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Fraud and Conspiracy Claims

against Professionals

Graeme McPherson QC

Daniel Saoul

Pippa Manby

4 New Square

February 2019

This material was provided for 4 New Square’s Professional Liability & Regulatory Conference in February 2019. It was not intended for use and must not be relied upon in relation to any particular matter and does not

constitute legal advice. It has now been provided without responsibility by its authors.

Graeme McPherson QC

Call: 1993 Silk: 2008 “His ability to absorb vast amounts of information and recall it is legendary.” - Legal 500

“Great attention to detail and extremely thorough preparation.” “He’s incredibly bright and can translate that across various different regulatory tribunals.”

– Chambers & Partners

Graeme’s practice is split primarily between international and domestic commercial litigation and arbitration, professional liability claims, regulatory/disciplinary work and sports claims.

He is recognised in the directories as a leading silk in those fields and in 2015 was winner of the Chambers & Partners Professional Liability Silk of the Year award. He increasingly specialises in appellate work. Outside the United Kingdom he works in the Caribbean, the Channel Islands and Gibraltar. He regularly sits as an Arbitrator (including for Sports Resolutions and as a Rule K Arbitrator in football disputes) and as a member of Judicial and Appellate Committees for various sporting regulators, including the Football Association. He has sat on the Rules and Regulatory Committees of a number of sports governing bodies. Graeme has been involved in numerous reported and significant cases at first instance, in the Court of Appeal and in the Supreme Court. A full CV is available on request.

Daniel Saoul Call: 2008 Silk: 2019

“Absolutely outstanding. He is the complete counsel: he has a brilliant intellect, he’s always able to find one extra first-rate point of argument, he’s excellent at paperwork and he’s a particularly outstanding advocate” – Chambers & Partners

Dan has a broad commercial practice and is recognised by the directories as a leading practitioner in his fields of specialism: commercial dispute resolution, international arbitration, civil fraud, professional negligence, sports law and costs litigation.

His appointment as Queen’s Counsel was announced in January 2019 and will be effective on 11 March 2019.

He has substantial experience of acting for both claimants and defendants in cases involving alleged commercial fraud, including applying for or resisting freezing injunctions, search orders and other interim relief as well as fighting heavily contested trials, a recent example being the Kazakhstan Kagazy v Arip litigation which went to a 13 week trial in the Commercial Court in 2017, resulting in a $300million Judgment for Dan’s clients in respect of which enforcement action is ongoing.

Pippa Manby Call: 2010

“Efficient at understanding the brief – she has no weaknesses”, “a rising star, who achieves good results against more experienced opponents”, “a creative thinker with a good analytical mind, she is fast, decisive and insightful.” – Legal 500

“Gaining a strong reputation in the professional negligence sphere” – Chambers & Partners

Pippa has a broad commercial practice, encompassing general commercial litigation, professional liability, costs and sports work. Pippa is recognised by the directories as a Leading Junior in Professional Liability, Sports Law and Costs.

Professional liability forms a substantial part of Pippa’s practice. She has advised and acted for claimants and defendants in professional liability actions involving lawyers, accountants / auditors, IFAs, surveyors, insurance brokers, construction professionals and other professionals. She has substantial experience of claims involving underlying fraud / dishonesty and fraud /dishonesty on the part of the professional.

DISHONESTY AND THE CAUSES OF ACTION THAT IT UNLOCKS

PART I: HONESTY, INTEGRITY AND RELATED CONCEPTS

Graeme McPherson QC

February 2019

What is dishonesty?

Ancient history: R v Ghosh [1982] 1 QB 1053; Twinsectra v Yardley [2002] UKHL 12; Barlow

Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2005] UKPC 37

Movement of ‘the tectonic plates of the legal firmament’: Ivey v Genting Casinos (UK) Ltd (t/a

Crockfords Club) [2017] UKSC 67

Expressing the test: LOCOG v Sinfield [2018] EWHC 51 (QB)

What is not dishonesty?

Negligence/gross negligence

Unconscionability

Recklessness – while it is undoubtedly evidence (‘a tell-tale sign’) of dishonesty, it may not be

dishonesty per se: Royal Brunei Airlines v Tan [1995] 2 AC 378; Clydesdale Bank plc v

Workman & Shoosmiths [2016] EWCA Civ 73

‘Lack of integrity’ (e.g. SRA Principle 2)

Hoodless v Financial Services Authority [[2003] UKFSM FSM007

The Solicitors Regulation Authority v Chan [2015] EWHC 2659 (Admin)

Scott v The Solicitors Regulation Authority [[2016] EWHC 1256 (Admin)

Bar Standards Board v Howd [2017] EWHC 210 (Admin)

Newell-Austin v The Solicitors Regulation Authority [2017] EWHC 411 (Admin)

Wingate v The Solicitors Regulation Authority [2018] EWCA Civ 366

Behaving in a way that undermines the trust which the public places in a professional and a

profession (e.g. SRA Principle 6)

Wingate v The Solicitors Regulation Authority [2018] EWCA Civ 366

The Solicitors Regulation Authority v Leigh Day [2018] EWHC 2726 (Admin)

PART II: PROVING DISHONESTY

Criminal standard – ‘beyond reasonable doubt’

Civil standard

A history lesson

Re H (minors) [1996] AC 563

The repeated references to that guidance being ‘misunderstood’

Consideration of what it really means

Re D (Secretary of State for Northern Ireland) [2008] 1 WLR 1499

Re B (Children) [2009] AC 11

Re S-B (Children) [2010] 1 AC 678

Re J (Children) [2013] 1 AC 680

Otkritie International Investments Management Ltd v Urumov [2014] EWHC 191

(Comm)

IT Human Resources v Land [2016] FSR 10

Group Seven Ltd v Nasir [2017] EWHC 2466 (Ch)

FM Capital v Marino [2018] EWHC 1768 (Comm)

JSC BM Bank v Kekhman [2018] EWHC 791 (Comm)

The correct approach?

