What are the requirements for pleading fraud?
The recent decision of the Court of Appeal in Sofer v Swissindependent Trustees SA  EWCA Civ 699 considered the requirements for pleading dishonesty in the context of a breach of trust. We take a look at the basics of pleading fraud and consider what practical tips can be gleaned from this recent Court of Appeal decision.
- What are the basic elements of a fraud claim?
- What does the case law say about pleading fraud?
- How specific do the Particulars of Claim need to be in relation to a pleading of dishonesty against a corporate body?
Basic elements of a fraud claim
Under English law, the term “commercial” or “civil” fraud covers a broad range of activities, and consequently, there are a number of different causes of action (i.e. claims) that can be brought against a potential defendant. These include:
- fraudulent misrepresentation
- breach of fiduciary duty
- breach of trust
- dishonest assistance
- inducing breach of contract
However, in respect of all of these different causes of action, there will normally be a common theme of a deliberate act involving dishonest conduct.
What does the case law say about pleading fraud?
In Three Rivers District Council v Governor and Company of the Bank of England (No 3)  UKHL 16 Lord Millett identified two overarching principles, as follows:
- The pleading must give a party sufficient notice of the case being made against it, and consequently, in the case of a fraud claim, it may not be sufficient to say “wilfully” or “recklessly”.
- An allegation of fraud or dishonesty must be sufficiently particularised; and therefore, in the case of dishonesty, it is necessary to plead the facts which will be relied upon at trial to justify inferences of dishonesty.
In McEneaney and others v Ulster Bank Ireland Ltd and others  EWHC 3173 (Comm) the Court reminded practitioners that pleadings, especially those alleging fraud, need to be clear and specific. This includes identifying the relevant causes of action and relief claimed. Furthermore, if the claimant wishes to plead negligence (in the alternative to fraud), then fraud must be pleaded first, clearly and separately from the plea of negligence.
In JSC Bank of Moscow v Kekhman and others  EWHC 3073 (Comm) it was held that there is no need for the particulars pleaded to be consistent only with the defendant’s dishonesty. The correct test is whether, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence.
Pleading dishonesty against a corporate body
In Sofer v Swissindependent Trustees SA  EWCA Civ 699, the Court of Appeal was faced with an appeal against the striking out of a breach of trust claim. The claim was brought by the son of a deceased millionaire who had established a number of trusts for the benefit of himself, and his children and grandchildren. The trustee, Swissindependent Trustees SA (the “Trustee”), had paid large sums to the late Mr Sofer prior to his death out of the trusts as loans with no repayment terms.
- Clause M1(1) of the relevant trust provided that the Trustee “must not pay convey or transfer any part of the corpus of the Trust to any Beneficiary for any purpose prior to the date of death of Hyman Sofer”.
- Clause D3(3) of the relevant trust stated that the Trustee had power to “lend any money forming the whole or any part of the assets of this Trust to any person who may for the time being be a Beneficiary upon such terms as to repayment and interest or interest free as the Trustees may in their absolute discretion think fit”.
The loans were never repaid, and the Claimant alleges that the Trustee knew that it was acting wrongly (i.e. in breach of trust) when making the payments (which were in truth, gifts) and never believed that they were loans.
The Claimant applied to amend his Particulars of Claim. The judge at first instance had said of the Particulars: “… version A does not give any sufficient particulars of the allegation of deliberate breach of trust. Such a breach requires knowledge, and the pleading rules require particulars of knowledge to be given. These must include which individuals with the defendant are alleged to have known, which terms of the trust are alleged to have been breached, and in respect of which payments made by the defendant.”
The Court of Appeal held that this criticism was equally applicable to the Claimant’s amended Particulars. Counsel for the Claimant submitted that the Judge was wrong to hold that it was mandatory for particulars of claim to identify at the outset the individuals whom the claimant alleged to have had the relevant knowledge at the relevant time, and that it was permissible for a claimant to provide such particulars subsequently, in an appropriate case following disclosure.
The Court of Appeal agreed stating that: “I do not doubt that, where an allegation of dishonesty is made against a body corporate, it is necessary to plead the relevant state of knowledge of that body at the relevant time. I do not accept, however, that a mere failure to identify at the outset the directors, officers or employees who had that knowledge means that such an allegation is liable to be struck out without further ado. Clearly such particulars should be given as soon as is feasible, and there may be situations in which the claimant’s unwillingness or inability to give such particulars when requested to do so justifies striking out; but that is another matter.”
In order to avoid a strike out application, it is necessary to plead fraud with precision and detail. Here are some practical tips:
- Follow the guidance set out in the CPR regarding statements of case. In particular, include those details named in paragraph 8.2 of Practice Direction 16 relevant to your case, for example, the fact of any illegality, details of any misrepresentation, details of all breaches of trust, notice or knowledge of a fact, details of unsoundness of mind or undue influence and details of willful default.
- Particulars of claim will not be sufficiently particularised if the facts alleged are consistent with innocence. Particulars of dishonesty will be read as a whole and in context, but you must plead facts that justify an inference of dishonesty.
- The Particulars should contain details of individuals alleged to have the requisite knowledge for proving dishonesty, to the extent that such individuals are known at the point of issue. If such individuals are not known, then these details should be added as soon as is feasible.
- Be specific. For example, if you are alleging fraudulent misrepresentation, then you must state the words used, by whom, to whom, when and how (i.e. in person, by telephone, email, letter). Append copies of any documents containing the alleged misrepresentation to the Particulars.
- Ensure the Particulars are clear and set out precisely what case the Defendant has to meet.
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