Fraud unravels all…?

In the recent case, Takhar v Gracefield Developments Ltd (2019), the Supreme Court sought to balance two conflicting principles of legal policy – that fraud unravels all and that there must be a finality to litigation. The resulting judgement will be welcomed by all unwitting victims of fraud.

Summary

  • The case highlights the question of when a judgement can be aside for fraud
    The Claimant didn’t raise allegations of fraud in the original trial but subsequently sought to have the judgement set aside on the basis of a fraud which came to light after the original trial.
  • The Courts have considered whether such action is an abuse of process on the grounds that the evidence which pointed towards the fraud was available at least 12 months prior to the original trial and the fraud could have been discovered by the exercise of reasonable diligence.
  • Initially, it was held that a party which seeks to set aside judgement on the basis it was obtained by fraud, didn’t have to demonstrate that they couldn’t have discovered the fraud by the exercise of reasonable diligence. The claim in this case was therefore not an abuse of process.
  • The Court of Appeal disagreed, citing that parties must normally advance the totality of their case in the first bout of litigation.
  • However now The Supreme Court has upheld the principle that “fraud unravels all”. Holding that, as the issue of fraud has not been decided in the original trial, the application to set aside judgement didn’t amount to re-litigation and therefore wasn’t an abuse of process.

Takhar v Gracefield – the facts

The Appellant, Mrs Takhar, is the cousin of the third respondent, Mrs Krishan. Prior to 2004, they hadn’t seen one another for many years – but the two became reacquainted in that year.

Mrs Takhar had fallen on difficult times financially, following separation from her husband a number of years earlier. Mrs Takhar owned a number of properties in Coventry, many of which had fallen into dilapidation so Mrs Krishan and her husband, Dr Krishan, offered to help.

As part of the arrangements between them, the properties were transferred to Gracefield Developments Ltd, a newly formed company of which Mrs Takhar and the Krishans were to be shareholders and directors.

Mrs Takhar claimed that although the legal titles of the properties was transferred to Gracefield, it had been agreed she would remain the beneficial owner and properties would be renovated and then let.

However, the Krishans presented a different account, claiming Gracefield was set up as a joint venture company and properties were to be sold after they had been renovated.

Proceedings

Mrs Takhar issues proceedings, claiming the properties had been transferred to Gracefield as a result of undue influence or other unconscionable conduct on the part of the Krishans.

This claim was rejected by HHJ Purle QC, who relied upon a written profit share agreement dated 1 April 2006 which appeared to be signed by Mrs Takhar.

Mrs Takhar denies ever having signed the agreement, however without a coherent explanation as to how her signature came to be on the document, the Krishans’ evidence was preferred. Shortly before the trial, Mrs Takhar had sought permission to obtain evidence from a handwriting expert to examine the signature on the agreement. Her application was refused on the basis it had been made too late.

Following the trial, Mrs Takhar instructed new solicitors who obtained an expert report in respect of her alleged signature on the agreement. The report concluded that the signature had been transposed from a letter signed by Mrs Takhar which had been sent to the Krishans’ solicitors.

Following receipt of the report, Mrs Takhar issued proceedings in which she sought to have Judge Purle’s judgement and order set aside on the basis they had been obtained by fraud.

The Krishans claimed Mrs Takhar’s claim was an abuse of process as the documents on which the expert report was based were available to her and her solicitors 12 months prior to the original trial.

Abuse of process

The question as to whether Mrs Takhar’s claim was an abuse of process was tried as a preliminary issue in 2015 before Newey J. It was held that a party who seeks to set aside a judgement on the basis it was obtained by fraud didn’t have to demonstrate they couldn’t have discovered the fraud by the exercise of reasonable diligence. Therefore, the claim was ruled not to be an abuse of process.

The Krishans appealed and, in a judgement delivered on 21 March 2017, the Court of Appeal allowed the appeal.
The appeal judgement upheld the principle set forth in Henderson v Henderson (1843) that, where a matter had been the subject of litigation and adjudication by a court, it was required of the parties that they “bring forward their whole case”.

Mrs Takhar appealed to the Supreme Court which delivered its judgement on 20 March 2019, allowing her appeal.

The Supreme Court judgement

In his judgement, Lord Kerr highlighted the distinguishing feature of the present case – namely that “the existence or non-existence of fraud has not been decided in the proceedings before Judge Purle. It is a new issue. It does not involve the re-litigation of an identical claim.”

Lord Kerr went on to discuss policy considerations dealing with the issue of whether fraud should unravel all. It was noted that, “The special place occupied by fraud in the setting aside of judgements obtained by its use has been recognised in Australia and Canada.

He said, “Newey J found the reasoning in the Australian and Canadian cases compelling. I also. The idea that a fraudulent individual should profit from passivity or lack of reasonable diligence on the part of his or her opponent seems antithetical to any notion of justice. Quite apart from this, the defrauder, in obtaining a judgment, has perpetrated a deception not only on their opponent and the court but on the rule of law.”

Lord Kerr described the policy arguments for permitting a party to apply to have judgement set aside where that judgement had been obtained by fraud as “overwhelming”. Concluding that where a judgement has been obtained by fraud and no allegation of fraud was made at the original trial, a requirement of reasonable diligence should not be imposed.

He added two qualifications to this:

  1. Where fraud had been raised at the original trial but new evidence had come to light in support of that fraud, the Court should have discretion as to whether to entertain the application.
  2. Where a deliberate decision had been taken not to investigate the possibility of fraud in advance of the original trial, the Court should again have discretion as to whether allowing an application to set aside judgement would be appropriate.

Fraud unravels all

This decision is to be welcomed and is a nod to the principle that people can’t be expected to conduct their affairs on the basis that others may commit fraud.

However, it should be noted that the question of fraud wasn’t raised at all in the original trial – a significant factor in the Supreme Court’s ruling.

If fraud had been raised at the original trial – and evidence in support of this had come to light – the outcome may have been very different.

If fraud is suspected – the issue is worth investigating thoroughly.

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