What factors will the Court consider?

Inherent Probabilities

Documentary evidence

Plausibility etc

Circumstantial evidence

Motive/’case theory’

cf caution surrounding (1) reliability of uncorroborated oral evidence, and (2) ‘inordinately long

witness statements’ e.g. Sir Owen Glenn v Eric Watson & Others [2018] EWHC 2016

Where there are other possible explanations

Fish v General Medical Council [2012] EWHC 1269 (Admin)

JSC BTA Bank v Ablyazov [2012] EWHC 237 (Comm)

Portland Stone Firms Ltd v Barclays Bank & Others [2018] EWHC 2341 (QB)

Autogas (Europe) Ltd v Ochoki & Others [2018] EWHC 2345 (Ch)

CMOC Sales & Marketing v Persons Unknown [2018] EWHC 2230 (Comm)

PART III: FIVE CAUSES OF ACTION UNLOCKED

BY DISHONESTY, RECKLESSNESS AND UNCONSCIONABLE BEHAVIOUR

(1) Fraudulent Misrepresentation/Deceit

Ingredients:

A representation:

Of present fact or law, of a statement of intention, of a statement of opinion

Express or implied

Positively made or actively concealment

Oral, written or by conduct

The representation is false

The representation is made to induce the recipient to act in a particular way

The recipient is in fact induced to act by the representation

The maker

knows that the representation is false

is reckless as to the truth of the representation i.e. is aware that a statement might

not be true yet makes it anyway

Actual knowledge that a statement is false connotes dishonesty: Brett v The Solicitors

Regulation Authority [2014] EWHC 2974

Recklessness?

Maker is aware/suspects that a statement might not be true, yet makes it anyway

(In a professional/regulatory context) ‘… capable of being characterised as a lack of

integrity … in determining whether behaviour is reckless regard must be had to what would

reasonably have been appreciated or understood by persons in the same position as the

individual in question’: Ford & Owen v The Financial Conduct Authority [2018] UKUT 358

(TCC)

(2) Conspiracy

Two types:

Unlawful means conspiracy

Conspiracy to injure

Each requires a combination or understanding between 2 or more persons

All persons need not join the conspiracy at the same time

Each person must be sufficiently aware of the surrounding circumstances and share the

same object for it properly to be said that they were acting in concert at the time of the

acts complained of

Unlawful means conspiracy

The combination takes action which is unlawful in itself – a fluid concept!

The combination act with the intention of causing damage to a third party (who does in

fact incur the intended damage)

What is the test for ‘intention’?

Pre-Lonrho plc v Fayed [1992] 1 AC 448

More recently

If the defendant knew or should have known that injury to the claimant (1) was

inevitable (2) would be likely to result?

If the defendant foresaw that the combination’s conduct might damage the

claimant, or that damage was a natural consequence of the combination’s

conduct?

Where there were multiple purposes behind the combination acting as it did?

If there are several objects or purposes, one has to establish the predominant

purpose

If the combination’s primary purpose was to further its own legitimate interests?

If the combination believed that it had a lawful right act as it did?

Conspiracy to injure/lawful means conspiracy

Focus is on the object of the combination – did the combination act

For their own legitimate benefit?

To deliberately damage the interests of the third party without any just cause?

Once again, interesting questions arise when there were mixed objectives

(3) Bribery – giving/offering inducements

A free-standing tort or simply a species of fraud?

‘… a commission or other inducement which is given by the third party to an agent as such,

and which is secret from the principal’: Anangel Atlas v Ishikawajima-HHI [1990] 1 Lloyd’s Rep

167

Is there any need to establish the donor’s state of mind or motive? Sir Owen Glenn v Eric

Watson [2018] EWHC 2016 (Ch) @ 418

(4) Dishonestly assisting a breach of trust/breach of fiduciary duty

Ingredients:

A trust/fiduciary obligation owed by the trustee/fiduciary to the claimant

A breach of that trust/fiduciary duty committed by the trustee/fiduciary (which breach

need not be dishonest)

The defendant assisted the trustee to commit that breach of trust (a more than minimal

role)

The defendant’s assistance was dishonest

What is ‘dishonesty’ in this regard?

Apply the objective Genting test: Autogas (Europe) Ltd v Ochocki [2018] EWHC 2345 (Ch)

Actual knowledge will suffice – but knowledge of what? Abou-Rahmah v Abacha [2007]

1 ALL ER (Comm) 827; Group Seven Limited v Nasir [2017] EWHC 2466 (Ch); FM Capital

Partners v Marino [2018] EWHC 1768 (Comm)

Suspicion will/may also suffice:

More than a ‘vague feeling of unease’

Must be ‘firmly grounded and targeted at specific facts’

Must be assessed without regard to hindsight

What if a defendant had no actual suspicion (even through negligence or incompetence)

when reasonable individuals would have had suspicions?

The key question in every case

(5) Knowing receipt of Trust Monies

Ingredients

Disposal by a third party of assets owned by the claimant in breach of trust/fiduciary duty

Beneficial receipt by the Defendant of those assets (or assets which are traceable as

representing the assets of the claimant)

Knowledge on the part of the defendant that the assets he received are traceable to a

breach of fiduciary duty or trust

What is ‘knowledge’ in this regard?

Historically, positions from across the entire spectrum have been adopted – from near

strict liability to proof of dishonesty

BCCI (Overseas) v Akindele [2001] Ch 437: Knowledge must be ‘such as to make it

unconscionable for him to retain the benefit of the receipt’

That is a less stringent test that dishonesty

But what does it actually mean?

