Supreme Court clarifies test for setting aside judgment for fraud

The Supreme Court has resolved uncertainty as to the test that must be met when seeking to set aside a judgment on the grounds that it was obtained by fraud. Overturning the Court of Appeal's decision, it confirmed that there is no need to demonstrate that the evidence of fraud could not have been obtained with reasonable diligence at the time of the earlier trial: Takhar v Gracefield Developments Ltd [2019] UKSC 13.

The question of whether there is a "reasonable diligence" requirement in cases involving fraud had been the subject of conflicting authority in the lower courts in recent years. It reflects a tension between, on the one hand, the public policy in favour of the finality of litigation and, on the other, the desire to do justice in individual cases and not permit fraudsters to benefit from their misuse of the court system. The Supreme Court's decision comes down in favour of the latter in this context, and to that extent can be seen as an illustration of the principle that "fraud unravels all".

However, the court expressly left open the question of the approach to be adopted in a case where the fraud had been raised in the original trial, or where a deliberate decision had been taken not to investigate a suspected fraud or rely on a known fraud. While no final view was reached, the judgments indicate a tentative view that, in such situations, a court dealing with the application to set aside the judgment should have a discretion whether or not to grant the application.

The judgments do suggest a narrow view as to when any such qualifications might be triggered. The claimant in this case had sought (and been refused) permission from the trial judge to adduce evidence from a handwriting expert, which might be thought to indicate that she had suspected, and indeed raised, the issue of fraud to that extent. Lord Kerr however observed that, while the claimant suspected there may have been fraud, it was clear she did not make a conscious decision not to investigate it; to the contrary, she sought to do so but her application to adduce expert evidence was refused.

As a practical matter, however, litigants who suspect some element of fraud should not assume that they will necessarily be entitled to re-open the litigation at a later date simply by producing evidence of fraud. Certainly, the decision does not give carte blanche effectively to "park" fraud allegations, either for tactical reasons or in the hope that stronger evidence of the fraud might come to light after judgment. In most cases, parties will still be well advised to investigate their suspicions and raise any allegations within the proceedings if they wish to pursue them.

Background

The factual background to the case is set out in our earlier post, here.  Briefly, the underlying proceedings concerned allegations of unconscionable conduct in a property transfer. The claimant was unsuccessful but subsequently commenced fresh proceedings seeking to set aside the judgment on the grounds of new forensic handwriting evidence indicating that her signature on a key agreement relied on by the defendants had been forged (her original evidence had been simply that she did not recall signing the agreement).

The defendants sought to strike out the second proceedings as an abuse of process. In particular, they argued that, in the circumstances, the evidence of forgery (if such could be proved) could and should have been obtained at the time of the trial.

There was no dispute that the following principles govern applications to set aside judgments for fraud (as summarised by the Court of Appeal in Royal Bank of Scotland plc v Highland Financial Partners LP [2013] EWCA Civ 328, and endorsed by the Supreme Court in the present case):

• There has to be a "conscious and deliberate dishonesty" which is relevant to the judgment sought to be impugned.
• The relevant dishonest evidence or action must be "material", in that the fresh evidence would have entirely changed the way in which the first court came to its decision.
• The materiality of the new evidence is to be assessed by reference to its impact on the evidence supporting the original decision, not its likely impact if the claim were to be retried on honest evidence.

The key dispute was whether there is also a further requirement to show that the new evidence could not with reasonable diligence have been obtained at the time of trial. This was dealt with as part of a trial of a preliminary issue.

At first instance, Mr Justice Newey concluded that there was no authority binding on him that confirmed the existence of such a "reasonable diligence requirement" and that, as a matter of principle, he should not apply it.

The Court of Appeal disagreed, concluding that it was bound by House of Lords authority to find that there was such a requirement. The Court of Appeal's conclusion was clearly reached with some reluctance, with Patten LJ (giving the lead judgment) commenting that there is "clearly a powerful argument" that the policy against re-litigation ought to be subject to an exception in cases of fraud, regardless of whether the due diligence condition is satisfied.

Decision

The Supreme Court allowed the appeal, holding that where it can be shown that a judgment has been obtained by fraud, a requirement of reasonable diligence should not be imposed on the party seeking to set aside the judgment. Judgments were given by Lord Kerr, Lord Sumption, Lord Briggs and Lady Arden. Lord Hodge, Lord Lloyd-Jones and Lord Kitchin agreed with both Lord Kerr and Lord Sumption.

The court considered that the earlier cases relied on were not in fact authority contrary to their decision but, even if they were, they should not be followed. While recognising the importance of the public policy against re-litigation, the court considered the competing public policy factors in cases of fraud to be compelling. Not only is it contrary to justice that a fraudulent individual should profit because their opponent fails to act with reasonable diligence, a person who obtains a judgment through fraud deceives not only their opponent but also the court and the rule of law.

The court noted that that position is consistent with the approach adopted in several other Commonwealth jurisdictions, including Australia and Canada.

Lord Briggs, while agreeing that the above should be the starting point, suggested that it should not represent a bright-line rule. He would have preferred a more flexible and fact-sensitive approach under which the court could weigh the gravity of the alleged fraud against the seriousness of the lack of due diligence. This suggestion was expressly rejected by Lord Sumption on the basis that it would introduce an unacceptable element of discretion into the enforcement of a substantive right.  Once the high standard of proof for fraud is satisfied, there are no degrees of fraud which can affect the right to have a judgment set aside.

The court left open whether a lack of diligence by the innocent party would preclude a judgment being set aside for fraud in two possible scenarios:

• where fraud has been raised at the original trial and the new evidence relied on to set aside the judgment is in support of that original allegation; or
• where the innocent party made a deliberate decision in advance of the first trial not to investigate a suspected fraud or not to rely on a known fraud.

Lord Kerr's judgment expresses the tentative view that, in such cases, a court considering an application to set aside the judgment should be able to exercise a discretion whether or not to grant the application, taking the applicant's conduct into account.

However, the court considered that neither scenario applied in the present case. Lord Kerr commented that, although the claimant did suspect that there may have been fraud, it was clear that she did not make a conscious decision not to investigate it. To the contrary, she sought permission to engage an expert but her application was refused.

Lady Arden said there were matters which caused her some concern on the facts, including that the claimant had concerns about the authenticity of her signature but failed to challenge the authenticity of the agreement or appeal the judge’s order denying permission to adduce handwriting evidence. However, Lady Arden agreed that there is not, and should not be, a general rule that a lack of diligence by the innocent party precludes a judgment being set aside for fraud.