party seeking to use the documents and that of the party protected by the CPR 31.22 order. As Lord Oliver said each case will depend upon its own facts.”
In the Gilani case itself HHJ Cooke considered the relevant authorities and explained the judicial discretion thus at :
“The discretion is thus a general one, to be exercised in the interests of justice in all the circumstances of the case, having particular regard to the fact that documents are disclosed under compulsion and are prima facie to be kept confidential and used only for the purpose of the proceedings so that some good reason has to be shown for permitting any other use, but this does not mean that the grant of permission is rare or exceptional if a proper purpose is shown, and use in other proceedings such as criminal proceedings brought in the public interest may be such a purpose. The court must be satisfied there is no injustice to the party compelled to give disclosure.”
before concluding that 
“In the circumstances, in my judgment the grant of permission would not cause any injustice whatever to any of the defendants. Even if it could be maintained that it was in some way unjust to the Saddiq brothers that the prosecution case against them is strengthened by production of documents disclosed by them, that is a result which they brought upon themselves by opposing the application to stay the civil proceedings, and indeed expressly assented to in the course of that opposition. The grant of permission would not prevent them from pursuing an argument to similar effect before the criminal court; if they do so that will be a matter for the criminal court to determine.”
This decision was largely based on 5 factors:
- The “considerable public importance in facilitating the effective prosecution of serious crimes such as fraud” – paragraph 22.
- The prosecutor “has the duty to lay before the criminal court all the evidence relevant to the offences charged, and would be hindered in doing so if evidence that would otherwise be relevant has to be withheld because this court refused permission.” – paragraph 23.
- There were no issues concerning the privilege against self-incrimination – paragraph 24.
- There was no injustice to the defendants in granting permission, indeed they had opposed the claimant’s application for a stay of the civil proceedings pending the outcome of the criminal prosecution – paragraphs 25 to 29.
- It cannot be said that use of the documents in criminal proceedings is in any respect an “improper” purpose – paragraph 30.
In Canary Riverside Estate Management Ltd v Circus Apartments Ltd  EWHC 1376 (Ch) Master Shuman was faced with a CPR r. 3.4(2) application by the defendant in a breach of Lease claim to strike out paragraph 9 of the Reply in which the claimant had made an allegation of dishonesty against the defendant.
The Master referred to the said paragraph 9 in this way:
“In the claimant’s reply it is also alleged that contrary to the defendant’s case that it has granted 45 separate underleases to Bridgestreet each for a term of 3 years and each containing a landlord “put option” only the defendant has entered into an unconditional agreement with Bridgestreet to underlet the Property for a term of 10 years. This is squarely an allegation of dishonesty.”
and in considering the law at paragraphs 10 to 19 of the judgment the Master established:
- There was no factual basis alleged to plead the dishonesty – paragraph 11.
- You cannot plead a fresh cause of action in a Reply – paragraph 11, 16PD para. 9.2.
- A strike out application should be made as soon as possible – paragraph 13.
- Where it is intended that there be an allegation that a fraud or dishonesty has been committed, you must allege it and you must prove it with sufficient particulars – paragraphs 15, 17; Three Rivers District Council v Bank of England  UKHL 16;  2 All ER 513 at [55, 184-6]
- The pleading party must have a proper basis for making an allegation of dishonesty in their pleading – paragraph 16; Three Rivers District Council v Bank of England  UKHL 16;  2 All ER 513 at .
- Mr Justice Flaux said in Jsc Bank of Moscow v Vladimir Abramovich Kekhman & ors  EWHC 3073 at :
“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. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty”. At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. 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.”
Counsel for the (ultimately successful) defendant set out the relevant principles thus (paragraph 19 of the judgment):
(1) The hope that something may turn up during cross-examination of a witness at trial does not suffice.
(2) The allegation of fraud must not be equivocal.
(3) There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.
(4) At an interim stage the court is only considering whether the facts as pleaded would justify the plea of fraud.
The Master ultimate found in favour of the application on the following primary grounds:
“34. I accept Mr Rainey QC’s submissions at paragraph 34 of his skeleton argument that, against the background of the 9 July 2015 agreement and the 45 under lettings, the fact that a junior employee of Bridge Street who was in sales said that he understood that position to be that Bridgestreet have the building for another 10 years is wholly insufficient to tilt the balance and to justify an inference that the defendant is dishonestly concealing an unconditional agreement to grant a lease of the whole of the Property to Bridgestreet for a term of 10 years. It does not come close. I accept that the statement by the employee is equivocal and equally consistent with an honest belief that Bridgestreet could remain in the Property for 10 years.