Armstrong v Winnington Networks [2012] EWHC 10 (Ch) and Group Seven Ltd v Nasir

[2017] EWHC 2466 (Ch)

Equating ‘unconscionability’ with Baden categories (1), (2) and (3):

(1) actual knowledge

(2) wilfully shutting one’s eyes to the obvious

(3) wilfully and recklessly failing to make such inquiries as an honest and

reasonable man would make

cf the rejection of that approach by Nourse LJ in BCCI (Overseas) v Akindele

Possibly also Baden categories (4) or (5):

(4) knowledge of circumstances which would indicate the facts to an honest and

reasonable man

(5) knowledge of circumstances which would put an honest and reasonable man

on inquiry

‘but only if, on the facts known to the defendant, a reasonable person would either

have appreciated that the transfer was probably in breach of trust or would have made

enquiries or sought advice which would have revealed the possibility of the breach of

trust’

BUT (1) does that not equate ‘unconscionable’ conduct with ‘negligent’ conduct? (2)

that does not appear consistent with the approach of the Court of Appeal in

Clydesdale Bank v Workman [2016] EWCA Civ 73

Conclusions?

THE ADVANTAGES OF ALLEGING FRAUD

Daniel Saoul

February 2019

1. Unlocking the possibility of recovery in a variety of factual scenarios

As we know, the commercial world is often messy: contracts are frequently left unsigned (or

never documented at all) and the precise legal nature of relationships between parties is often

unclear. Even in the case of professionals, it is not always clear if they were formally retained

and if so by whom or on what terms.

Crucially, fraud claims do not require a contractual basis, nor a duty of care. As a result, one

can immediately see that, the range of factual scenarios to which a fraud claim might apply is

far broader than the more vanilla causes of action. This is often crucial in commercial disputes

where identifying clear-cut contractual or common law obligations (or, at least, obligations of

that nature which have been breached) can be challenging (for example cases where

individuals are said to have introduced or facilitated a transaction etc).

Therefore, when presented with a scenario that does not fit within a straightforward or

conventional legal analysis – but where wrongdoing in some more shadowy form appears to

have taken place – turning to fraud can often be the answer.

2. The breadth of the causes of action available and the willingness of English law to flex to

achieve a just outcome

It is well known that English law does not have a single cause of action known as “fraud”.

Whilst deceit is often the first port of call, there is a multitude of formulations available,

including the economic torts, claims in equity (breach of fiduciary duty, dishonest assistance,

knowing receipt), unjust enrichment and also other common law avenues such as conversion,

money had and received etc.

The range of different legal options and their differing requirements can often be bewildering

or frustrating – but on the other hand, it means that virtually any factual scenario in which a

dishonest act has taken place causing loss to another party, will be captured under one cause

of action or another. Whilst English fraud law is not unified, it is extremely flexible.

Moreover, in practice the Courts will seek to exploit that flexibility to achieve a just outcome,

and the legal doctrines underpinning the relevant causes of action continue to be developed

(see e.g. OBG Ltd v Allan [2007] UKHL 21, and see also Petrodel v Prest [2013] UKSC 34 for

another example of the Court finding a “way around” to achieve a just outcome, in that

instance in relation to the piercing (or not) of the corporate veil).

3. The Availability of Protective Injunctive Relief

It can be very difficult, if not impossible, to satisfy the requirements for (a) a freezing

injunction or (b) a search and seizure order, in cases in which fraud is not alleged.

Of course, in theory the relevant tests are distinct, and it is well established that (for example)

dishonesty does not equate to a real risk of dissipation or a real possibility of the destruction

of evidence (see e.g Thane Investments v Tomlinson [2003] EWCA Civ 1272).

However, plainly factual scenarios justifying an allegation of fraud will often also (a) give rise

to a concern about the dissipation of assets, or the destruction of evidence, which might

trigger Iman application for interim relief and (b) provide a sufficient factual basis to support

such an application. As Picken J stated in PJSC Tatneft v Boglyubov [2016] EWHC Comm 2816,

where the dishonesty alleged “is at the heart of the claim against the relevant defendant, the

court may well find itself able to draw the inference that the making out, to the necessary

standard, of that case against the defendant also establishes sufficiently the risk of dissipation

of assets” (see also Lloyd LJ in VTB v Butritek [2012] EWCA Civ 808).

Obtaining orders of this kind – and holding on to them – can often result in very significant

strategic gains, above and beyond protecting the financial or evidential position pending trial.

4. Putting yourself in a better position on causation and loss

The approach to causation is more favourable to a claimant in a fraud case than in e.g. a

negligence case:

o Reliance or inducement is readily inferred where a misrepresentation has been made,

and subsequent decisions taken – and there is typically no requirement to establish

“but for” causation – it is sufficient if the misrepresentation was one of a number of

factors relied upon;

o The law of foreseeability of damage does not apply – see Nationwide Building Society

v Dunlop Haywards (DHL) Ltd [2010] 1 WLR 258;

o Likewise, there is no scope of duty / SAAMCO test or cap applicable

o Contributory negligence arguments will generally not be available, unless the claimant

has itself acted fraudulently (and even then will not be available in breach of trust or

breach of fiduciary claims – Nationwide Building Society v Balmer Radmore [1999]

PNLR 606)

o Recoverable damages will include consequential losses – significantly widening the

range of potential recovery

o Compound interest is also available

o Clauses seeking to limit liability are unlikely to be effective

5. Getting around limitation defences

The law of limitation is again much more favourable to claimants bringing fraud claims

Section 32 of the Limitation Act 1980 provides that in fraud cases, the period of limitation shall

not begin to run until discovery of the fraud.

Also, Section 21 of the Act provides that there is no limitation period at all applicable to claims

for fraudulent breach of trust.

