The Supreme Court recently held in Ivey v Genting Casinos (UK) Ltd t/a Crockfords(1) that the test for dishonesty should be assessed only by reference to whether the defendant's conduct is dishonest by the objective standards of ordinary, reasonable and honest people. This ruling removes the second limb of the well-known Ghosh test, which the court concluded did not correctly represent the law and that directions based on it should no longer be given.
Over the course of two days in August 2012 the claimant, Mr Ivey, played a game called Punto Banco (a variant of Baccarat) at a London casino, Crockfords Club. While playing, Ivey persuaded the croupier to rotate the cards in a systematic way on the basis of the small differences that he noticed in the decorative pattern printed on the back of the card (a difference which resulted from the manufacturing process). The result of this careful process ('edge-sorting') was that all cards were eventually sorted by the croupier to display a different 'edge' (Type A or Type B) according to whether they were high or low cards. When these cards were used, Ivey took advantage of this distinctive sorting to gain a competitive advantage, knowing from the edge of each card whether it was high or low. It was agreed at trial that such knowledge will give a punter a long-term edge of about 6.5% over the house if played perfectly accurately and in fact Ivey won approximately £7.7 million.
However, the casino refused to pay out on the basis that Ivey had cheated. Ivey argued that what he had done was not cheating and that he had simply deployed a perfectly legitimate advantage. He issued proceedings against the casino.
The judge at first instance found that Ivey had given truthful evidence of what he had done and accepted that he was genuinely convinced that what he did was not dishonest. However, the judge concluded that it was cheating, as did the majority of the Court of Appeal. The decision for the Supreme Court was whether they were right in this conclusion.
Ivey argued as follows:
- The test of what is cheating must be the same for the implied contractual term prohibiting cheating between a gambler and a casino as for the criminal offence of cheating at gambling under Section 42 of the Gambling Act 2005.
- Cheating necessarily involves dishonesty.
- The judge found that Ivey was truthful when he said that he did not consider what he did to be cheating; therefore, dishonesty and in particular the second leg of the test established by R v Ghosh had not been demonstrated.
- It followed that what had been done was not cheating and that Ivey ought to recover the £7.7 million.
The Supreme Court agreed that cheating carries the same meaning when considering an implied contractual term not to cheat and when applying Section 42 of the Gambling Act, even if there will be a difference in standard of proof as between civil and criminal proceedings.
Can a parallel be drawn with conspiracy to defraud?
The Supreme Court rejected the argument that cheating requires dishonesty. Ivey had relied on R v Scott, arguing that it had been decided that dishonesty was an essential element of the common law offence of cheating. It was the same, he contended, for cheating at gambling.
The Supreme Court rejected this authority on several grounds. First, it did so on the basis that the charge in that case was not cheating at common law, but conspiracy to defraud. The substantial issue before the House of Lords in that case had been whether conspiracy to defraud required deception, which was recognised as only one form of defrauding. However, the House of Lords had also stated that defrauding included depriving another, by dishonest means, of something which is his or hers or to which he or she would or might be entitled but for the fraud.
The Supreme Court noted that, to the extent that defrauding someone may take the form of depriving that person of something which is his or hers or to which he or she might otherwise be entitled, it is unsurprising that a criminal offence of defrauding must additionally contain an element which demonstrates that the means adopted are illegitimate and wrong (ie, proof of dishonest means). Otherwise, perfectly proper business competition would be caught.
Although the ancient common law offence of cheating consisted of a particular subset of fraudulently depriving another of property, the Supreme Court concluded that R v Scott was of no help in construing the meaning of cheating in the context of gambling. The draftsmen responsible for the Gambling Act would not have intended to adopt an analogy with a common law offence which had been largely abolished 40 years previously (by Section 32(1) of the Theft Act 1968) and when the word 'cheat' was then used in an entirely different context in the Theft Act. The Supreme Court held that while it made sense to interpret the concept of cheating in Section 42 of the Gambling Act in the light of the meaning over many years, it made no sense to interpret cheating, as used over many years, by reference to an expression – 'dishonesty' – introduced into the criminal law for different purposes long afterwards in 1968.
The meaning of 'cheating' in ordinary language
Ivey had further contended that as a matter of ordinary English, 'cheating' necessarily imparts dishonesty. The Supreme Court gave various examples to show that there will always be debate as to what constitutes cheating, such that dishonesty is not always an essential element. It clarified that the question before it was not a matter of formulating a definition of 'cheating', but whether cheating necessarily requires dishonesty as one of its legal elements.
