Court of Appeal clarifies test for setting aside judgment for fraud

The Court of Appeal has clarified the test that must be met when seeking to set aside a judgment on the grounds that it was obtained by fraud: Takhar v Gracefield Developments Ltd and others [2017] EWCA Civ 147.

The decision confirms that the court must be satisfied that evidence of the fraud was not available to the innocent party at the time of trial and could not with reasonable diligence have been uncovered then.

This resolves the uncertainty that had arisen from conflicting lower court authority as to whether the "reasonable diligence" requirement extends to cases involving fraud or whether fraud cases were excepted from the rule on the basis that "fraud unravels all". It confirms that, in this context, the public policy in favour of finality of litigation takes precedence over the desire to do justice in individual cases to the extent that they conflict – at Court of Appeal level at least. While this may operate harshly against innocent parties in some cases, there remains scope for a court to exercise its judgment as to what the standard of "reasonable diligence" requires in any particular case.

As a practical matter, parties to litigation who suspect some element of fraud should be aware of the limitations on re-opening litigation, and should ensure that they take all reasonable steps to investigate their suspicions and raise any such allegations within the proceedings if they wish to pursue them.

Background

The claimant, Mrs Takhar, had brought proceedings in 2008 alleging undue influence or unconscionable conduct by the defendants in connection with the transfer of certain properties she had previously owned. The trial involved a factual dispute between the parties as to what had been agreed between them regarding the properties.

The trial judge preferred the defendants' account of what had been agreed and ruled in their favour.  A significant piece of evidence relied upon was a joint venture agreement which the trial judge accepted had at least been prepared for signature and was a true reflection of what had earlier been agreed orally between the parties. The only evidence that Mrs Takhar had signed the agreement was a scanned copy of the signature page. She maintained that she did not recall having seen the agreement before and that she could not remember signing it.

Subsequently, in 2013, Mrs Takhar obtained expert handwriting evidence which suggested that her signature had been forged. She commenced further proceedings against the defendants alleging that the judgment had been obtained by fraud and should be set aside. The defendants sought to strike out the claim 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 as to the principles governing 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):

• There has to be a "conscious and deliberate dishonesty" which is relevant to the judgment sought to be impugned
• The relevant dishonest evidence, action, statement or concealment 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 by reference to its impact on what decision might be made if the claim were to be retried on honest evidence.

The issue in this case was whether there is an additional requirement to show that the new evidence could not with reasonable diligence have been obtained at the time of trial (that is, the general test that applies to attempts to adduce new evidence on appeal).

Having considered various authorities, Newey J concluded that there was no authority binding on him that confirmed the existence of such a requirement and that, as a matter of principle, he should not apply it. Accordingly, he dismissed the application to strike out the claim.

Decision

The Court of Appeal unanimously allowed the appeal (Lord Justice Patten giving the lead judgment). It remitted to Newey J the question whether Mrs Takhar satisfied the reasonable diligence condition in this case.

Newey J's decision had left a degree of uncertainty, as several other judges at first instance have taken a different view and concluded that the "reasonable diligence" (or "due diligence") requirement does apply to cases alleging fraud (most recently in Chodiev v Stein [2015] EWHC 1428 (Comm), which rejected Newey J's conclusion, and Roshan v Singh [2017] EWHC 176 (Ch)). Those judges  had considered themselves bound by various appellate decisions to find that there was such a requirement, including by the House of Lords in Owens Bank Ltd v Bracco [1992] 2 AC 443 and in Hunter v Chief Constable of the West Midlands Police [1982] AC 529.

In the present case, the Court of Appeal essentially agreed that the prior appellate decisions had authoritatively confirmed that the reasonable diligence requirement does apply to cases where the new evidence relates to fraudulent conduct. It rejected Newey J's characterisation of comments in Owens v Bracco as merely obiter and also noted that Newey J had apparently not been referred to Hunter.

The court's decision was reached firmly on the basis that it was bound by precedent. Patten LJ's judgment hints that the decision might have been different in the absence of such binding authority. The court was clearly conscious of the tension between the need to ensure finality in litigation and the desire to ensure that court judgments are not tainted by fraud and that fraudsters are not permitted to benefit from their dishonest manipulation of the court system.

Patten LJ commented 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. In particular, he referred to the reasoning relied on in many Commonwealth decisions that have declined to impose the condition, to the effect that contributory negligence is not a defence to any type of claim based on fraud.

However, he concluded: "So far as this Court is concerned [the due diligence requirement] represents the balance struck by the English authorities between the two policy considerations which are in play and in my view we are obliged to apply it".

Note: This decision was overturned on appeal. See our post on the Supreme Court decision here.