Source: https://thelawreviews.co.uk/edition/the-asset-tracing-and-recovery-review-edition-6/1174590/england-and-wales
Timestamp: 2019-08-25 15:04:57
Document Index: 93008084

Matched Legal Cases: ['art 3', 'arty105', 'UKSC ', 'UKSC ', 'EWCA ', 'UKSC ', 'UKSC ', 'EWCA ', 'EWCA ', 'UKHL ', 'UKSC ', 'UKPC ', 'EWCA ', 'EWCA ', 'UKSC ', 'EWCA ', 'UKSC ', 'EWCA ', 'arty 7', 'EWCA ', 'EWCA ', 'art 25', 'EWCA ', 'UKSC ', 'EWCA ', 'UKHL ', 'EWCA ', 'EWCA ', 'UKHL ']

England & Wales - The Asset Tracing and Recovery Review - Edition 6 - TLR - The Law Reviews
To be liable to the victim of a fraud in the tort of deceit:4
the victim must have suffered damage in consequence.
A representation is a statement of some kind. For example, if the fraudster tells his or her victim that their funds will be invested in a profitable scheme when in fact he or she knows it will simply be spent on luxuries for the fraudster, the statement would be an 'untrue representation' or 'misrepresentation'. The representation usually applies to past or present events, but can sometimes simply be one of the fraudster's own beliefs. Promises are not misrepresentations unless the person who makes them knows that they will not be fulfilled (in which case he or she has misrepresented his or her state of mind).5 In the example given, the fraudster has lied about what he or she believes will happen to the money, and hence the representation will be false even though the money has not yet been given to the fraudster, invested or spent. Similarly, the representation can be by conduct alone rather than spoken or written words. Leaving falsified accounts for a due diligence team to discover and act upon in a corporate acquisition would usually be a 'representation by conduct' that the accounts were genuine.6 Sometimes representations will not be outright lies, but half-truths that a fraudster knows will be misunderstood by his or her victim.7 Statements of this kind would be regarded as 'false' because of how the fraudster knew they would be interpreted, even if it was possible to interpret them in a way such that it was not untrue.
Difficulties exist where a statement is made that is true when it is made, but becomes untrue before the victim of fraud acts upon it. However, statements of this kind are capable of giving rise to fraud claims.8 Much of the emphasis of the claim against the fraudster will be upon his or her dishonesty (see below).
This relates to the knowledge or indifference of the fraudster that his or her representation was false.9 Carelessness is not enough. It is necessary to demonstrate that the fraudster either knew that what he or she said was untrue, or did not know because he or she did not care one way or the other whether it was true or false. Little difficulty exists where it is possible to show on present facts that the fraudster said something that he or she was aware was not the case. However, it is often possible for fraudsters to say that they made statements that were false believing what other people had told them themselves or having forgotten information that was inconsistent with them. In these situations, the court will decide whether it believes the fraudster having heard all the evidence and, most importantly, witness evidence at trial.
Greater difficulties arise where the fraudster does not know whether the statement was true or false because he or she has failed to look into the matter. Sometimes, the situation will arise because the fraudster has been careless, and mere negligence will not be enough to make him or her liable. On other occasions, however, the fraudster will have suspected what he or she said to be false but made no enquiry as to the facts for fear of finding out this was the case. Situations of this kind are called 'wilful blindness' or 'blind-eye' knowledge. The general rule is that it is not enough for the fraudster to be generally uneasy about what he or she said – he or she must have actually entertained a specific suspicion as to the fact that it would make what he or she said untrue and deliberately decided not to investigate that suspicion before making the representation.10
It is commonly thought by those who defend fraud claims against them that it will assist them to prove that the victim would have acted as he or she did even if he or she had not been lied to. Indeed, this kind of assertion is frequently made in cases where the fraud has induced the victim to enter into a contract with the fraudster (see below). It is not, however, an answer to the victim's claim. The court will not look at whether the victim would have done what he or she did without the lie anyway.11 It will simply ask two questions. First, it will consider whether the representation was 'material'. A representation is material where it would naturally induce someone to act on it in the way that the victim acted. Hence, a statement by a fraudster that investment A is more profitable than a competitor's investment B would be material to an ordinary investor's decision to purchase investment A, but not to purchase investment B. Second, the representation must have actually induced the victim to have acted upon it, but as said above, this does not involve the victim showing that he or she would not have acted in that way if the representation had not been made to him or her. It is sufficient to show that it was simply a significant part of this decision-making. Many victims of fraud will say that the lie that was made to them made them more comfortable about coming to a decision that they might have come to in any event. This does not stop their actions succeeding. Indeed, it is often the reason the lie has been told.12 The victim does not need to prove that they believed the lie to be true, just that it influenced them.13
While the test of 'inducement' is often a light one, it must still be the case that the fraudster's misrepresentation played a part in the victim's decision to act as he or she did. Cases in which the victim has been lied to after he or she has acted do not usually give rise to fraud claims. Hence, where the victim has invested in some dubious scheme and those running it have lied to him or her about why they cannot return his or her funds, an action based upon those lies alone will not usually result in a fraud claim because the victim had already parted with his or her money before he or she was lied to.14 It is necessary to found the action on something that the victim has done in consequence of the lie that was told to him or her.
It is not possible to bring civil proceedings (at least of this kind) where no damage has been suffered simply to prove a moral point.15
Where the fraud leads to the victim entering into a contract with the fraudster, this is a form of the tort of deceit known as 'fraudulent misrepresentation'.16 The victim has the right to monetary damages and has an option to rescind the contract.17
Rescission is the reversal of a contract so that the parties are put back in the position they were in before they entered the contract. Rights and assets transferred under the contract are returned to their original owners and future obligations are no longer binding.18 The victim of a fraudulent misrepresentation has a right to require rescission even if this is inconvenient or disproportionate, but not where it is impossible.19
Under Section 2(1) of the Misrepresentation Act 1967, a victim of any misrepresentation will have the right to the same level of damages that would be awarded in the case of a fraudulent misrepresentation unless the misrepresentor can prove that he or she had, up until the point the contract was made, reasonable grounds to believe the representation was true. This gives the more generous measure of damages to victims of negligent misrepresentations, but in such cases the court will have discretion to refuse rescission.20
First, while it is not necessary to demonstrate that the fraudster actually regarded what he or she did as fraudulent, he or she will generally be regarded as 'dishonest' if the tort of deceit is proved against him or her. As will be seen below, the English courts adopt a higher burden of proof where a claimant seeks to establish dishonesty because people are more readily presumed to have acted honestly. It will therefore be necessary to prove all the ingredients of the action so strongly that the court can be confident that dishonesty can be found against the fraudster.21 If there is another plausible explanation for what happened that does not involve the fraudster acting dishonestly, the action will fail. While the tort of deceit is therefore difficult to prove, it is often alleged because once it is established, a number of consequences follow that are very much to the victim's advantage. The remainder of the 'special features of claims in the tort of deceit' describe these advantages.