THE DISADVANTAGES OF PLEADING FRAUD

Pippa Manby

February 2019

(1) Presentational Issues

1. Sales LJ in Playboy Club London Ltd v Banca Nazionale Del Lavoro Spa [2018] EWCA Civ 2025, at

[46] recognised the seriousness of alleging fraud / dishonesty as follows:

“The pleading of fraud or deceit is a serious step, with significance and reputational

ramifications going well beyond the pleading of a claim in negligence. Courts regard it as

improper, and can react very adversely, where speculative claims in fraud are bandied about by

a party to litigation without a solid foundation in the evidence. A party risks the loss of its fund

of goodwill and confidence on the part of the court if it makes an allegation of fraud which the

court regards as unjustified, and this may affect the court's reaction to other parts of its case.

Moreover, as Birss J observed in Property Alliance Group v Royal Bank of Scotland…, allegations

of fraud "can cause a major increase in the cost, complexity and temperature of an action." For

these reasons parties are well-advised, and indeed enjoined according to usual pleading

principles, to be reticent before pleading fraud or deceit.”

2. Pleading fraud or causes of action relating to dishonesty considerably “ups the ante” in a claim

against a professional. It is likely to garner the attention of the professional in a way that an

allegation of negligence might not. The challenge to the professional’s honesty can potentially

be a bar to a swift settlement being achieved: an insured professional is likely to be significantly

more buoyed up to fight such an allegation.

3. The seriousness of a plea of fraud is reflected in the pleading requirements imposed by

regulatory bodies:

a. The SRA Handbook at Chapter 5 sets out the outcomes to be achieved for solicitors in

their dealings with their clients and the courts. It includes two Indicative Behaviours said

to demonstrate a failure to achieve those Outcomes:

i. Indicative Behaviour 5.7(b) refers to “drafting any documents relating to any

proceedings containing …. any allegation of fraud, unless you are instructed to do

so and you have material which you reasonably believe shows, on the face of it, a

case of fraud.”

ii. Indicative Behaviour 5.8 refers to “suggesting that any person is guilty of a crime,

fraud or misconduct unless such allegations: (a) go to a matter in issue which is

material to your own client’s case; and (b) appear to you to be supported by

reasonable grounds.”

b. The Bar Handbook provides at 704(c):

“A barrister must not … draft any statement of case, witness statement, affidavit, notice

of appeal or other document containing … any allegation of fraud unless he has clear

instructions to make such allegation and has before him reasonably credible material

which as it stands establishes a prima facie case of fraud … provided that nothing in this

paragraph shall prevent a barrister drafting a document containing specific factual

statements or contentions included by the barrister subject to confirmation of their

accuracy by the lay client or witness.”

4. The upshot of this is that allegations of fraud or dishonesty cannot be pleaded without clear

instructions and reasonably credible evidence to support them: Medcalf v Mardell [2003] 1 AC

120.

5. An oft-cited statement of the law in this area is contained in the judgment of Millett LJ in

Paragon Finance v Thakerar [1999] 1 All ER 400:

“It is well-established that fraud must be distinctly alleged and as distinctly proved, and that if

the facts pleaded are consistent with innocence it is not open to the Court to find fraud. An

allegation that the defendant 'knew or ought to have known' is not a clear and unequivocal

allegation of actual knowledge and will not support a finding of fraud even if the Court is

satisfied that there was actual knowledge. An allegation that the defendant had actual

knowledge of the existence of a fraud perpetrated by others and failed to disclose the fact to the

victim is consistent with an inadvertent failure to make disclosure and is not a charge of fraud.

It will not support a finding of fraud even if the Court is satisfied that the failure to disclose was

deliberate and dishonest.”

6. In McEneaney v Ulster Bank Ireland Ltd [2015] EWHC 3173 (Comm) at [64-67] Andrew Smith J

refused an application to amend to plead fraud on various bases including the inadequacy of

the proposed pleading. He held that the proposed pleading which contained “rolled up” pleas

and allegations which did not make it clear what fraud was alleged against the bank could not

be allowed.

7. It is impermissible to seek to side-step pleading fraud or dishonesty by oblique pleading. The

importance of proper pleading of fraud or dishonesty was recognised by Mostyn J in SRA v

Malins [2017] EWHC 835 where he criticised the SRA for pleading its case against the

Respondent as one of lack of integrity where he considered that it was really alleging

dishonesty. He held:

“It is elementary, and supported by abundant authority, that if you are accused of dishonesty

then that must be spelt out against you with pitiless clarity.”

8. These matters aside, it remains possible to plead negligence in the alternative as shown by the

following cases:

a. Abbar v Saudi Economic & Development Company Real Estate [2010] EWHC 2132 in which

the court rejected a submission that if the alternative plea of negligence alleged facts

which were consistent with honesty, the court was barred from finding the defendant

guilty of dishonesty.

b. JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 3073 in which Flaux J held (at a

summary judgment application) that a claimant does not have to plead primary facts that

are only consistent with dishonesty but does have to show that an inference of

dishonesty is more likely than one of innocence or negligence. The correct test was

whether, on the basis of the primary facts alleged, an inference of dishonesty was more

likely than one of innocence or negligence.

(2) Costs

9. Pleading fraud or dishonesty will likely result in the allegations being fought more vigorously

than allegations of negligence. This is likely to result in greater costs being incurred by the

defendant(s) to such pleas as they seek to vindicate their professional reputations.

10. It is also more likely that a judge would find that those costs were reasonably and

proportionately incurred in defending the allegations made against the professional.