35. As to the other evidence relied on by the claimant in the witness statements put before me, this is not pleaded. However for completeness I have considered that evidence. I note that in relation to Mr Wallace he has refused to provide a witness statement to the claimant. In relation to the attendance note I consider that when Mr Wallace said that he had been told by either Mr Beck or Mr Rands that Bridgestreet had the property for 10 years that is explicable on the same basis as the email of 29 July 2015, that Bridgestreet were confident that they would be in the Property for the next 10 years. It was certainly in the defendant’s commercial interests for the underleases to be renewed. In relation to the email about the term “3+3+3+ 1 =10” I fail to see how this is evidence supporting the claimant’s contention that the defendant is dishonest. It demonstrates the mechanics of the agreement between the defendant and Bridgestreet and specifically refers to the fact that the defendant is awaiting the consent of the claimant which would alter these mechanics and therefore provide a single term of 10 years rather than a multiple of different terms adding up to 10 years.
36. So again I go back to paragraph 9 of the reply and that the claimant’s pleaded case hinges on the one email from Mr Wallace, a junior employee in sales writing an informal email to a potential client. I do not see how this email can be said to tilt the balance and justify an inference of dishonesty. I accept Mr Rainey QC’s submissions that this email is wholly insufficient to tilt the balance and wholly insufficient to mount a case that the defendant is dishonestly concealing a 10 year agreement for lease.”
Vicarious liability for fraudulent misrepresentation
In Winter v Hockley Mint Ltd  EWCA Civ 2480 the Court of Appeal was faced with an appeal against a damages award of £531,803.98 made for vicarious liability for fraudulent misrepresentations made to the respondent company.
The Court only had to consider the first of four grounds – the Judge applied the wrong legal test in determining that Mr Winter was vicariously liable for the deceit of Mr Ramsden, and should have applied the test that a principal is only liable for the fraudulent misrepresentations of his or her agent where those misrepresentations were made within the scope of the agent’s actual or apparent authority – because they found in the appellant’s favour and remitted for re-hearing and determination the issue of Mr Winter’s vicarious liability on the grounds of Mr Ramsden’s ostensible authority.
In particular, the Judge did not apply the correct legal test in reaching his conclusion that Mr Winter was vicariously liable for Mr Ramsden’s deception of Hockley Mint, the test being:
“36. Lloyd v Grace, Smith & Co  AC 716 concerned the liability of the defendant firm of solicitors for the conveyancing fraud of their managing clerk, who conducted the conveyancing business of the firm without supervision. One of the issues was whether it was a defence that the fraud was committed, not for the benefit of the firm, but for the benefit of the managing clerk. The firm contended that Barwick v English Joint Stock Bank (1867) LR 2 EX 259 was authority for the proposition that a principal was not liable for the fraud of his agent unless the fraud was committed for the benefit of the principal.
37. Lord Macnaghten, with whose speech Earl Loreburn and Lord Atkinson agreed, said (at 735-6) that the true principle to be derived from Barwick was that an innocent principal was civilly responsible for the fraud of his authorised agent, acting within his authority, to the same extent as if it was his own fraud. Lord Macnaghten did not consider separately actual authority, on the one hand, and apparent or ostensible authority, on the other hand. He said (at 736), for example, that the expressions “acting within his authority”, “acting in the course of his employment”, and “acting within the scope of his agency” meant one and the same thing, and that it was not easy to define with exactitude what was meant by those expressions. This reflects the fact that the case was decided at an early stage in the development of the jurisprudence on ostensible authority and on the difference between actual authority, on the one hand, and ostensible authority, on the other hand, as was described much later in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd  2 QB 480, esp at 502-3 (Diplock LJ).”
Armagas Ltd v Mundogas Ltd  AC 717 “is binding authority of the House of Lords that, where a claimant has suffered loss in reliance on the deceit of an agent, the principal is vicariously liable if, but only if, the deceitful conduct of the agent was within his or her actual or ostensible authority” (paragraph 48).
More particularly, the Judge went wrong as follows:
“63. The analysis of the Judge did not identify or address the essential ingredients of vicarious liability of a principal for the deceit of his agent as required by Armagas: a holding out or representation by the principal to the claimant, intended to be and in fact acted upon by the claimant, that the agent had authority to do what he or she did, including acts falling within the usual scope of the agent’s ostensible authority. Instead, he applied a broad principle of fairness and a test of “sufficiently close connection” derived from Lister and Dubai Aluminium. Those cases, however, did not concern a reliance based tort, and were not about the ostensible authority of an agent or employee as a result of a holding out by the principal or employer. They concerned the ordinary course of employment (in Lister) and the ordinary course of a firm’s business (in Dubai Aluminium). That is why Armagas was not mentioned in any of the speeches in either case, and why Lord Nicholls in Lister said (at ) that in that case and in the other cases he cited there was no question of reliance or holding out, and why Lord Nicholls in Dubai Aluminium said (at ) that he left aside cases where the wronged party was defrauded by an employee acting within the scope of his apparent authority. In short, the first ground of appeal is correct in stating that the Judge applied the wrong test.”
Judgments obtained by fraud
This issue was recently considered by the Court of Appeal in Terry v BCS Corporate Acceptances Ltd & Ors  EWCA Civ 2422, where the defendant failed in his appeal, having unsuccessfully applied to strike out the claimant’s claims post default judgment.