Second, if the tort of deceit is established, the victim will be entitled to all the damage that he or she has suffered as a result of his or her acting on the representation. Hence, for example, if the victim is induced by a fraudulent misstatement to buy a company and, having acquired shares in the company, the business fails, it will not be necessary for the victim to establish that it was foreseeable that the victim would suffer this loss because of the lie that the fraudster told. It will simply be sufficient to show that the loss was caused by the victim's purchase of the shares. Hence, in Smith New Court Securities v. Scrimgeour Vickers (Asset Management) Ltd,22 the claimant bought shares in Ferranti on the basis of false representations made by the defendant. The value of those shares then plummeted following the discovery of a different and entirely unrelated fraud. It was held that the claimant was entitled to be put back in the position that he would have enjoyed had he not purchased the shares at all. In other words, the loss that resulted from the discovery of the unrelated fraud was to be borne by the fraudster.
Finally – and most importantly – it is no defence to an action in the tort of deceit that the victim of the fraud was careless. Very frequently fraudsters, particularly those who induce investors to part with their money for shares in worthless companies or investment schemes, will claim that the victim should have made his or her own enquiries about the scheme and that the victim's loss is, in substance, the victim's own fault. Once it has been established that the victim acted on the fraudster's misrepresentation, it will not matter that the victim was careless in believing it, nor that the victim should have made other enquiries in addition to relying upon the representation. It is almost invariably the case that victims of fraud are careless or negligent to some degree, but as a clear rule of law based upon moral principle, the fraudster is the last person to be in a position to complain that the victim believed or relied upon him or her.23
A finding by the court that there is a trust relationship will normally (but not inevitably) bring with it a number of assumptions about the parties' rights. It will generally be assumed that the trustee owes a number of duties recognised by the law of equity to the beneficiary. These usually include an obligation not to make any profit from the trust fund to which the beneficiary has not specifically agreed.24 Hence, for example, where a fraudster takes money from a number of different investors saying that he or she will aggregate them for some fictitious investment where, in fact, he or she simply intends to skim the interest from them, this will often be a breach of this duty. Second, the trustee is normally obliged not to put himself or herself in a position where his or her own interests with regard to the money conflict with those of the beneficiary unless, again, this has been explicitly agreed to.25 Finally, and most importantly, the trustee is obliged to hold the money according to the terms of the trust. If he or she does not do so, he or she will face action for breach of trust.
Hence, for example, if a fraudster takes money from a victim on the basis that he or she intends to use it to make a specific purchase or to invest it in a particular fund, if the fraudster uses it for a different purpose, he or she would be liable for breach of trust. If a trustee wrongly transfers property in breach of trust and the transfer causes the property to be lost to the trust fund, the trustee is usually under an immediate obligation to restore to the trust fund whatever has been taken out. If restitution is not possible or appropriate, the victim may entitled to monetary compensation from the trustee, to put the victim in the position that would have obtained had the breach not occurred.26
There is some dispute in English law as to whether, if the transfer of the funds is fraudulent, it will not matter that the loss would have happened anyway. In Bairstow v. Queen's Moat House plc,27 company directors, acting dishonestly, had paid money away from the company as dividends. In doing so, they had failed to comply with the relevant laws, but it was probable that the dividends could have been lawfully paid in any event. The question in the case was whether the directors were liable only for the difference between the unlawful dividends and the lawful dividends that they could have paid or whether they were liable for the full amount. The English Court of Appeal held that they were liable for the full amount. The potential availability of arguments of this kind is one of the reasons claimants in fraud cases will often seek to formulate their claims in this way.
There is much debate as to the scope of fiduciary duties, but generally speaking they involve an obligation not to act contrary to the interests of the person to whom the duty is owed28 and not to permit a position in which the fiduciary's interests might come into conflict with those of the principal.29 In each case, it is a defence to show that the principal gave his or her informed consent to what was done. A good example of where a fraud claim will involve a breach of fiduciary duty is where trustees take money for investment purposes but use it for investments in which they themselves are personally interested. Claims of this kind often give rise to 'secret profits'.
Another very common situation involving fiduciary duties is, of course, bribery. In a situation where an agent negotiates a commission for him or herself of which the principal is not informed, in return for committing the principal to a contract of arrangement, the agent has permitted his or her own interests in negotiating the commission to conflict with those of the principal in entering into the most favourable arrangement extracting the best terms available from it.30 The taking of the commission will therefore be regarded as a breach of fiduciary duty.
It is not necessary to succeed in an action for breach of fiduciary duty for the victim of the fraud to show that he or she has suffered loss (although he or she may have done so). The victim may choose to claim from the fraudster or fiduciary either the loss that the victim has suffered or the profit that the fraudster has made. A bribe or secret commission received by an agent is held on trust by the agent for its principal, allowing the principal to claim a proprietary remedy against the bribe or secret commission itself, rather than a personal remedy against the agent.31 Claims of this nature therefore have an advantage over claims in deceit that can be made only if the victim has suffered damage (see above).
Where the victim of fraud proves that he or she has suffered damage as a result of unlawful action that has been taken pursuant to a plan made between the defendant and someone else to injure him or her unlawfully, he or she is likely to have an action against that person for 'unlawful means conspiracy'. According to the Court of Appeal in Kuwait Oil Tanker SAK v. Al Bader:32
A conspiracy to injure by unlawful means is actionable where the Claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the Defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the Defendant to do so.
