Supreme Court judgment offers reassurance to fraud victims

The judgment, which was backed by seven Supreme Court judges, sought to resolve a conflict between two legal principles: the common law principle that 'fraud unravels all'; and the principle that there must be finality in litigation. However, the judges were unable to agree on a "bright-line boundary" between types of case where one principle or the other would succeed.

The applicant, Mrs Takhar, claimed she had been defrauded by her cousin, Mrs Krishan, when she agreed to transfer ownership of a number of properties in Coventry to a newly-formed company, Gracefield Developments Ltd. Mrs Takhar claimed that the properties were to be renovated and rented out, with her retaining beneficial ownership, while Mrs Krishan and her husband claimed that the properties were to be sold after they had been renovated and the proceeds split between them and Mrs Takhar.

In October 2008, Mrs Takhar issued proceedings claiming that the properties had been transferred to Gracefield as a result of "undue influence and unconscionability" on the part of the Krishans. At a trial before Judge Purle at the High Court (the Purle judgment), the Krishans presented a scanned copy of a written profit share agreement, purportedly signed by Mrs Takhar, to support their case. Mrs Takhar applied for leave to obtain evidence from a handwriting expert, but permission was refused. As Mrs Takhar was unable to prove that she had not signed the document, the High Court found in favour of the Krishans.

After the trial Mrs Takhar engaged a handwriting expert, who agreed that the signature had been forged. She then applied to have the Purle judgment set aside on the basis of fraud. The Krishans and Gracefield claimed that this application was an abuse of process. They argued that because Mrs Takhar had access to the documents on which the expert report was based before the Purle judgment, Mrs Takhar should not have the opportunity to re-open this litigation. Mr Justice Newey at the High Court allowed Mrs Takhar's application.

The Court of Appeal allowed the Krishans' appeal. Lord Justice Patten, giving the leading judgment, said that "wider policy considerations" barred Mrs Takhar from challenging the Purle judgment "by commencing new proceedings in which the same issues arise". The court found that the success of Mrs Takhar's second claim "depends upon evidence which could with reasonable diligence have been produced at the earlier trial".

The Supreme Court disagreed, restoring the decision of Mr Justice Newey. Lord Kerr, giving the judgment of the court, said firstly that the issue of whether the signature was fraudulent had not been raised in the proceedings before Judge Purle. This was therefore "not a case of commencing new proceedings where the same issues arise", he said.

Lord Kerr then said that there was not yet any "unequivocal judicial statement that seeking to set aside a judgment on the basis that it was obtained by fraud constitutes an abuse of process, if evidence of the fraud could, with reasonable diligence, have been obtained and produced at the earlier trial". Previous cases only dealt with "re-litigation of the issue which had been determined against the party seeking to reopen the case", he said.

Lord Kerr then considered whether fraud was "a thing apart", leading to the basic principle that "the law does not expect people to arrange their affairs on the basis that others may commit fraud". The clear implication of this was that "in cases of fraud, unlike other instances of claimed miscarriages of justice, it is not necessary to show that the further evidence would have been a determining factor in the result", the judge said.

"And, if it was not necessary to show that, it could hardly be said that it would have to be shown that evidence of the fraud could not have been obtained before the first trial by the exercise of reasonable diligence (a more rigorous requirement, by any standard)," Lord Kerr said. "It appears to me that the policy arguments for permitting a litigant to apply to have judgment set aside where it can be shown that it has been obtained by fraud are overwhelming."

Civil fraud and asset recovery expert Alan Sheeley of Pinsent Masons, the law firm behind Out-Law.com, said the Supreme Court's judgment was "quite clearly the correct result when applying the broad principles of justice".

"Lord Kerr's reasoning provides great reassurance to victims who have concerns that a judgment has been obtained against them on the basis of fraud," he said. "It is clearly an injustice if a fraudulent party can profit from their fraud due to the other party not discovering the fraud through reasonable diligence. Parties should not be expected to assume that others may be fraudulent and investigate every transaction just in case," he said.

"However, if the fraud was raised in the earlier proceedings, any application to set aside the judgment may not be entertained. Further, if a suspicion of the fraud arises before the earlier trial, the applying party must not deliberately fail to investigate. Lady Arden's caveats in her supporting judgment send a clear message that parties cannot ignore a suspicion of fraud during the initial proceedings, in the hope that this can be later raised to overturn an adverse judgment," he said.

Civil fraud expert Bill Geiringer of Pinsent Masons welcomed the confirmation by the court that an application to set aside an earlier judgment on the basis of fraud is a new 'cause of action'.

"Those who suspect a judgment has been obtained on the basis of fraud can seek advice from specialist civil fraud solicitors after the judgment to review the matter and advise on next steps," he said. "If appropriate, this could involve an application to set aside. It is reassuring that such applications won't be barred as an abuse of process, meaning that it should have been raised as part of the earlier proceedings; allowing proper access to justice," he said.