Setting aside judgments for fraud: Court of Appeal considers what level of prior knowledge will disentitle the innocent party

The Court of Appeal has allowed a party to proceed with an action seeking to set aside a default judgment against him in earlier proceedings on the basis that the judgment was procured by fraud. The fact that, prior to the original proceedings, the party was aware of the factual circumstances now relied on to plead fraud did not mean that the action was an abuse of process: Park v CNH Industrial Capital Europe Ltd (trading as CNH Capital) [2021] EWCA Civ 1766.

The decision is of interest for its application of the principles recently confirmed by the Supreme Court in Takhar v Gracefield Developments Ltd [2020] UKSC 13 regarding the circumstances in which a judgment can be set aside for fraud or dishonesty (discussed in this post). Although the present case was decided in the context of a small business dispute, the principles discussed will apply equally in more complex commercial litigation.

Here, the alleged dishonesty lay in the fact that a deed upon which the original claim was based was said to have been procured by misrepresentation, and the claimant was said to have knowingly falsely asserted in its pleadings that the deed reflected what had always been the parties' common intention.

The lower court's decision to strike out the claim as an abuse of process failed to follow Takhar. There is no general principle that a party cannot set aside a judgment for fraud on the basis of evidence or facts that it knew about before the judgment was entered. While several of the judgments in Takhar suggested that an action might potentially be abusive if the party had made a deliberate decision not to raise the fraud allegation or rely on the evidence in the original proceedings, the court here noted that there is a distinction between a party being aware of the existence of facts or evidence and being aware that it could deploy that evidence to plead fraud. If the party was unaware of the latter, as was found to be the case here, it could not be said that it made a deliberate decision not to raise the issue.

The decision is also interest for its confirmation that applying for default judgment based on materially false pleadings can constitute deception of the court, even though the default judgment process is administrative and does not involve judicial consideration of the substantive allegations.

However, as we have previously noted, as a practical matter 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 the fraud. While the court's approach to this issue is broadly supportive of victims of fraud, it does not give them carte blanche 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 original claim was brought by a finance company against a farmer, claiming monies due under several hire-purchase agreements for farm equipment.

The parties to the agreements were the finance company and a limited company. The farmer signed on behalf of the limited company and also signed a separate personal guarantee for that company's liabilities. However it later came to light that the limited company named in the agreements (which the finance company had prepared) was not the company through which the farmer traded, and in fact did not exist. The result was that neither the agreements nor the guarantee could be enforced.

Shortly after, the finance company procured the farmer's signature on a "Deed of Rectification", the effect of which was to make him personally liable as the hiring party in the place of the non-existent company.  The finance company later issued proceedings against the farmer relying on the Deed and pleaded in its Particulars of Claim (verified by a Statement of Truth) that it had always been intended that the farmer himself be the hirer under the agreements and that this was the "mistake" that the Deed sought to rectify.

The farmer, who was unrepresented for most of the action, defended the proceedings but with no mention of the Deed and no pleading of dishonesty or fraud. However, following his failure to comply with procedural directions, the finance company obtained default judgment. His application for relief from sanctions was refused, and he exhausted all avenues to appeal that refusal.

He then commenced the present action to set aside the default judgment on the basis that the Particulars were knowingly false. The District Judge refused an application to strike out the action as an abuse of process. However, it was allowed on appeal by the Circuit Judge and the claim was struck out.

The farmer appealed to the Court of Appeal.

Decision

The Court of Appeal (Sir Geoffrey Vos, Andrews and Edis LJJ) allowed the appeal and restored the District Court's directions for the action to proceed.

Interestingly, during the course of the appeal hearing the finance company indicated that it would no longer oppose the appeal against the strike out. However, as it appeared to envisage re-airing the abuse argument at trial, the Court of Appeal considered it appropriate to deliver a full reasoned judgment to make clear its view that the claim was not abusive.

Lady Justice Andrews, giving the lead judgment, set out the principles relating to setting aside a judgment for fraud, as summarised in RBS Plc v Highland Financial Partners Lp [2013] EWCA Civ 328 and recently approved in Takhar. In summary, those authorities confirmed that a victim of fraud must establish that both it and the court were materially deceived by the party in whose favour judgment was entered.

Was the court deceived?

The parties submitted conflicting accounts of the facts around the signing of the Deed of Rectification, which occurred in unconventional circumstances when a representative of the finance company arrived with the document at the farm one night without prior arrangement and climbed over the locked gate to gain entry.  His evidence was that he had expressly informed the farmer that the Deed's purpose was to "correct" the agreements by substituting him as the hiring party. The farmer rejected this and said he was told he needed to sign the document to release any claim over some of the farm equipment, so as to enable its sale, and that he only ever saw the final page.

The court noted that the factual conflict could only be finally determined at trial but that the farmer appeared to have strong grounds for contending that his signature on the Deed was procured by fraud.