A broad range of acts may constitute unlawful means. In JSC BTA Bank v. Khrapunov,33 the Supreme Court confirmed that contempt of court – in that case breaching worldwide freezing and receivership orders – could constitute unlawful means for the purposes of the tort of conspiracy.
A further requirement is that the defendant must have intended to injure the victim. However, for the purposes of the kind of conspiracy described above, it does not need to be shown that the infliction of damage was his or her sole intention, or even his or her predominant purpose. In Lonrho Plc v. Al-Fayed (No. 1)34 Lord Bridge said:
It is very commonly the case that accessories will persuade directors or employees of the victim of the fraud to break their contractual obligations to him or her. In these circumstances, they are often joined to the proceedings in an action for inducing a breach of contract.35 For these purposes, it will not matter that the precise terms of the contract are not known to the defendant.36 It will be enough that he or she knows enough about the relationship to appreciate that what he or she is doing would be a breach of the contractual obligations that are owed to the victim. It will also be sufficient if the defendant does not know of the contract because he or she has 'turned a blind eye' (see above) to the possibility that it might exist.37 Recently, the courts have limited the type of act that can amount to an inducement to breach a contract. The inducement should normally be a promise or reward of an obvious tangible benefit, rather than vague enticements.38
Note that when a director is acting within his or her authority and bona fide interests of his or her company, he or she cannot be liable for inducing a breach of contract on the part of his company.39
It is clear that a duty of care may arise where the defendant has made a negligent misstatement to the victim of fraud in circumstances where it is obvious that he or she will rely upon it and might suffer loss if the statement is wrong as in the case of Hedley Byrne & Co Ltd v. Heller & Partners Ltd.40 It is plain that in some circumstances auditors may owe a duty of care to the company to identify fraud discovered in their audit. However, it will usually be extremely difficult to establish that third parties, other than the company that has relied upon audited accounts that have been negligently prepared and thereby concealed the existence of fraud, should be liable to them.41
In the many and varied situations in which parties' carelessness (and in particular failure to spot fraud) may damage other parties, it is difficult to predict with certainty when a duty of care will be owed. Popular tests currently include the 'assumption of responsibility' test, in which the court will look at the facts to determine whether the defendant assumed any responsibility towards the claimant,42 and the incremental approach, by which the court tends to see whether there have been previous similar cases and follows them rather than extracting some fundamental principle from them.
Where a customer company of a bank has an employee who, despite the fact he or she is acting within the scope of the bank's mandate, is engaged in a fraud, the bank may owe the customer a duty of care to alert it to the fraud if it should have been spotted. However, the courts have repeatedly emphasised that bankers are not detectives and that the basis of the relationship between a banker and its customer is one of trust. Strong evidence will therefore be needed to show that the bank was or should have been alerted to impropriety.43
A bank receives funds from a third party who is not a customer who has (untruthfully) been told by a fraudster that the sums will remain in a blocked account. The bank fails to spot that the customer is engaged in a fraud on the third party. In these circumstances, it is usually very difficult to assert the duty of care to the third party.44
A surveyor who is responsible for certifying that goods have been loaded on board a ship by issuing a certificate to that effect without inspecting them is liable to the buyer under a documentary credit. This is because he or she knew the seller would use the certificate to obtain payment via the letter of credit.45
A bank is served with a freezing injunction (see below) but carelessly fails to comply with it, with the consequence that the defendant fraudster was able to withdraw money from the frozen accounts that should have become available to the claimant. The bank owed the claimant no duty of care.46
Third-party recipients or transmitters of the proceeds of fraud
People who induce others to commit breaches of fiduciary duty can be liable if they act dishonestly when they do so. For this purpose, the test of dishonesty is not the subjective question of whether the person appreciates that what he or she is doing is wrong, but whether the court would regard it as so from an objective viewpoint.47 Such claims are very commonly made against parties who seek to conceal or divert the proceeds of fraud to ensure that the victim is unable to recover them. Frequently, therefore, they are seen against banks and professionals who are engaged in what are, in effect, money laundering schemes. The test of proof of dishonesty is, however, a high one, and claims of this nature need strong evidence to succeed.48
In the case of knowing receipt, the victim can recover the amount that the defendant received. In the case of dishonest assistance, the victim is entitled to recover the loss that he or she suffered as a result of the scheme in which the defendant persisted. The victim may also be able to claim an account of profits from a dishonest assister, provided the profits in question have a sufficient causal connection with the dishonest assistance.49 This can result in difficult considerations in determining what exactly the scheme was and whether there were one or several schemes involved.
As a matter of policy, English law provides that wrongdoers should not be subjected to the threat of legal action for an indefinite period after the actions to which they relate occur. For example, a general claim in tort will only be able to be brought within six years of the loss being suffered by the victim, this being the accrual of the cause of action.50 However, where the cause of action is based on the fraud of the defendant, such as in a claim for deceit, policy dictates that different rules should apply and time will not start to run until the victim discovers, or should have discovered, the actions of the fraudster.51 In this context, 'should have discovered' means that the victim has to show that unless he or she took exceptional measures, not reasonably to be expected of him or her, he or she would not have discovered the fraud.52
For claims of fraudulent breach of trust by a fiduciary, there is no time limit on the victim's ability to bring a claim against the fraudster.53 The limitation defence will, however, be available to dishonest assistors and knowing receivers of trust funds.54
This also applies to what is referred to as a breach of 'constructive trust'.55 However, a distinction is drawn between a case where a transfer of money held on trust ('trust property') is made as part of a fraudulent breach of trust, where no limitation period applies, to where a fiduciary fraudulently receives money to which a victim may be given a personal claim in equity, in which case a six-year limitation period will apply. Confusingly, both cases are described as a fraudulent breach of constructive trust. However, in the latter case the property is not trust property. An example of this would be where the director of a company improperly receives a bribe to secure the company agreeing to a waiver of debt; as a director, he or she has fiduciary duties to his or her company, and the money he or she receives is in breach of those duties; however, the money itself was never trust property.56 Although this is the current state of the law, it is a debated point in a complex area of law and depends on the specific facts of each case.