11. Failed claims which allege dishonesty or fraud are also likely to attract costs awards against the

claimants on an indemnity basis. This will reflect the court’s distaste for such allegations being

raised inappropriately. Some examples of this are in the cases of:

a. Jarvis PLC v Pricewaterhousecoopers [2000] 2 BCLC 368 where indemnity costs in a

discontinued claim against auditors were awarded by Lightman J, in part, because bad

faith had been alleged against the auditors.

b. Clutterbuck v HSBC [2015] EWHC 3233 (Ch); [2016] 1 Costs LR 13 where damages for

negligence and deceit were claimed before the proceedings were abruptly discontinued.

David Richards J held that:

“the general provision in relation to cases in which allegations of fraud are made is that,

if they proceed to trial and if the case fails, then in the ordinary course of events the

claimants will be ordered to pay costs on an indemnity basis. Of course the court retains

a complete discretion in the matter and there may well be factors which indicate that

notwithstanding the failure of the claim in fraud indemnity costs are not appropriate, but

the general approach of the court is to adopt the course that I have indicated. The

underlying rationale for that approach is that the seriousness allegations of fraud are such

that where they fail they should be marked with an order for indemnity costs because, in

effect, the defendant has no choice but to come to court to defend his position.”

c. PJSC Aeroflot – Russian Airlines v Leeds [2018] EWHC 1735 (Ch); [2018] 4 Costs LR 775

where Rose J allowed indemnity costs in a claim where serious and consistent allegations

of fraud had been levelled and then entirely abandoned without explanation and the

proceedings discontinued. He held at [53]:

“Where a claimant makes serious allegations of fraud, conspiracy and dishonesty and

then abandons those allegations, thereby depriving the defendant of any opportunity to

vindicate his reputation, an order for indemnity costs is likely to be the just result, unless

some explanation can be given as to why the claimant has decided that the allegations

are bound to fail.”

12. These were all decisions where a claimant discontinued their claim before trial rather than

decisions made where a fraud or dishonesty claim had failed at trial. Rose J in PJSC, in particular,

was influenced by the fact that the defendants had not had the chance to vindicate their

reputation. Therefore, there may be scope for distinguishing such decisions where the matter

has proceeded to trial and the claim has failed, especially if the failure was on a technical basis

or the allegations of dishonesty or fraud were only narrowly defeated.

(3) Insurance

(a) Indemnity / Coverage issues

13. In many instances this disadvantage will be the most important consideration when it comes to

a decision as to whether or not to plead fraud. It would be a Pyrrhic victory indeed to establish

fraud against a defendant and then to discover that it does not have the benefit of insurance

cover as a result.

14. Therefore, it is important at the outset of a claim that includes or may include allegations of

fraud or dishonesty to consider the insurance position of the defendant professional. As a

solicitor representing a claimant this makes sense in order to ascertain how best to plead and

pursue the claim and also the likelihood of enforcing any award against a solvent defendant. As

a solicitor representing a defendant, there may well be separate coverage investigations going

on in the background.

15. The starting point is that no professional indemnity policy will provide cover in the event that

the insured’s liability arises from his or her own fraud. As a matter of law it is not possible to

insure against your own fraud or dishonesty. The reasons for this are that:

a. It is impermissible as a matter of public policy for an insured to be indemnified against

the adverse consequences of his or her own wrongdoing: Beresford v Royal Insurance

Company Limited [1938] AC 586 at 596; Sea Glory Maritime Company v Al Sagr National

Insurance Company [2014] 1 Lloyd’s Rep 14 at [298].

b. As a matter of construction, insurance policies normally only cover non-deliberate

events.

c. Most liability policies contain exclusions for dishonesty.

16. It is possible to obtain insurance that covers the fraud of others and vicarious liability for the

fraud of others. Many professional indemnity policies will provide cover for the dishonest acts

of employees and partners provided even though they will not indemnify the person who has

actually been dishonest.

17. The SRA’s Minimum Terms provide:

“The insurance may exclude liability of the insurer to indemnify any particular person to the

extent that any civil liability or related defence costs arise from dishonesty or a fraudulent act or

omission committed or condoned by that person, except that:

(a) the insurance must nonetheless cover each other insured; and

(b) the insurance must provide that no dishonesty, act or omission will be imputed to a

body corporate unless it was committed or condoned by, in the case of a company, all

directors of that company, or in the case of an LLP, all members of that LLP.”

18. This is a (deliberately) high hurdle to impute dishonesty to a corporate body. Essentially, an

insurer will have to establish that all of a firm’s principals were in some way complicit in the

fraud.

19. That said, recent decisions have taken a broad view of condonation which may cause difficulties

for claimants wanting to proceed against a small defendant entity: Zurich Professional v Karim

[2006] EWHC 3355 (QB); Goldsmith Williams v Travellers Insurance [2010] EWHC 26 (QB); and

Rahim v Arch Insurance Company (Europe) Limited [2016] EWHC 2967 (Comm).

20. It is important to note that avoiding pleading fraud will not necessarily preserve the defendant

professional’s insurance cover. It is well-established that a court will consider the substance of

the allegations not just their form:

a. In West Wake Price & Co v. Ching [1957] 1 WLR 45 a firm of accountants had received

two payments from clients which had gone missing. A clerk was considered to have been

responsible but the claimants were careful not to allege that what had happened was a

fraud, rather framing the case in negligence, restitution and conversion. The defendant

firm had a policy of insurance which covered “neglect, default or error”. Insurers refused

to pay on the basis that the true nature of the claim was in fraud. Devlin J held that he

was entitled “to look at the matter as well as the form of the statement of claim” and “to

reach [his] own conclusions about it”. Having done so, he determined that this was a

claim that was based primarily on the alleged fraud of the clerk. In the event that the

allegations were made out, the proximate cause of the loss would have been the fraud

and thus outwith the scope of the indemnity afforded by the policy.

b. In MDIS v. Swinbank [1999] Lloyd’s Rep IR 516, the Court of Appeal held at [22]:

“Claimants may have many reasons of their own why they choose to put their case in a

particular way, regardless of what would be held to be the true proximate cause of the

insured’s liability. One common example… was a claim against say a solicitor or

accountant which could be put as a claim for fraud or a claim for negligence. In such a

case it would ordinarily be sufficient (and much easier) for the claimant to put its case

only in negligence. Thus the claim might be put in negligence or it might be put in

negligence and fraud and in either case it might be settled. It is common ground that in

both cases underwriters would not be liable if the proximate cause of the loss was the

fraud of the insured…

[U]nderwriters’ liability depends upon the true facts and not simply upon the way in which

the claimant chooses to put its case.”

