Dishonesty: what is the standard of proof?

Summary

• Fraud is generally thought of as requiring a higher standard of proof as a result of its overlap with criminal law in which the standard of proof is “beyond reasonable doubt”.
• However, in a civil claim this is not the case. In Re B (Children) 2009 AC 11, Lady Hale stated that the proper standard of proof in civil cases involving dishonesty “is the simple balance of probabilities, neither more nor less.”
• This can be difficult to apply in practice as most fraud cases will involve an inference of dishonesty, where the claimant has been unable to uncover all of the relevant facts.
• In Bank St Petersburg PJSC v Arkhangelsky, the Court of Appeal found that the High Court judge had applied a “too exacting” or “heightened standard” of proof which is not necessary to conclude fraud had occurred.

Bank St Petersburg PJSC (the “Bank”) v Arkhangelsky

The facts of the case revolve around the 2008 financial crisis and involve allegations of dishonesty on both sides. Dr Arkhangelsky took out a personal loan with the Bank to service a debt owed by his former business. The loan was not repaid when it fell due and the Bank obtained judgment against Dr Arkhangelsky’s business in Russia. There was, however, a shortfall of £16.5 million which the Bank sought to recover from Dr Arkhangelsky.

Dr Arkhangelsky claimed that the agreements between him and the Bank were forged, that the Bank had conspired to strip the business of its assets and denied any personal liability to the Bank. The Bank asked the Court to dismiss Dr Arkhangelsky’s counterclaim and make negative declarations to the allegations made against it.

The High Court rejected Dr Arkhangelsky’s counterclaim (despite making findings that the Bank had acted dishonestly and that they had been falsifying evidence) and gave judgment for the Bank in the sum of £16.5 million. However, the Court also declined to make the negative declarations requested by the Bank.

Court of Appeal decision

Dr Arkhangelsky appealed the High Court’s decision claiming that the judge had:

1. Applied the wrong standard of proof for dishonesty which set the bar too high;
2. Reviewed the evidence in a piecemeal fashion which prevented him from making an overall assessment of the alleged fraud.

The Court of Appeal agreed and allowed the appeal ordering a retrial on the counterclaim before a different judge.

Standard of proof

It appears that the High Court judge allowed these factors to tip the balance on the standard of proof resulting in the Judge applying a heightened standard of proof in this case. For example, at paragraph 1138 of his judgment, he said: “Again, I take into account that the more serious the allegation the more improbable the event sought to be established…”. Lord Justice Males described this assessment as a fair starting point, on the basis that people do not usually act dishonestly, but considered it could be no more than a starting point (para.117). He went on to conclude that the only question is “whether it has been proved that the occurrence of the fact in issue…was more probable than not.” This echoes the judgment of the House of Lords in Re B (Children) in which Lord Hoffmann stated: “…there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not”.

The first instance judgment in Bank St Petersburg PJSC v Arkhangelsky is littered with references to the burden and standard of proof.  The test which the judge set himself was that proof of dishonesty “could only be discharged by showing the facts to be incapable of innocent explanation” and described this as the “heavy onus of proof in the context of an assertion of dishonesty”.  The Court of Appeal concluded that he had “misdirected himself as to the standard of proof required” with the result that his findings as to the absence of dishonesty on the Bank’s part cannot stand.

Learning points

The Court of Appeal refused to lay down any more specific guidelines than had already been set out in the well-known cases on this subject matter. That is because the cases before it had made it abundantly clear that the standard of proof was no different in fraud cases, than in ordinary civil claims. We can however extract some key points from the case law:

• Fraud and dishonesty are serious allegations that require fully particularised (i.e. detailed) pleadings and cogent evidence.
• However, the seriousness of such allegations should not make any difference to the standard of proof to be applied in determining the facts.
• There is no logical or necessary connection between seriousness and probability. Some very serious and harmful behaviour is not at all improbable.
• Whilst the Court may need to analyse each allegation on its facts, it must also stand back and look at all of the allegations together in deciding whether the fraud or dishonesty has been established.

When faced with two different explanations of conduct that is on the face of it dishonest, the Court must simply decide which explanation is more probable than not.

Comment

This case does not establish a new standard of proof in fraud claims and does not derogate from the well-known case law on this issue. On the contrary, the Court of Appeal’s decision makes it clear that the standard of proof for fraud is the balance of probabilities, no more, no less. Consequently, the decisions which follow must be careful not to attach too high a standard to such allegations.

Fraud and dishonesty remain difficult allegations to make, but this decision has the effect of evening the playing field in civil claims where fraud is alleged.

Should you suspect that you are a victim of fraud or other wrongdoing, please do not hesitate to get in touch at hello@tenetlaw.co.uk