Judy Dawson analyses the importance of the decision and the stance The Supreme Court is taking against fraud

The Supreme Court again overturns the Court of Appeal’s priority of the finality principle over the principle that fraud unravels all

The Supreme Court has overruled the Court of Appeal on a number of occasions recently where the lower Court has apparently prioritised the finality of litigation over the public interest in discouraging fraud. Judy Dawson analyses the importance of the decision and the stance the Supreme Court is taking against fraud.

Background

In Hayward v Zurich Insurance Company [2016] EWCA Civ 327, Gohil v Gohil [2015]UKSC61  and Sharland v Sharland [2015] UKSC60 the Supreme Court ruled that the principle of the finality of litigation was overruled by fraud. In each case the parties had compromised their claims only one party to later discover evidence that proved that the other had lied, the first in relation to the injury sustained and the on-going symptoms in a personal injury claim, and the second and third in relation to financial assets relevant to a divorce settlement.  It held that the public interest in not allowing fraudsters to gain from their misdeed overruled the principles of the finality of settlements.

Takhar v Gracefield Developments Limited

The Supreme Court has again taken a similar stance in a judgment given yesterday. In the case of Takhar v Gracefield Developments Ltd and Others [2019] UKSC 13 (Click here for the  judgment) the seven-member Supreme Court again gave a clear and strong judgment that where it could be shown that a judgment had been obtained by fraud, and where no allegation of fraud had been raised at the trial, a requirement of reasonable diligence should not be imposed on the party seeking to set aside the judgment.

Facts

(Taken from the Lawtel summary)

A dispute had arisen about the terms on which the appellant (T) had transferred properties to the first respondent. The second and third respondents (K) relied on a joint venture agreement apparently signed by T. She denied signing it and claimed she had not seen it until the dispute arose. She brought proceedings alleging that the transfers had been procured by undue influence. She sought permission to obtain a report from a handwriting expert, but permission was denied. The judge accepted K’s account and dismissed T’s claim. She then obtained evidence from a handwriting expert, who concluded that her signature had been transposed onto the agreement from another document. She issued proceedings to have the judgment set aside on the basis of fraud. The judge concluded that the second action was not an abuse of process and should be allowed to proceed. However, the Court of Appeal concluded that T had to establish that the evidence of fraud was not available at the time of the first trial, and could not have been discovered with reasonable diligence.

Judgment

Henderson v Henderson [1843-60] All E.R. Rep. 378 was authority for the principle that parties must normally advance their total case on the first bout of litigation. It was not open to them, save in exceptional circumstances, to raise a point which should have been raised earlier and which could, with reasonable diligence, have been discovered and canvassed on the first trial. However, Henderson did not decide two critical issues;

1. On whether the rule applied where the new point was not in issue between the parties on the first trial and where, if it had been and evidence on the point had been led, a different outcome might have ensued.
2. On whether the rule required modification or disapplication where the new issue raised an allegation that the original judgment was obtained by fraud.

The law did not expect people to arrange their affairs on the basis the others might commit fraud. The idea that a fraudulent individual should profit from passivity or lack of reasonable diligence on the part of their opponent seemed antithetical to any notion of justice. The defrauder had perpetrated a deception not only on their opponent and the court, but on the rule of law. The policy arguments for permitting a litigant to apply to have a judgment set aside where it could be shown that it had been obtained by fraud were overwhelming.

Where it could be shown that a judgment had been obtained by fraud, and where no allegation of fraud had been raised at the trial, a requirement of reasonable diligence should not be imposed on the party seeking to set aside the judgment. However, where fraud had been raised at the original trial and new evidence about it was advanced to set aside the judgment, or where a deliberate decision was taken not to investigate the possibility of fraud, the court dealing with the application to set aside should have discretion as to whether to entertain the application. The existence of fraud had not been decided in T’s first action. It was a new issue and did not involve the re-litigation of an identical claim. T had suspected fraud, but was refused permission to engage an expert to investigate it. Her second action should therefore be allowed to proceed to trial.

Per Lord Briggs – The appeal turned on the outcome of a “bare-knuckle” fight between two long-established principles of public policy: first, that fraud unravelled all and, second, that there had to come an end to litigation. On the facts of the instant case the fraud principle should prevail. However, there should not be a bright-line boundary between the types of case where one principle should prevail. A more flexible basis was preferred, where the court could apply a fact-intensive evaluative approach to whether lack of diligence in pursuing a case in fraud in the first proceedings ought to render a claim to set aside an abuse of process.

Per Lord Sumption – The cause of action to set aside a judgment in earlier proceedings for fraud was independent of the cause of action asserted in the earlier proceedings. A flexible approach would introduce an unacceptable element of discretion into the enforcement of a substantive right. The standard of proof for fraud was high, but once it was satisfied there were no degrees of fraud which could affect the right to have the judgement set aside.

Per Lady Arden – It was not a rule that want of reasonable diligence in the first action of itself led to a blanket ban on bringing an action to rescind a judgment obtained by fraud (para.106).

Comment

This case does not directly overrule the judgment of the Court of Appeal in Gentry v Miller [2016]EWCA Civ 141  (where the insurer failed to get judgment in default set aside where it subsequently produced evidence of fraud). This is a different principle involving res judicata and the rule in Henderson v Henderson. However the Supreme Court’s consistent stance on this public interest matter of not allowing fraudsters to benefit from their fraudulent activity (and in particular the reference to a fraudster not being able to profit from the passivity or lack of reasonable diligence by their opponent) does suggest that were this matter to come before the Supreme Court today, the Court of Appeal would once again be overturned and that Court’s determination to promote principles of finality of litigation would again be subject to Supreme Court reversal.