The fraudster will commit the criminal offence of fraud if he or she carries out the fraud through a false representation to the victim (or anyone else) as to a fact, law or state of mind, or a failure to disclose information that he or she is under a legal duty to disclose.57 In each case, the fraudster must have the intention to make a gain for him or herself or another, or to cause loss to another, or to expose another to the risk of loss. The first of these offences would clearly very frequently be the case where the fraudster lies to the victim to make a profit.
These offences require proving that the fraudster has acted dishonestly. Dishonesty in criminal law recently received substantial scrutiny by the Supreme Court in Ivey v. Genting Casinos.58 The test has been brought in line to reflect the civil law (above), and now only requires that the act was objectively dishonest, applying the standards of ordinary reasonable people. This removes the 'second limb'59 of dishonesty, which required proof that the defendant realised that what he or she was doing was wrong by those standards.
There is a further offence if the fraudster is in a position where he or she is expected not to act against the financial interests of the victim, for example if the fraudster is an employee, or is under a fiduciary duty such as an agent or trustee (discussed above) and dishonestly abuses that position, even by omission, with the requisite intention.60 Each of these three offences can carry a term of imprisonment of up to 10 years.
If the fraudster has created, copied or used a false document to mislead his or her victim into thinking it is genuine, and thereby to cause the victim to act in some way prejudicial to his or her interests, he or she is guilty of an offence of forgery.61 Such an offence can carry a term of up to 10 years' imprisonment.62 Other commonly seen offences include the common law – and self-explanatory – offence of conspiracy to defraud and the offence of fraudulent trading,63 which, although primarily designed to target the carrying on of a business with the intention of defrauding creditors, is drafted widely enough to capture all manner of fraudulent trading practices.
Beyond these more specific offences, it will often be possible to rely on the simple criminal charge of theft, where the fraudster has dishonestly taken someone else's property intending to keep that property permanently.64
There are also very wide provisions in English law criminalising acts that consist of the giving or receiving of bribes. Space does not permit a full outline of these offences, but broadly, where the fraudster gives a bribe to someone who is in a position of trust, or of whom there is otherwise a reasonable expectation that he or she will act in good faith or impartially in carrying out any activity connected with a business or trade, and hopes by giving the bribe to secure improper performance of any such activity, the fraudster will be guilty of an offence of bribery.65 This will also be the case where the fraudster him or herself requests, agrees to receive or receives a bribe in connection with the improper performance of any such activity.66 These offences extend to bribery involving public officials, employees and other people representing corporate bodies. The Bribery Act 2010 is noteworthy for its novel 'failure-to-prevent' provisions, criminalising commercial organisations that do not have in place adequate procedures to prevent persons acting on their behalf from offering bribes.67
More recently, the Criminal Finances Act 2017 amended the Proceeds of Crime Act 2002.68 Part 3 of the 2017 Act makes both UK and non-UK companies criminally liable for failing to prevent the facilitation of UK or foreign tax evasion in circumstances where the company neglects to have 'reasonable' prevention policies in place.69
There are also provisions of the criminal law that allow for the restraint and recovery of money that constitutes, or represents, the proceeds of crime. Restraint – akin to an interim freezing injunction in civil proceedings – can be sought by certain state agencies at the investigation stage, or by a prosecutor once criminal proceedings have commenced.70 Confiscation proceedings arise upon conviction.71 Alternatively, the state can bring a claim in a civil court to recover any money that is, or represents, property obtained through unlawful conduct even where no criminal conviction has been secured.72 To make such a claim, it will suffice to show that on the balance of probabilities the unlawful conduct has occurred and that this is the gain from that conduct.
Property obtained through unlawful conduct may be followed into the hands of third parties who receive the property from the fraudster, or receive the property from the first recipient, and so on. Significantly, it is not necessary to prove that the receipt by the third party of the property was 'unconscionable'; indeed, it is not necessary to establish the state of mind of the recipient at all. Recovery will not be possible, however, where the third party purchases any property for valuable consideration. The property may also be traced into any funds that represent the original property.73
The Criminal Finances Act 2017 introduces Unexplained Wealth Orders (UWOs).74 UWOs apply to politically exposed persons or persons suspected of being or having been involved in serious crime or persons connected with a person so suspected. A UWO requires the respondent to explain their interest in property. The property identified in a UWO may then become subject to an interim freezing order while restraint or confiscation proceedings are pursued.
A fraudster convicted of a criminal charge can be made to pay his or her victim under a compensation order, made upon an application or of the court's own motion.75 An application for such an order is made by the prosecutor rather than the victim unless, in the case of a private prosecution, they are one and the same. There is no upper limit on the amount of compensation the Crown Court may order, but it will only make realistic orders that it believes the fraudster will be able to pay within a reasonable time.76 Compensation orders will also be limited to the loss 'resulting from', that is to say occasioned directly by, the fraudster's offences of which he or she is convicted or that are taken into account during sentencing.77 The procedure adopted for the making of a compensation order is a summary one, inapt for detailed enquiry,78 and an order will only be made where the loss is readily ascertainable.79 Any award made should not exceed the sum that would be awarded by a court in civil proceedings.80 The court may order both confiscation and compensation arising from the same loss. In the event that the fraudster has insufficient assets to satisfy both orders, the court prioritises the victim in that sums recovered by the state pursuant to a confiscation order may go towards any shortfall in compensation to the victim.81 Separately, where property has been obtained by theft, blackmail or fraud, the criminal court may, upon the application of the victim or of its own motion, make an order for the restitution of the property stolen or its value.82 An order for restitution will, however, only be made in the 'plainest of cases'. Where there is doubt about the rights of the parties or there is an issue in dispute, the matter will be left to be decided in the civil courts.83
Despite the creation by statute of various bodies to investigate and prosecute fraud, the right to bring a private prosecution is expressly preserved in English and Welsh law.84 In recent years, victims of fraud have noticed a reluctance – or lack of resources – on the part of the police in particular to pursue fraud investigations. To a great extent, the nationwide ActionFraud online portal has replaced traditional methods of reporting fraud. Instead, victims of fraud have been increasingly exercising their rights as private prosecutors to pursue justice, punishment, deterrence and – quite properly – compensation and confiscation against fraudsters. There is now a solid body of case law clarifying the scope of the private prosecutor's access to the powers of the criminal courts, particularly in terms of confiscation, as to which see the recent R (Mirchandani) v. Somaia.85 Essentially, almost all the tools of the state prosecutor are available to the private prosecutor. The position is somewhat different in respect of investigatory powers prior to a prosecution. It is also clear that it is only rarely impermissible for criminal and civil proceedings concerning the same subject matter to be conducted concurrently, even if the prosecutor is also the claimant in the civil case.86
In England, it is possible to obtain an order before an action has been started, during the course of the action or after judgment has been granted in favour of the victim of fraud, called a 'freezing injunction', which can freeze all property belonging to the defendant.87 Similar 'proprietary injunctions' can be obtained where the claimant is seeking to freeze property in which he or she has an equitable interest (see above).