The Court of Appeal set out the correct procedures that should have been followed at paragraphs 25 to 40 of Hamblen LJ’s judgment:
- The primary means of doing so was by bringing a fresh action seeking the equitable relief of setting aside the judgment – paragraph 26; see Flower v Lloyd  6 Ch D 297; Hip Foong Hong v H Neotia & Company  AC 888.
- In order to succeed in setting aside the judgment it will be necessary not only to prove the alleged fraud but also that it involved “conscious and deliberate dishonesty” and that it was “material” to the decision reached – paragraph 35; Royal Bank of Scotland Plc v Highland Financial Partners LP & Others  EWCA Civ 328 at .
- The Court preferred the test of materiality set out in in Hamilton v Al Fayed (No 2)  EMLR 14 at :
“Where it is clearly established by fresh evidence that the court was deliberately deceived in relation to the credibility of a witness, a fresh trial will be ordered where there is a real danger that this affected the outcome of the trial.”
- There might be special reasons for departing from this “established practice” in certain cases, but, if so, “the necessity for stating the particulars of the fraud and the burden of proof are no whit abated and all the strict rules of evidence apply”: paragraphs 27, 29; Jonesco v Beard  AC 298 at .
- The other established means of challenging a judgment obtained by fraud is by appealing and seeking to adduce fresh evidence in accordance with the conditions laid down in Ladd v Marshall  1 WLR 1489, that is the evidence (1) could not have been obtained with reasonable diligence for use at the trial; (2) is such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; and (3) is apparently credible, though it need not be incontrovertible – paragraph 31.
- The tensions between the appeal/set aside approaches was explained by Lord Justice Hamblen in this way:
’32. In Noble v Owens the Court of Appeal considered the tension between the Ladd v Marshall line of cases, which involve an appeal and a retrial without proof of fraud, and the Jonesco line of cases, which involve a fresh action being brought to prove the fraud. This tension was described by Smith LJ in the following terms at :
“16. It appears to me that there is an inconsistency between the two lines of authority upon which the opposing parties to this appeal rely. On the one hand there is Ladd v Marshall  1 WLR 1489 which suggests that, where fresh evidence is properly admitted and it appears to the court that it might, if admitted, have had an important effect on the trial, the right course is to send the case back for retrial. That should be done, apparently even if the new evidence suggests that a deceit was practised on the court below: see Hamilton v Al Fayed  EMLR 394. On the other hand, Jonesco v Beard  AC 298 suggests that, where it is alleged that there was deceit in the court below, the proper course is to leave the aggrieved party to commence a new action, save where the Court of Appeal either determines the issue of fraud itself—in effect where it is admitted—or the evidence is incontrovertible. How are these two lines of authority to be reconciled?”
33. Smith LJ, with whom Elias LJ agreed, answered this question as follows at :
“In my judgment, the true principle of law is derived from Jonesco v Beard and is that, where fresh evidence is adduced in the Court of Appeal tending to show that the judge at first instance was deliberately misled, the court will only allow the appeal and order a retrial where the fraud is either admitted or the evidence of it is incontrovertible. In any other case, the issue of fraud must be determined before the judgment of the court below can be set aside.””
Unless the fraud is admitted or the evidence of it is incontrovertible, the issue of fraud should therefore be both properly particularised and proved. This would usually require a fresh action, although if the appeal route is adopted the trial of the fraud issue could be referred to a High Court judge pursuant to CPR 52.20(2)(b) (see Noble v Owens  EWCA Civ 224,  1 WLR 2491):
(2) The appeal court has power to—
(b) refer any claim or issue for determination by the lower court
It will also be necessary to establish that the evidence which is relied upon to establish the fraud could not with reasonable diligence have been obtained for the trial (the “reasonable diligence condition”) – paragraph 39; Takhar v Gracefield Developments Ltd  EWCA Civ 147,  Ch 1. It is to be noted, however, that an appeal against this decision has recently been heard in the Supreme Court.
The wrong procedure was therefore followed by the defendant and the court had no jurisdiction to strike out a claim post-judgment.
The Court also found that there were no grounds to support any application to set aside judgment under CPR r. 3.1(7) (insofar as the actual application could be treated as such):
75. In summary, the circumstances in which CPR 3.1(7) can be relied upon to vary or revoke an interim order are limited. Normally, it will require a material change of circumstances since the order was made, or the facts on which the original decision was made being misstated. General considerations such as these will not, however, justify varying or revoking a final order. The circumstances in which that will be done are likely to be very rare given the importance of finality. An example is provided by cases involving possession orders made when the defendant did not attend the hearing where CPR 39.3 may be relied upon by analogy – see Hackney London Borough Council v Findlay  EWCA Civ 8,  HLR 15. Another example is the use of powers akin to CPR 3.1(7) to vary or revoke financial orders made in family proceedings in relation to which there is a duty of full and frank disclosure and the court retains jurisdiction – see, for example, Sharland v Sharland  UKSC 60,  AC 871 and Gohil v Gohil (No 2)  UKSC 61,  AC 849.