In any event, the court regarded it as very clear from the parties' dealings that their' common intention when the agreements were signed was that contracts would be with the company through which the farmer traded, not the farmer personally. The only mistake was the misidentification of that company.

The court therefore considered there to be an 'overwhelming' case that the claimant deceived the court into granting default judgment by making false statements in its Particulars of Claim, which it knew were untrue when it instructed its solicitor to sign the Statement of Truth and when it later applied for the default judgment.  In accepting that this amounted to deception of the court, the Court of Appeal noted:

• The administrative process of default judgment involves the court trusting in the truth of representations made in the Particulars that are material to the cause of action, which will not have been examined by a judge and tested at trial. A claimant's application for default judgment necessarily carries with it an implicit representation of entitlement to judgment on the case set out in its Particulars.
• As established by Takhar, the deceit only needs to be an operative cause of the judgment being entered. The Circuit Judge had therefore applied the wrong test in concluding that “the operative cause” of the default judgment was the farmer's procedural default rather than the misleading Particulars. The procedural defaults provided the opportunity for the claimant to seek default judgment but the judgment was entered on the basis that the farmer was personally liable for the reasons set out in the Particulars. The entire action was based upon the Deed, and absent the Deed, the company had no basis for a claim against the farmer. The deception here was therefore an operative cause of the judgment being entered.

• It is no answer to a claim to set aside a judgment procured by a dishonest representation regarding the claimant’s primary case, that it also had an alternative cause of action on which it might have entered judgment without relying on the dishonest representation.  The policy considerations discussed in Takhar as underlying the maxim that “fraud unravels all” mean that once a judgment is tainted by deceit it is fatally flawed. Therefore, even if the claimant had had a viable alternative cause of action against the farmer based on the guarantee, that would not have been a valid basis to refuse to set aside the judgment.

The victim's knowledge of the fraud

Having found that there was an overwhelming case that the court had been consciously and deliberately deceived, as well as a strong arguable case that the farmer was deceived into signing the Deed, the key issue for the Court of Appeal was whether the Circuit Judge was nevertheless right to find that the farmer's action to set aside the judgment was an abuse of process because the circumstances in which he came to sign the Deed were known to him before the default judgment was entered. The Court of Appeal's short answer to that was that the Judge failed to follow Takhar and, in so doing, reached the wrong conclusion.

The Judge had proceeded on the basis that the facts or evidence relied upon by a person seeking to set aside a judgment must be matters that were not known to it at the time of the original judgment. However, the Court of Appeal observed that, far from supporting that proposition, the reasoning of the Supreme Court in Takhar contradicts it.

The Supreme Court held that, in a case where the alleged fraud had not been in issue in the original proceedings, even if the judgment was entered after a trial on the merits, the innocent party is not obliged to show that the fraud could not have been discovered before the original trial by reasonable diligence on his or her part. The well-known requirement in Henderson v Henderson (1843) 3 Hare 100 that “a litigant should bring forward his whole case” in the first set of proceedings does not apply in such circumstances, and there were no good policy reasons to allow a fraudulent party to rely upon the passivity or lack of due diligence of its opponent.

The Court of Appeal noted that some of the judgments in Takhar left open the question whether the court should have a discretion to refuse to entertain an application to set aside a judgment in two situations, namely (i) where the fraud was in issue in the earlier proceedings and the party seeks to rely on evidence of its existence that was not adduced in those proceedings and (ii) where a deliberate decision was taken not to investigate the possibility of fraud in advance of the first trial.  Lord Kerr thought it arguable that, in both those scenarios, the court should have such a discretion. Lord Sumption considered that, in cases where fraud was not originally raised, it will only be abusive where the innocent party not only could but should have raised it – and that that would only be the case if it deliberately decided not to investigate a suspected fraud or rely on a known one. (He also expressed a provisional view that the position should be the same in the scenario described in (i)).

However, the Court of Appeal rejected a submission that Takhar (and other authorities) meant that a party cannot set aside a judgment for fraud on the basis of evidence or facts that it knew about before trial.

The court observed that a person cannot take a deliberate decision not to rely on evidence of fraud unless they are not only aware of that evidence, but know that they can rely on it to plead fraud in answer to the case brought.

In the present case, the farmer's evidence was that he had no reason to connect the document he signed late at night with a deed that made him personally liable under the hire-purchase agreements, at least until after he saw the company representative's witness statement. Even then, he did not have the benefit of legal representation. The court found that there was no evidence that he knew that he could rely upon those circumstances as a defence until he retained legal representation shortly before his relief from sanctions application, by which time it was too late to plead it.

In that regard, the Judge had been wrong to disregard as irrelevant the fact that the farmer had for the most part not been legally represented. Recent authorities concerning the courts' approach to unrepresented parties in the context of non-compliance with the CPR were not relevant here. The fact that a litigant did not have the benefit of legal advice at the time when they decided what substantive defence to advance was "obviously relevant" to the quite different issue of whether they had taken a deliberate decision not to advance a case in fraud.