Freezing orders can be granted to freeze assets inside or outside England and anywhere in the world;88 in support of English proceedings or proceedings in other countries anywhere in the world;89 and in support of arbitration proceedings wherever they are taking place.90 They are not, however, available against foreign states unless that state has given written consent.91
To obtain a freezing injunction, the applicant must show:
that he or she has a good arguable case. This does not mean that it necessarily has more than a 50 per cent chance of success, but it must have some substance to it;
that there are assets that the injunction would catch; and
that there is a real risk that the judgment will not be satisfied in view of what the defendant is likely to do.
There is no 'right' to a freezing injunction; it is very much for the court to decide whether one is appropriate given all the circumstances. In addition, unlike a similar relief in other jurisdictions, a freezing injunction does not give security in the insolvency of the defendant. It is possible to obtain a freezing injunction without notifying the defendant and, indeed, most freezing injunctions are obtained in this way. However, in these circumstances, the applicant will have to satisfy an obligation of 'full and frank disclosure'92 whereby he or she explains to the court any arguments that the defendant might have made, had he or she been present, as to why the injunction should not have been granted. The requirements for a proprietary order are similar, save that it is sometimes said that the strength of a case to support one need not be so high.
A search order is an order available to litigants in England and Wales entitling them and their representatives (usually lawyers and forensic accountants) to enter a defendant's premises and search for a copy of and remove documents or material that may be used in court proceedings.93 They are also available against a third party, even where there is no cause of action against that party and no third-party disclosure order in place.94 To obtain a search order, there must be a very strong prima facie case; good evidence that the defendant's actions have resulted in serious damage to the claimant's interests; and very clear evidence that the defendant will have on his or her premises 'incriminating documents' or other items, and that there is a real possibility that he or she will dispose of them if he or she learns that the claimant might apply for one.95 Search orders are therefore almost always granted ex parte, and the duty of full and frank disclosure is taken very seriously.
A Norwich Pharmacal order requires someone to disclose documents or information to the applicant, often a victim of fraud. Frequently, they are sought to identify those who have assisted in perpetrating the fraud, to explore the full nature of the fraud or, perhaps most commonly, to trace assets that are subject to proprietary claims (see above). Very commonly, when the victim of a fraud discovers that his or her money has been misappropriated, he or she will apply for a Norwich Pharmacal order against a bank (sometimes called a Bankers Trust Co v. Shapira96 order). The intention of such an order is to obtain information about where funds have gone, or who has received them or assisted in transmitting them for the purposes of no-receipt or no-existence claims.
Again, the order is not available as of right, but the court will decide on the basis of all the information available to it whether it is appropriate to grant it. To obtain such an order, it is necessary to demonstrate that the respondent has been involved in the defendant's wrongdoing, if only unwittingly.97 A bank that innocently transmits funds that later turn out to be the proceeds of fraud would be therefore be 'involved'. However, if it has taken no action in connection with the fraud, the risk is that it will be regarded as a 'mere witness' and a Norwich Pharmacal order will not be available. It is also necessary to show that there are no other relevant provisions or procedures available under English law by which information could be obtained, that the respondent is likely to have relevant documents or information, and that there is a good arguable case if there is wrongdoing.
Norwich Pharmacal relief is invariably used in respect of respondents and material within the jurisdiction. Whether it can be used outside the jurisdiction has been seriously doubted.98
In civil proceedings in English courts, parties are typically ordered to disclose a list, to the court and the other parties, of all documents on which they rely; that adversely affect their own case; that adversely affect another party's case; and that support another party's case.99 This is known as 'standard disclosure'. The court can order, with or without the agreement of the parties, that a different level of disclosure is required, and will often do so to ensure that only a proportionate disclosure exercise is undertaken.100
legal advice privilege: communications by which a client seeks or receives legal advice from a lawyer are privileged;101
litigation privilege: communications made or received by a party that have the predominant purpose of relating to the litigation are privileged;102 and
privilege against self-incrimination: a party is not required to disclose documents that might incriminate him or her or increase his or her exposure to criminal prosecution. This will be relevant where the conduct complained of would be a crime.103
Disclosure occurs after proceedings have been commenced, so the fraudster will have had time to destroy or conceal evidence. A party can apply to the court for an order for pre-action disclosure,104 but this relies on the cooperation of the party being asked for documents. In cases where there is a risk of evidence being destroyed or concealed, a search order (see above) should be considered.
A party can apply to the court for an order that specific documents are searched for and made available for inspection by another party105 or a third party,106 and there is EU legislation governing the obtaining of evidence from other countries in the EU.107
In the first scenario, a bank is usually unprotected where, for example, a fraudster forges a signature on a bill of exchange or otherwise lacks authority to draw a bill.108 The bank can, however, attempt to claim an estoppel (e.g., by showing an express representation from the customer accepting the forgery that means it would be unfair to allow the customer to contradict that representation) or adoption (see the Greenwood case below).
As a general principle, persons dealing with companies are not bound to inquire into whether the internal procedures of that company to delegate the necessary power to an employee have been followed. However, where for example a payment instruction was fraudulently made by an employee of a company without express authorisation, this general principle has been found not to apply,109 and banks have been found liable to the company for accepting instructions from unauthorised employees of that company.
