The disappointment of an unexpected adverse judgment following long-running and expensive litigation may cause litigants to "draw a line" under the issue and move on. However, what if there is a suspicion, whether developed during the trial or subsequently, that one's opponent has succeeded by fraudulent means? In the recent case of Takhar v Gracefield Developments Limited and others1, the UK Supreme Court considered whether a party, seeking to set aside an earlier judgment on the basis that it had been obtained fraudulently, owed a duty to demonstrate that evidence of the fraud could not have been discovered by due diligence during the earlier proceedings.
In doing so, the Supreme Court grappled with the interesting question of how to reconcile two well-established - but often competing - principles of public policy; namely (i) the "finality of litigation"2, which requires claimants, ordinarily, to "bring forward their whole case" or, in the words of Lord Kerr, advance the totality of their case on the first bout of litigation, and (ii) the maxim that "fraud unravels all"3, meaning that a party should not benefit from a fraudulent act.
Mrs. Takhar (the "Appellant") had acquired a number of properties from her husband as part of their separation arrangement. However, largely as a result of the dilapidated condition of these properties, Mrs. Takhar suffered financial problems and, as a result, her cousin, Mrs. Krishan, agreed to provide her with financial assistance. Subsequently, it was agreed that the legal title to the properties would be transferred to a newly formed entity, Gracefield Developments Limited ("Gracefield"), of which the Appellant, Mrs Krishan and her husband (the "Krishans" and together with Gracefield, the "Respondents") would be the shareholders and directors.
However, the purpose of this transfer was later disputed. The Appellant claimed that the purpose of this arrangement was that the properties would be renovated and then let, with the proceeds being used to cover the renovation costs, and the Appellant remaining as the beneficial owner of the properties. By contrast, the Krishans claimed that Gracefield was set up as a joint venture company and the properties were to be sold after they had been renovated, with a percentage of the profits being shared with the Krishans.
In light of the dispute, the Appellant issued proceedings, claiming that the properties had been transferred to Gracefield as a result of undue influence or other unconscionable conduct on the part of the Krishans. The judge, relying heavily on a document purporting to be a profit share agreement seemingly signed by the Appellant (the "Agreement"), dismissed the claim. Although the Appellant claimed that she had not signed this Agreement, having been refused permission to adduce evidence from a handwriting expert on the basis that trial was then imminent, she could not deny that the signature was hers and, in the absence of any evidence to the contrary, the judge accepted the Respondents' position that the Appellant had executed the Agreement.
Following the trial, the Appellant obtained an expert handwriting report which concluded that the signature on the Agreement had in fact been a forgery. In reliance on this, the Appellant issued new proceedings seeking to set aside the initial judgment on the grounds that it had been obtained fraudulently. The Respondents challenged this application, claiming that it was an abuse of process by virtue of the fact that the Agreement had been available to the Appellant before the trial, and the alleged fraud could have been discovered previously with reasonable diligence.
The Respondents' challenge was tried as a preliminary issue and, while the High Court rejected the Respondents' application, that position was reversed on appeal by the Court of Appeal. The Appellant subsequently appealed to the Supreme Court.
The Supreme Court's analysis
The Supreme Court allowed the Appellant's appeal and held that she was not required to demonstrate that evidence of the fraud could not have been discovered prior to the trial by the exercise of reasonable diligence.
In reaching its conclusion, the Supreme Court addressed, inter alia, the following:
- the law does not expect people to proceed on the basis that others may commit fraud. A person is entitled to assume honesty on behalf of others, and a person who obtains a judgment through fraud "has perpetuated a deception not only on their opponent and the court but on the rule of law";
- following the cases of The Ampthill Peerage4 and Hip Foong Hong v H Neotia & Co5, the clear implication was that in cases of fraud, unlike other instances of claimed miscarriages of justice, it is not necessary to show that the further evidence would have been a determining factor in the result. A judgment "that is tainted and affected by fraudulent conduct is tainted throughout, and the whole must fail"; and
- the idea that a fraudulent individual should profit from passivity or lack of due diligence on the part of their opponent seems "antithetical to any notion of justice". In particular, if it were not possible to impugn the judgment which had been obtained by fraud, this may result in an unacceptable position whereby the winning party could be sent to prison for their fraudulent act and yet still be able to enforce the judgment they had procured by means of it.
Having regard to these points, and to lines of authorities in Australia and Canada, which revealed that nothing else had to be proved other than the existence of fraud, the majority found that the policy arguments for setting aside a judgment where it can be shown that it has been obtained by fraud are "overwhelming".
However, it is important to note that the Supreme Court left open two possible qualifications to this principle. While no definitive view was reached, it was considered that the Court could still choose not to set aside the judgment if:
- allegations of fraud had been raised at the original trial and new evidence as to the existence of fraud is advanced in support of the application to set aside the judgment; or
- a deliberate decision was taken not to investigate the possibility of fraud in advance of the first trial, even if it was suspected.
Key points to note
The significance of Takhar is that it confirms that a party seeking to set aside a judgment on the basis that it was obtained by fraud does not need to have raised fraud at the original trial; and nor does it need to demonstrate that fraud could not have been discovered at an earlier time by the exercise of reasonable diligence. Although the principle of the "finality of litigation" remains an integral component of the English legal system, a "knave does not escape liability because he is dealing with a fool"6 and, for the reasons outlined above, it may be trumped by the public policy considerations underlying the principle that a party should not benefit from a fraudulent act.
It should be borne in mind that, although the majority agreed that "fraud trumps all", Lord Briggs and Lady Arden were mindful of the importance of finality of judgments and Lord Briggs, in particular, was reluctant to establish a "bright-line boundary between types of case where one principle or the other should clearly prevail". Instead, he advocated a more flexible approach in which the court should engage in a thorough examination of the facts of each case, to assess whether a lack of diligence in the earlier proceedings should in fact render a future application to set aside a judgment an abuse of process. This examination would, for example, take account of the gravity of the fraud and the seriousness of the shortfall from the exercise of reasonable diligence. If Takhar results in a surge of applications to set aside judgments on the basis of fraud, Lord Briggs' approach may yet find favour with the courts.
Instances of fraud can be many and varied and are, by their nature, often difficult to recognise. Clearly, if fraud is suspected, it should be investigated and brought to the court's attention at the earliest possible opportunity. Even if a party only becomes aware after the conclusion of a trial that the judgment may have been tainted by a fraudulent act, in light of Takhar, this should be investigated and, if appropriate, an application should be made to set aside the judgment.