Insights

Takhar v Gracefield Developments Ltd and others - does fraud unravel all?

17/05/2019

The established and somewhat confusing case law on setting aside a judgment on the grounds of fraud has recently been clarified by the Supreme Court in Takhar v Gracefield Developments Ltd.

In unanimously allowing the appeal from the Court of Appeal, the Supreme Court held that it was not essential for the party seeking to set aside the judgment to establish that evidence of the fraud could not have been obtained with reasonable diligence prior to the earlier trial.  Bringing the new action to set aside a judgment on the grounds of fraud was found not to be an attempt to have a second bite of the cherry in these circumstances. Instead, it constituted a cause of action in and of itself which was independent to that established in the earlier trial.  Since the existence of fraud had not been decided at the earlier trial, there could be no question of cause of action or issue estoppel.

Background

Mrs Takhar, the appellant, owned a number of properties.  In November 2005, it was agreed between Mrs Takhar, her cousin (second respondent), and the cousin's husband (third respondent) that legal title to the properties would be transferred to a company called Gracefield Developments Ltd (first respondent), of which they were shareholders and directors.  A dispute subsequently arose over the terms of that transfer.

The appellant's position was that the properties were to be renovated, with the expense borne by the second and third respondents, and then let out, with the income from the rental used to repay the cost of the renovations.  The appellant said that she was to remain the beneficial owner of the properties.

The second and third respondents' position was that it was agreed that the properties were to be sold once they had been renovated.  The appellant was to receive a fixed value for each property and any profit from the sales over that amount would be divided equally.

In October 2008, the appellant issued proceedings on the grounds that she had been unduly influenced into transferring the properties.  The second and third respondents relied on a copy of a profit share agreement ("PSA") between the parties, which had purportedly been signed by the appellant.  The appellant had previously applied for permission to adduce evidence from a handwriting expert, although this had been refused.  At trial, it was the appellant's position that she was unable to say that the signature on the PSA was not hers, and that she could not explain how it had got there.  The trial judge, HHJ Purle QC, concluded that the appellant had in fact signed the PSA and dismissed her claim.

The appellant issued fresh proceedings in December 2013, having obtained the evidence of a handwriting expert whose report concluded that the signature on the PSA was a forgery.  The respondents argued that this new claim was an abuse of process because it was based on documents which had been available far in advance of the first trial and the original application for expert evidence had been dismissed.  The matter was heard by Newey J as a preliminary issue.  He found that the action was not an abuse of process and that the application to set aside should proceed.  This decision was appealed by the respondents to the Court of Appeal, which allowed the appeal on the basis that the reasonable diligence condition was applicable.  The appellant then appealed to the Supreme Court.

Supreme Court decision

The Supreme Court allowed the appeal and restored the decision of Newey J, finding there were no grounds to impose a reasonable diligence requirement in the test for setting aside a judgment for fraud.  The appellant was therefore permitted to bring her new claim.

Lord Kerr provided the lead judgment and approved the requirements set out by Aikens LJ in Royal Bank of Scotland PLC v Highland Financial Partners LP and others for challenging a judgment on the grounds of fraud.  The requirements were threefold:

  • "…first, there has to be a ‘conscious and deliberate dishonesty’ in relation to the relevant evidence given, or action taken, statement made or matter concealed, which is relevant to the judgment now sought to be impugned."
  • "Secondly, the relevant evidence, action, statement or concealment (performed with conscious and deliberate dishonesty) must be ‘material’. ‘Material’ means that the fresh evidence that is adduced after the first judgment has been given is such that it demonstrates that the previous relevant evidence, action, statement or concealment was an operative cause of the court’s decision to give judgment in the way it did. Put another way, it must be shown that the fresh evidence would have entirely changed the way in which the first court approached and came to its decision..."
  • "Thirdly, the question of materiality of the fresh 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."

In deciding the appeal, the Supreme Court was tasked with determining between two important principles of public policy; that fraud unravels all and that there must be finality to litigation (with Henderson v Henderson cited as authority for the principle that parties must generally advance the totality of their case rather than hold back certain points in the hope of deploying them in later proceedings).  In finding that the fraud principle took precedence, Lord Kerr felt the idea of a fraudulent individual profiting from a lack of reasonable diligence on the part of their opponent to be antithetical to any notion of justice, and reflected on the basic position that "the law does not expect people to arrange their affairs on the basis that other may commit fraud"- a point that also resonated with Lord Sumption. 

 In obiter dicta, and perhaps by way of warning, Lord Kerr stated that in circumstances where either an appellant has previously raised the issue of fraud at the original trial and new evidence was used to support the case to set aside, or an appellant had deliberately decided to refrain from investigating a potential fraud in the first instance, the court might exercise its discretion in deciding whether or not to allow the application.  In addition to the confirmation of the rather strict requirements established by Aikens LJ, these obiter comments suggest that the Takhar decision, whilst providing welcome clarity, is unlikely to result in a raft of fresh actions.