Customers owe their bank a duty to refrain from preparing or ordering individual payment orders in a way that makes fraud or forgery simple or likely: see London Joint Stock Bank Ltd v. Macmillan.110 If a customer writes a cheque in a manner that makes fraud simple or likely (e.g., by leaving blank spaces that make alterations and additions straightforward), he or she may be guilty of a breach of a duty he or she owes to the bank, and may be liable to the bank for any loss sustained by the bank as a natural and direct consequence. The customer does not, however, owe a wider duty to take reasonable precautions in the management of its business to identify forged cheques and prevent them from being presented to its bank.111
Customers also owe their bank a duty to inform it of any known forged payment order as soon as they become aware of it: see Greenwood v. Martins Bank Ltd.112 If they do not, the courts will not allow them to assert that there has been a forgery. However, a customer does not owe a broader duty to the bank in circumstances where a reasonable person would have been merely put on enquiry of fraud.113
Banks and their employees can be criminally liable under the Proceeds of Crime Act 2002 if they accept deposits of that money either knowing or suspecting that it has been generated by criminal activity114 such as criminal fraud or if they fail to disclose suspicious transactions to nominated officers or the authorities.115 Banks and their employees can also be subject to civil or criminal liability and fines under the Money Laundering Regulations 2007 if they do not have systems and procedures in place to identify customers and suspicious transactions.116
A liquidator of a company can seek a court declaration that anyone who was knowingly party to a fraudulent business must make a contribution to the company's assets.117 Fraudulent trading requires more than simply creating more debts in the company when the directors knew that the company was insolvent. Actual dishonesty must be shown. It is not only directors who may be liable; banks have been found to be parties to fraudulent trading as a consequence of their employees' knowledge.118 Any recovery becomes part of the general funds available to the liquidator to distribute to the company's unsecured creditors.
Section 214 of the Insolvency Act 1986 provides for claims to be brought against directors and former directors who continued the trading of the company when they knew, or ought to have realised, that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Liability arises if, on a net basis, it is shown that the company is worse off as a result of the continuation of trading.119 Dishonesty is not required, and accordingly there is a lower burden of proof than that required to prove fraudulent trading.
There are various provisions that assist office holders administering the insolvency of a company to investigate such claims. Section 235 of the Insolvency Act 1986 requires, inter alia, former directors and employees of the company to cooperate with an office holder (without a court order being first obtained) and provide them with such information concerning the company and its promotion, formation, business, dealings, affairs or property as the office holder may at any time after the relevant date reasonably require.120 There are also further wide-reaching provisions allowing office holders to apply for private examinations of directors and secretaries of the company.121
Under the principle of separability, the invalidity or rescission of a contract does not necessarily mean that the agreement to arbitrate contained within it is invalid or unenforceable.122 Separability is a matter for the law governing the contract.123 The arbitration agreement may therefore be affected in instances where the law governing the contract does not recognise the doctrine of separability.
There are also some grounds of invalidity that may affect an agreement to arbitrate itself. These grounds relate to circumstances where the contract itself was never entered into – for example, where a signature was forged or a signatory lacked authority.124 It is also theoretically possible for an arbitration clause to be invalid because of a fraudulent inducement, or if there was a misrepresentation relating to the effect or presence of the arbitration clause itself.
Arbitration awards may be set aside when obtained through fraud.125
A judgment must be set aside because it was obtained by a party's fraud if there was a conscious and deliberate dishonesty relating to, for example, evidence or action relevant to the judgment;126 and the evidence or action was material and causative.127
Materiality should be measured by assessing the impact of a party's fraud on the evidence that supported the original decision.128
In criminal proceedings, the guilt of the defendant must be proved 'beyond reasonable doubt', and this applies in cases of criminal fraud.129
In civil cases in the English courts, judgment is given 'on the balance of probabilities'. This applies irrespective of the seriousness of the allegation made.130 However, in the circumstances of an individual case, it may be inherently unlikely that fraud or reprehensible behaviour has occurred, and therefore cogent evidence will be required.131
If fraud is alleged in a civil case, it must be specifically pleaded. This means the specific allegation of fraud must be set out in the initial written submissions made by the parties before the trial.132
The ordinary rule of English law is that parties to litigation are not required to disclose legal advice received from their solicitors or communications between client and solicitor relating to the proceedings (see above). However, it has been confirmed that communications between a client and solicitor will not be privileged if the purpose of the client is to seek advice to further or facilitate crime or fraud.133 In Kuwait Airways Corporation v. Iraqi Airways Company, the Iraqi Airways Company's correspondence with its solicitors relating to a trial in which it had conspired with a key witness to deceive the English court was held not to be privileged.
i Conflict of laws134
The European regime takes precedence over the traditional common law rules, applying to civil and commercial matters principally where the defendant is domiciled in an EU Member State or certain other non-EU European countries. The guiding principle of the regime is that defendants should be sued in the courts of the Member State of their domicile.135 Therefore, if a fraudster is domiciled in Germany, the starting point is that they should be sued in relation to their fraud in Germany. However, the regime also provides various other grounds of special jurisdiction that allow a claimant to start proceedings against a defendant in a different jurisdiction, for example, where the parties have an exclusive jurisdiction agreement. Special jurisdiction is also granted in relation to torts to the place where the harmful event occurred or may occur;136 this would allow a European-domiciled fraudster to be sued under certain circumstances in England so long as it could be shown that the harm caused by the fraud occurred there.