The Supreme Court concluded that it did not need to add to the value judgement of whether conduct is cheating a further value judgement as to whether it is dishonest. If cheating is by definition dishonest, the addition of a legal element of dishonesty adds nothing. On the other hand, if some acts of cheating are wrong but not dishonest, the addition would serve to render the illegitimate legitimate.
Although the Supreme Court rejected the submission that cheating required dishonesty, it nevertheless went on to consider Ivey's reliance on the Ghosh test for dishonesty.
There has always been confusion around the definition of 'dishonesty'. This has been complicated by differing interpretations in civil and criminal proceedings. In criminal proceedings, the leading case was R v Ghosh,(2) which stipulated a two-limb test:
- whether according to the ordinary standards of reasonable and honest people what was done was dishonest; and
- if so, whether the defendant realised that what he or she was doing was by those standards dishonest.
There is precedent in the civil courts for this combined objective/subjective test of dishonesty, notably Twinsectra.(3) However, other cases have favoured an entirely objective test (eg, Royal Brunei and Barlow Clowes(4)).
The Supreme Court set out to eliminate this inconsistency and confusion. It noted that in the 30 years following Ghosh a number of serious problems with the second limb of the rule have emerged:
- It had the unintended effect that the more warped the defendant's standards of honesty are, the less likely it is that he or she will be convicted of dishonest behaviour. This is especially problematic, given that it is not unusual for such defendants not to share the standards which ordinary honest people hold.
- It was based on the premise that it was necessary in order to give proper effect to the principle that dishonesty – and especially criminal responsibility for it – must depend on the actual state of mind of the defendant, whereas the rule is not necessary to preserve this principle.
- It sets a test which jurors and others often find puzzling and difficult to apply.
- It has led to a divergence between the test for dishonesty in criminal and civil proceedings. The Supreme Court noted that there is some doubt about the freedom of the courts to depart from Ghosh in the absence of a decision from the Supreme Court first.
- It represented a significant departure from the pre-Theft Act law.
- It was not compelled by authority and the better view was that the pre-Ghosh cases favoured the simpler rule that, once the defendant's state of knowledge and belief had been established, whether that state of mind was dishonest is to be determined by the application of the standards of ordinary honest people.
In Ghosh it had been assumed necessary to have the second limb of the test in order to preserve the principle that criminal responsibility for dishonesty must depend on the actual state of mind of the defendant. However, the Supreme Court held that the first limb of the Ghosh test was sufficient for this purpose. This is because, in order to decide whether someone was dishonest by the standards of ordinary honest people, it would be necessary to establish his or her own actual state of knowledge.
In reviewing the post-Theft Act authorities before Ghosh, the Supreme Court disagreed with the view that the case law supported a binary dichotomy between those which supported an objective approach and those which supported a subjective one. In the end, the Supreme Court decided that there was in fact only one pre-Ghosh case which raised the relevance of the defendant's own view as to the honesty of what he or she had done (R v Gilks(5)).
The Supreme Court concluded that there were convincing grounds for holding that the second limb of the Ghosh test did not correctly represent the law and that directions based on it should no longer be given. There was no reason why the law should excuse those who make a mistake about what contemporary standards of honesty are. The Ivey test for dishonesty is therefore as follows:
"When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual's knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest."
Having determined that cheating did not require dishonesty, the Supreme Court agreed with the Court of Appeal that Ivey's actions undoubtedly amounted to cheating. The game played by Ivey was meant to be one of pure chance and what was in fact undertaken by Ivey was a carefully planned operation. It concluded that while it was clever and skilful, it could not alter the fact that it amounted to cheating. Ivey therefore could not recover the £7.7 million that he had won.
However, by its new test for dishonesty, the Supreme Court held that Ivey's conduct was dishonest even if his personal belief that it was not dishonest was truthfully held. He therefore lost on almost all heads.
The effect of this decision remains to be seen, but will be undoubtedly profound. In criminal proceedings the new Ivey test may make prosecution easier, as the defence of personal beliefs will no longer be effective for defendants. The ruling will affect offences which require some indication of dishonesty for conviction (eg, cheating Her Majesty's Revenue and Customs, money laundering and fraud).
By this ruling the Supreme Court has underlined that courts will refuse to make any allowances for those who make a mistake about what contemporary standards of honesty are and, in doing so, cited numerous contexts in which it intends this re-formulated rule to apply – including insurance claims, high finance, market manipulation and tax evasion.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
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