21. Therefore, in terms of practical advice relating to coverage issues in claims where dishonesty or

fraud are alleged:

a. Consider if this is a case where you are likely to only be able to enforce a judgment if

there is insurance cover in place (this will normally be the case).

b. Consider carefully (and early) the extent to which allegations of dishonesty or fraud will

affect the defendant professional’s cover for the judgment sought.

c. Consider whether there is e.g. an innocent partner who would be vicariously liable for

the dishonest or fraudulent partner’s conduct or, in the case of a corporate defendant,

whether the dishonesty can be imputed to that entity as a whole.

d. Remember that the way that the case is pleaded is not determinative of how a court will

treat the allegation.

e. Consider what may be going on in the background in terms of coverage investigations

and how best to deal with this: would a tripartite mediation between claimant, defendant

professional and insurer be appropriate?

(b) Aggregation

22. Even if there is an indemnity being provided by insurers, aggregation of claims can also create

difficulties for claimants in terms of recovery against an insured professional. Different

professional indemnity policies contain different rules regarding aggregation of claims. Based

on the standard policy wordings used in professional indemnity policies, claims based on fraud

or dishonesty may increase the risk of those claims being aggregated. This may reduce the pool

of money available to claimants in those actions.

23. The SRA Minimum Terms provide at clause 2.5:

“(a) All Claims against any one or more Insured arising from:

(i) One act or omission; or

(ii) One series of related acts or omissions; or

(iii) The same act or omission in a series of related matters or transactions; or

(iv) Similar acts or omissions in a series of related matters or transactions; or

(v) One matter or transaction

will be deemed to be and treated as one Claim for the purposes of the Limit of Indemnity.”

24. This clause was interpreted by the Supreme Court in AIG Europe Limited v Woodman [2017] 1

WLR 1168. The Supreme Court held that:

a. Aggregation clauses are normally not to be approached with a predisposition towards a

broad or narrow construction.

b. The use of the phrase “series of related transactions” was intended to prevent limitless

aggregation and confine it to cases in which there was a “real connection” between the

transactions.

c. The use of the word “related” implied that there must be some interconnection between

the matters or transactions; in other words that they “fit together in some way”. It is not

enough that the transactions bear a “striking similarity”.

d. But as the Law Society had not chosen to specify by what criterion or criteria they should

relate to one another, determining whether transactions were related was “an acutely

fact sensitive exercise…an exercise of judgment, not a reformulation of the clause to be

construed and applied”.

e. The Supreme Court disapproved the Court of Appeal’s approach to construction of the

clause: (1) the test was not whether there was an “intrinsic” connection as opposed to

an “extrinsic” connection; that was to either specify the standard of connection, or

reformulate the clause, to mean something the parties had not chosen; and (2) it was

important not to take too narrow a view of the transaction: it was to be distinguished

from the act or omission giving rise to liability on the part of the insured (the payment

out of the escrow account, in that case. Hence the Court said that “was an act giving rise

to a claim, but the act occurred in the course of a wider transaction.”) The transactions

had to be identified and looked at objectively, taking the transactions in the round, and

not from any one party’s viewpoint.

f. Applying those principles, the Court concluded that the separate investments into each

investment project (Peninsula Village and Marrakech) were ‘related transactions’, but

that the two projects were unrelated, resulting in two ‘pots’ of claims.

g. The focus of the argument was on whether the transactions were “related”: the Supreme

Court’s answer was that similar transactions were only related if they had some real

connection or inter-connection, taking a broad view of the transactions from a neutral

perspective, and without insisting on an ‘intrinsic’ as opposed to ‘extrinsic’ factor.

Graeme McPherson QC, Daniel Saoul and Pippa Manby

4 New Square Professional Liability & Regulatory Conference

© 2019 Graeme McPherson QC, Daniel Saoul and Pippa Manby.

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Fraud and Conspiracy Claims

Graeme McPherson QC

Dan Saoul

Pippa Manby

OR

Dishonesty and the causes of action that it unlocks:

are they worth the hassle ?

GMQC’s topics

Part I: Honesty, integrity and related concepts

Part II: Proving Dishonesty

Part III: Five causes of action unlocked by dishonesty

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What is dishonesty ?

Ivey v Genting Casinos (UK) Ltd (t/a Crockfords Club)

LOCOG v Sinfield @ para 51

“… whilst dishonesty is a subjective state of mind, the standard bywhich the law determines whether that state of mind is dishonest is

an objective one, and that if by ordinary standards a defendant’smental state is dishonest, it is irrelevant that the defendant judges bydifferent standards.”

What is not dishonesty ? (1)

(1) Negligence/Gross negligence

(2) Unconscionability

(3) Recklessness

What is not dishonesty ? (2)

(4) Lack of Integrity

Hoodless v The FSA @ para 19

“… 'integrity' connotes moral soundness, rectitude and steadyadherence to an ethical code. A person lacks integrity if unableto appreciate the distinction between what is honest or

dishonest by ordinary standards. (This presupposes, of course,circumstances where ordinary standards are clear. Where

there are genuinely grey areas, a finding of lack of integritywould not be appropriate.)”