When the European regime does not apply, the common law rules allow the English courts (depending on the circumstances) to take 'exorbitant' jurisdiction over defendants, whether domiciled in the jurisdiction or not, with jurisdiction based on service of proceedings or submission to the jurisdiction by the defendant. A non-European fraudster can, therefore, with the permission of the court, be served abroad with proceedings allowing the English courts to take jurisdiction. In deciding whether to grant permission to serve proceedings abroad, the English court must decide whether it is the most appropriate forum for resolution of the dispute, or if not whether justice nevertheless requires that the case be tried in England.137 The court usually assesses factors such as convenience and expense, governing law and the places where the parties reside and carry on business.138 The court retains discretion to stay proceedings on several grounds even if there is effective service, including, for example, where there is a more appropriate forum,139 or where a jurisdiction agreement between the parties points to another forum.140
Where enforcement of a foreign judgment is sought under the Commonwealth-related statutes, there are explicit provisions that provide a defence against enforcement if the judgment was obtained by fraud.141 Where enforcement of foreign judgments not covered by the aforementioned regime or the European regime is sought, the common law similarly provides a defence.142
However, there are no specific grounds allowing a court to refuse to enforce a judgment covered by the Brussels Regulation or Lugano Convention on the basis that the judgment was obtained by fraud. The European regime does, however, provide defences on public policy grounds that allow for a fraud defence to be raised in certain limited circumstances.143
1 Robert Hunter is a partner and Jack Walsh is a senior associate at Edmonds Marshall McMahon Ltd. The authors would like to express their gratitude to Andrew Young, Sam Waudby, Eytan Storfer and Rupert Wheeler, who assisted in the preparation of this chapter.
5 Edgington v. Fitzmaurice [1885] 29 Ch D 459; Al Khudairi v. Abbey Brokers Ltd [2010] EWHC 1486.
6 Man Nützfahrzeuge AG v. Freightliner Ltd [2005] EWHC 2347 (Comm).
7 Hallows v. Fernie [1868] LR 3 Ch App 467.
8 Slough Estates Plc v. Welwyn-Hatfield DC [1996] 2 PLR 50.
9 Derry v. Peek [1889] 14 App Cas 337.
10 AIC Ltd v. ITS Testing Services (UK) Ltd [2005] EWHC 2122 (Comm).
11 OMV Petrom SA v. Glencore International AG [2015] EWHC 666 (Comm) at 15.
12 Holmes v. Jones [1907] 4 CLR 1692.
13 Hayward v. Zurich Insurance Co Plc [2016] UKSC 48.
14 Museprime Properties Ltd v. Adhill Properties Ltd [1990] 61 P&CR 111.
15 Diamond v. Bank of London & Montreal Ltd [1979] QB 333.
16 Ninemia Maritime Corporation v. Trave Schiffahrtsgesellschaft mbH & Co KG ('The Niedersachsen') [1983] 2 Lloyd's Rep 600.
17 Attwood v. Small [1838] 6 Cl&F 232.
18 Newbigging v. Adam [1886] 34 Ch D 582.
19 Oakes v. Turquand [1867] LR 2 HL 325.
20 Royscot Trust v. Rogerson [1991] 2 QB 297.
21 Hornal v. Neuberger Products Ltd [1957] 1 QB 247.
22 [1997] AC 254.
23 Venezuela Central Ry v. Kisch [1867] LR 2 HL 99.
24 Imperial Mercantile Credit Association v. Coleman (1873) LR 6 HL 189 at 198.
25 Bray v. Ford [1896] AC 44 at 51.
26 AIB Group (UK) plc v. Mark Redler & Co Solicitors [2014] UKSC 58; Target Holdings Ltd v. Redferns [1996] AC 421.
27 [2001] EWCA Civ 712.
28 Bristol & West Building Society v. Mothew [1998] Ch 1 at 18.
29 Bray v. Ford [1896] AC 44 at 51.
30 Ross River Ltd v. Cambridge City FC [2008] 1 All ER 1004 at 203.
31 FHR European Ventures LLP and others (Respondents) v. Cedar Capital Partners LLC (Appellant) [2014] UKSC 45.
32 [2000] 2 All ER (Comm) 271.
33 [2018] UKSC 19.
34 [1992] 1 AC 448.
35 Lumley v. Gye [1853] 2 E&B 216.
36 Stratford & Son Ltd v. Lindley [1965] AC 269 HL.
37 Emerald Construction Co Ltd v. Lowthian [1966] 1 WLR 691.
38 R(Emblin) v. Revenue and Customs Commissionsers [2018] EWHC 626.
39 Lifestyle Equities v. Santa Monica Polo Club [2018] F.S.R. 15 at [162]–[165].
40 [1964] AC 465.
41 Al-Saudi Banque v. Clarke Pixley (A Firm) [1990] Ch 313 and Ikumene v. Leong [1993] 9 PN 181, but see Coulthard v. Neville Russell [1998] PNLR 276.
42 Williams v. Natural Life Foods Ltd [1998] 1 WLR 830.
43 Barclays Bank plc v. Quincecare Ltd [1992] 4 All ER 363 and Lipkin Gorman v. Karpnale Ltd [1992] 4 All ER 409.
44 HSBC Bank plc v. 5th Avenue Partners Ltd [2009] EWCA Civ 296.
45 Niru Battery Manufacturing Co v. Milestone Trading Ltd (No. 1) [2003] EWCA Civ 1446.
46 Commissioners of Customs and Excise v. Barclays Bank Plc [2006] UKHL 28.
47 Ivey v. Genting Casinos [2017] UKSC 67; Barlow Clowes v. Eurotrust [2005] UKPC 37; Royal Brunei Airlines v. Tan [1995] 2 A.C. 378.
48 Abou-Rahmah v. Abacha [2006] EWCA Civ 1492.
49 Novoship (UK) Ltd and others v. Nikitin and others [2014] EWCA Civ 908.
50 Limitation Act 1980, Section 2.
51 Limitation Act 1980, Section 31(a).
52 Paragon Finance v. DB Thakerar & Co (1999) 1 All ER 400.
53 Limitation Act 1980, Section 21(1)(a).
54 Williams v. Central Bank of Nigeria [2014] UKSC 10.
55 Limitation Act, Section 38.
56 See Sinclair Investments (UK) Ltd v. Versailles Trade Finance Ltd (In Administration) [2011] EWCA Civ 347 and in the High Court at [2010] EWHC 1614 (Ch) where this distinction was drawn with particular reference to limitation periods.
57 Fraud Act 2006, Sections 1, 2 and 3.
58 [2017] UKSC 67; see also DPP v. Patterson [2018] 1 Cr.App.R. 28, DC (per Sir Brian Leveson P).
