4 NEW SQUARE LINCOLN’S INN LONDON WC2A 3RJ WWW.4NEWSQUARE.COM T: +44 (0) 207 822 2000 F: +44 (0) 207 822 2001 DX: LDE 1041 E: [email protected]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.
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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:
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.
• 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.