Wingate v The SRA @ paras 96-99

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What is not dishonesty ? (3)

(5) Behaving in a way that undermines trust

Wingate v The SRA (supra) @ paras 105-106

“It is possible to think of many forms of conduct which would underminepublic confidence in the legal profession. Manifest incompetence is oneexample. A solicitor acting carelessly, but with integrity, will breachPrinciple 6 if his careless conduct goes beyond mere professionalnegligence and constitutes “manifest incompetence”; see Iqbal and Libby.

In applying Principle 6 it is important not to characterise run of the millprofessional negligence as manifest incompetence. All professional peopleare human and will from time to time make slips which a court wouldcharacterise as negligent. Fortunately, no loss results from most suchslips. But acts of manifest incompetence engaging the Principles ofprofessional conduct are of a different order”

Proving Dishonesty: the standard of proof (1)

Re H (Minors) @ p568E-H

“The balance of probability standard means that a court is satisfied an eventoccurred if the court considers that, on the evidence, the occurrence of the eventwas more likely than not. When assessing the probabilities the court will have inmind as a factor, to whatever extent is appropriate in the particular case, that themore serious the allegation the less likely it is that the event occurred and, hence,the stronger should be the evidence before the court concludes that the allegationis established on the balance of probability. Fraud is usually less likely thannegligence… Built into the preponderance of probability standard is a generousdegree of flexibility in respect of the seriousness of the allegation.

Although the result is much the same, this does not mean that where a seriousallegation is in issue the standard of proof required is higher. It means only thatthe inherent probability or improbability of an event is itself a matter to be takeninto account when weighing the probabilities and deciding whether, on balance,the event occurred. The more improbable the event, the stronger must be theevidence that it did occur before, on the balance of probability, its occurrence willbe established.”

Proving Dishonesty: the standard of proof (2)

Otkritie International v Urumov @ paras 88 -89

“… it has been firmly established that:

i) First, there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not: Re B at para 13 per Lord Hoffmann

ii) Second, the proposition that “the more serious the allegation, the more cogent the evidence needed to prove it” is wrong in law and must be rejected

iii) Third, while inherent probabilities are relevant in considering whether it was more likely than not that an event had taken place, there is no necessary connection between seriousness and inherent probability.”

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Proving Dishonesty: relevant factors

(1) Inherent probabilities

(2) Documentary evidence

(3) Plausibility

(4) Circumstantial evidence

(5) Motive/’case theory’

But caution over

(6) Oral evidence

(7) Witness statements

Proving Dishonesty: other possible explanations

Portland Stone v Barclays Bank @ para 26

“… it is not possible to infer dishonesty from facts that are equally consistent with honesty.”

Autogas (Europe) v Ochocki @ para 15

“… the court is not entitled to make a finding of fraud unless theprimary facts pleaded are inconsistent with anything other than

dishonesty …

… It is not open to the court to infer dishonesty from facts which have

not been pleaded or from facts which have been pleaded but areconsistent with honesty. There must be some fact which tilts thebalance and justifies an inference of dishonesty, and that fact must be

pleaded and proved.”

(1) Fraudulent Misrepresentation/Deceit

The Ingredients

The necessary state of mind – the maker of the

representation must

(1) Know that the representation is false

(2)Be reckless as to the truth of the representation

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(2) Conspiracy

The 2 types of conspiracy(1) Unlawful Means Conspiracy

(2) Conspiracy to Injure

An ingredient common to both types – acombination or understanding between 2 or morepersons to act in concert

Unlawful Means conspiracy- The combination takes action is itself unlawful

- The combination acts with the intention of causing damage to a third party

What is the test for ‘intention’ ?

(3) Bribery

Is bribery a cause of action ?

What is bribery ? Anangel Atlas v Ishikawajima HHI

“… a commission or other inducement which is given by the thirdparty to an agent as such, and which is secret from the principal”

What must be established as regards the third party’s state of mind ?

(4) Dishonest assistance

The Ingredients

The assistance must be given dishonestly – but

what is ‘dishonesty’ in this regard ?

- Objective (Genting) test

- Actual knowledge will suffice – but knowledge of what ?

FM Capital Partners v Marino @ para 83(1)

“There is no need to prove that the defendant was aware of the detailsof the underlying fraud, that there existed a trust and/or they knew

the facts which give rise to the trust … It suffices if they simply knowthat they are assisting the fiduciary to do something he or she is not

entitled to do”

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(4) Dishonest assistance

What if actual knowledge cannot be proved ?

- Turning a blind eye ? FM v Marino @ para 83(2) “… deliberately close their eyes and ears or deliberately refrain from asking questions lest they learn something they would rather not

know, and proceed regardless”

- Recklessness ?

- Suspicion ?

The ‘key question’ in each case: Group Seven v Nasir

(5) Knowing receipt of trust monies

The Ingredients

The need to prove ‘knowledge’ – but what is

‘knowledge’ in this regard ?

BCCI (Overseas) v Akindele – knowledge must be “such as to

make it unconscionable for him to retain the benefit of the receipt”

But what does that mean in practice ? A return to Baden categories ?