59 R v. Ghosh [1982] Q.B. 1053.
60 Fraud Act 2006, Section 4.
61 Forgery and Counterfeiting Act 1981, Sections 1–4.
62 Forgery and Counterfeiting Act, Section 6.
63 Companies Act 2006, Section 993.
64 Theft Act 1968, Section 1.
65 Bribery Act 2010, Sections 1, 3–5.
66 Bribery Act 2010, Section 2.
67 Bribery Act 2010, Section 7.
68 See introduction to Criminal Finances Act 2017.
69 See Criminal Finances Act 2017, Sections 45–47.
70 Proceeds of Crime Act 2002, Sections 40–41.
71 Proceeds of Crime Act 2002, Sections 6–13B.
72 Proceeds of Crime Act 2002, Sections 240–245.
73 Proceeds of Crime Act, Sections 300–310.
74 Criminal Finances Act 2017, Sections 1–3.
75 Powers of the Criminal Courts (Sentencing) Act 200, Sections 130–133.
76 R v. Hackett [1988] 10 Cr App R (S) 388.
77 R v. Graves [1993] 14 Cr App R (S) 790.
78 R v. Stapylton [2012] EWCA Crim 728.
79 R v. Donovan [1981] 3 Cr App R (S) 192.
80 R v. Flinton [2008] 1 Cr App R (S) 96.
81 Proceeds of Crime Act 2002, Section 13.
82 Powers of the Criminal Courts (Sentencing) Act 2000, Sections 148–149, read together with the Theft Act 1968, Section 24(4).
83 See R v. Ferguson 54 Cr App R 410; R v. Calcutt and Varty 7 Cr App R (S) 385.
84 Prosecution of Offences Act 1985, Section 6.
85 [2017] EWCA Crim 741. See also R (Virgin Media) v. Zinga, referred to at footnote 2.
86 See the line of cases including Mote v. Secretary of State for Work and Pensions [2007] EWCA Civ 1234.
87 Civil Procedure Rules Part 25 and Practice Direction 25A.
88 Derby & Co Ltd and Others v. Weldon and Others (No. 6) [1990] 3 All ER 263.
89 Civil Jurisdiction and Judgments Act 1982, Section 25.
90 Kastner v. Jason [2004] EWCA Civ 1599.
91 State Immunity Act 1978, Section 13(2)(a).
92 Siporex Trade SA v. Comdel Commodities Ltd [1986] 2 Lloyd's Rep 428.
93 Anton Piller KG v. Manufacturing Processes Ltd [1976] Ch 55.
94 Abela v. Fakik [2017] EWHC 269.
96 [1980] 1 WLR 1274.
97 Norwich Pharmcal Co v. Customs and Excise Commissioners [1974] AC 133.
98 AB Bank v. Abu Dhabi Commercial Bank PJSC [2016] EWHC 2082 (Comm).
99 Civil Procedure, Rules 31.6.
100 Civil Procedure Rules 31.5.
101 R (Prudential Plc) v. Special Commissioner of Income Tax [2013] UKSC 1.
102 Wheeler v. Le Marchant [1881] LR 17 Ch D 675.
103 Lamb v. Munster [1882–83] LR 10 QBD 110, but see Fraud Act 2006, Section 13, for an important exception to this rule.
104 Civil Procedure, Rules 31.16.
105 Civil Procedure, Rules 31.12.
106 Civil Procedure, Rules 31.17.
107 Council Regulation (EC) No. 1206/2001.
108 Bills of Exchange Act 1882, Section 24; Paget's Law of Banking, 13th edition, pp. 485, 508.
109 Ruben v. Great Fingall Consolidated Ltd [1906] AC 549.
110 [1918] AC 777.
111 Tai Hing Cotton Mill v. Liu Chong Hing Bank Ltd [1986] AC 80, PC.
112 [1933] AC 51.
113 Patel v. Standard Chartered Bank [2001] Lloyd's Rep Bank 229.
114 Proceeds of Crime Act 2002, Sections 327–329.
115 Proceeds of Crime Act 2002, Sections 330–332.
116 Money Laundering Regulations 2007/2157, Regulations 42 and 45.
117 Insolvency Act 1986, Section 213(2).
118 Bank of India v. Morris [2005] EWCA Civ 693.
119 Re Marini Ltd (the liquidator of Marini Ltd v. Dickenson and Others) [2003] EWHC 334.
120 Insolvency Act 1986, Section 235(2).
121 Insolvency Act 1986, Section 236.
122 Premium Nafta Products Ltd v. Fili Shipping Co Ltd [2007] UKHL 40.
123 Astrazeneca UK Ltd v. Albemarie International [2010] EWHC 1028.
124 Nigel Peter Albon v. Naza Motor Trading SDN BHD [2007] EWHC 665 (Ch).
125 Celtic Bioenergy Ltd v. Knowles Ltd [2017] EWHC 472; Section 68(2)(g) Arbitration Act 1996.
126 Ampthill Peerage case [1977] AC 547.
127 Sphere Drake Insurance plc and another v. Orion Insurance Company plc [1999] EWHC 286 (Comm).
128 Kuwait Airways Corporation v. Iraqi Airways Corporation (Perjury II) [2005] EWHC 2524 (Comm).
129 Serious Organised Crime Agency v. Gale [2011] 1 WLR 2760.
130 Hornal v. Neuberger Products Ltd [1957] 1 QB 247.
131 H (Minors), Re [1996] AC 563.
132 D & G Cars Ltd v. Essex Police Authority [2013] EWCA Civ 514.
133 Kuwait Airways Corporation v. Iraqi Airways Company [2005] EWCA Civ 286.
134 The rules relating to choice of law in connection with fraud claims cannot be summarised usefully within the space available here.
135 Article 2 Brussels Regulation.
136 Article 5(3) Brussels Regulation.
137 This doctrine is known as forum non conveniens.
138 Spiliada Maritime Corp v. Cansulex [1986] UKHL 10.
140 The Eleftheria [1969] 1 Lloyd's Rep 237.
141 See, for example, Administration of Justice Act 1920, Section 9(2)(d) and Foreign Judgments (Reciprocal Enforcement) Act 1933, Section 4(1)(a)(iv).
142 Jet Holdings Inc v. Patel [1990] 1 QB 335 (CA).
143 Interdesco SA v. Nullifire Ltd [1992] 1 Lloyd's Rep. 180.