Armstrong v Winnington Networks

Group Seven v Nasir

The advantages of pleading fraud or causes of action based on dishonesty

Daniel Saoul

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Unlocking recovery in a wide range of scenarios

• No duty of care required – no need to get into the Caparo / Hedley Byrne type considerations

• No contractual basis required either – you can sidestep

tricky issues of contractual interpretation or construction

• You can now explore scenarios where there was no formal retainer with the professional, or even where the

professional was acting for a third party, or acting as some kind of introduction agent or facilitator in a transaction –indeed, the circumstances in which a fraud claim might be

pursued are extremely wide ranging

The breadth and flexibility of English fraud law

• There is no “unified” law of fraud in England & Wales

• This is a strength in many ways: where dishonesty has occurred there is almost certainly a cause of action / remedy available, by one route or another

• Deceit

• Economic torts

• Breach of fiduciary / dishonest assistance / knowing receipt

• Conversion

• Money had and received/ deceit / equitable causes of action / conversion / money had and received / unjust enrichment

• And the Court will strain to achieve a just outcome

The availability of protective injunctive relief

• The English Court has two “nuclear” weapons at its disposal: freezing orders and search and seizure orders

• It is fair to say that “dishonesty” or “fraud” and “real risk of

dissipation” or “real possibility of the destruction of evidence” are not the same thing (Bingham LJ in Thane Investments)

• However the more recent approach of the Court has been to recognise that the two often converge – and the facts establishing dishonesty might well also establish the

relevant requirements for urgent interim relief

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Causation and Loss – An Easier and Better Path

• Typically the test for causation is reliance or inducement: which the Court will usually be willing to infer where fraud has been proved

• Harder edged tests such as “but for” can be avoided

• As can questions of scope of duty and foreseeability

• Contributory negligence will typically not be available as a defence

• Recoverable losses will extend to consequential losses, and compound interest is available

• Clauses seeking to limit liability will normally be ineffective

Limitation – A more generous approach

• Section 32 of the Limitation Act 1980 defers the commencement of the limitation period until the discovery of the fraud (or concealment)

• Also, Section 21 of the Limitation Act dispenses with limitation periods in claims for fraudulent breach of trust (though note laches may still apply)

• In cases involving foreign law, the Foreign Limitation Periods Act may also assist so as to disapply a foreign limitation period that might otherwise bar recovery in a

fraud claim (and see Kazakhstan Kagazy v Arip for the most recent analysis of the law)

Disadvantages of pleading fraud or causes of action based on dishonesty

Pippa Manby

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(1) Presentational Issues

Upping the ante

Sales LJ in Playboy Club London Ltd v Banca Nazionale Del Lavoro Spa [2018] EWCA Civ 2025:

“The pleading of fraud or deceit is a serious step, with significance and reputational ramifications going well beyond the pleading of a claim in negligence. Courts regard it as improper, and can react very adversely, where speculative claims in fraud are bandied about by a party to litigation without a solid foundation in the evidence. A party risks the loss of its fund of goodwill and confidence on the part of the court if it makes an allegation of fraud which the court regards as unjustified, and this may affect the court's reaction to other parts of its case. Moreover, as Birss J observed in Property Alliance Group v Royal Bank of Scotland…, allegations of fraud "can cause a major increase in the cost, complexity and temperature of an action." For these reasons parties are well-advised, and indeed enjoined according to usual pleading principles, to be reticent before pleading fraud or deceit.”

Regulatory pleading requirements

• SRA Handbook Chapter 5 IB 5.7(b)

• SRA Handbook Chapter 5 IB 5.8

• Bar Handbook paragraph 704(c)

• Medcalf v Mardell [2003] 1 AC 120

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Fraud must be clearly and unequivocally pleaded

The Courts have repeatedly reiterated the need to allege fraud or dishonesty clearly and unequivocally:

• Paragon Finance v Thakerar [1999] 1 All ER 400

• McEneaney v Ulster Bank Ireland Ltd [2015] EWHC 3173 (Comm)

• SRA v Malins [2017] EWHC 835

You can still plead negligence in the alternative

• Abbar v Saudi Economic & Development Company Real Estate [2010] EWHC 2132

• JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 3073

(2) Costs

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Quantum of Costs

• Likely to result in more costs being incurred due to seriousness of allegations and professionals’ desire to

defend the same.

• More likely that a (costs) judge will consider that those costs were proportionately and reasonably incurred by the defendant professional

Basis of Assessment

• Failed / discontinued claims in fraud / dishonesty likely to attract indemnity costs awards.

• Jarvis PLC v Pricewaterhousecoopers

[2000] 2 BCLC 368

• Clutterbuck v HSBC [2015] EWHC 3233

(Ch)

• PJSC Aeroflot – Russian Airlines v Leeds [2018] EWHC 1735 (Ch)

(3) Insurance Issues

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(3)(a) Indemnity / Cover

Will there be insurance money to pay the claim?

• Important consideration for claimants: could I win “too big” in establishing fraud / dishonesty on the part of the professional such that cover is pulled?

• Important consideration at the outset of a claim. How to play fraud / dishonesty angle?

Professional Indemnity Policy Wording

• No cover for insured’s liability arising from their own fraud.

• However, cover for fraud of others and vicarious liability for fraud of others.

• SRA Minimum Terms:

“The insurance may exclude liability of the insurer to indemnify any particular person

to the extent that any civil liability or related defence cost arise from dishonesty or a fraudulent act or omission committed or condoned by that person, except that:

(a) the insurance must nonetheless cover each other insured; and

(b) the insurance must provide that no dishonesty, act or omission will be imputed

to a body corporate unless it was committed or condoned by, in the case of a company, all directors of that company, or in the case of an LLP, all members of that LLP.”

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What is “condonation”?

• Zurich Professional v Karim [2006] EWHC 3355 (QB)

• Goldsmith Williams v Travellers Insurance [2010] EWHC 26 (QB)

• Rahim v Arch Insurance Company (Europe) Limited [2016] EWHC 2967 (Comm)

Substance not form

• West Wake Price & Co v. Ching [1957] 1 WLR 45

• MDIS v. Swinbank [1999] Lloyd’s Rep IR 516

(3)(b) Aggregation

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Issues arising from aggregation

Aggregation of claims

Risk of insurance pot being split between multiple claims / claimants.

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