PLEADING AND PROVING ALLEGATIONS OF FRAUD OR DISHONESTY: MULLARKE -v- BROAD: USEFUL LINKS AND GUIDANCE
Great care needs to be taken in pleading allegations of fraud or dishonesty. In particular the pleader needs to be sure that there is sufficient evidence to justify the pleading. This was considered in some detail by Lewison J in Mullarkey -v- Broad  EWHC 3400 (Ch). This post looks at that case, useful posts and articles on the subject and the Bar Council guidance.
The claimants were bringing an action alleging misfeasance on the part of a former director of a company. The alleged actions had been carried out nearly 14 years beforehand and, to avoid limitation issues, the claimants had establish fraud on the part of the defendant.
THE JUDGE’S OBSERVATIONS ON THE NEED TO PLEAD AND PROVE FRAUD
The judgment contains a useful review of the case law in relation to pleading fraud.
“Pleading and proving intentional wrongdoing
In Paragon Finance plc v D B Thakerar & Co  1 All ER 400 Millett L.J explained clearly the difference between different causes of action involving breach of fiduciary duty. He said:
“In my judgment, it is incontrovertible that an amendment to make a new allegation of intentional wrongdoing by pleading fraud, conspiracy to defraud, fraudulent breach of trust or intentional breach of fiduciary duty where previously no intentional wrongdoing has been alleged constitutes the introduction of a new cause of action. …Breach of fiduciary duty was already pleaded, but in terms which did not involve any conscious impropriety. The plaintiffs submit that the mere addition of an allegation of intent does not amount to a new cause of action. In my judgment this is contrary to the authorities already cited, which show that intentional and unintentional wrongdoing give rise to distinct causes of action.”
In Belmont Finance Corporation Ltd. v. Williams Furniture Ltd.  Ch. 250, 268 Buckley L.J. said:
“An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word ‘fraud’ or the word ‘dishonesty’ must be necessarily used. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.”
“In order to allege fraud it is not sufficient to sprinkle a pleading with words like “wilfully” and “recklessly” (but not “fraudulently” or “dishonestly”). This may still leave it in doubt whether the words are being used in a technical sense or merely to give colour by way of pejorative emphasis to the complaint.”
“It is well established that fraud must be distinctly alleged and as distinctly proved, and that if the facts pleaded are consistent with innocence it is not open to the court to find fraud. An allegation that the defendant ‘knew or ought to have known’ is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud even if the court is satisfied that there was actual knowledge. An allegation that the defendant had actual knowledge of the existence of a fraud perpetrated by others and failed to disclose the fact to the victim is consistent with an inadvertent failure to make disclosure and is not a charge of fraud. It will not support a finding of fraud even if the court is satisfied that the failure to disclose was deliberate and dishonest. Where it is expressly alleged that such failure was negligent and in breach of a contractual obligation of disclosure, but not that it was deliberate and dishonest, there is no room for treating it as an allegation of fraud.” (Emphasis added)
In a case where the complaints relate to things that happened for the most part over fifteen years ago, it is, I think, all the more important that the allegations of dishonesty be clearly and distinctly pleaded.
I explained to Mr Goodman more than once in the course of his cross-examination of Mr Broad that if he wished to allege dishonesty against Mr Broad the charges of dishonesty had to be squarely and individually put to him. As May L.J. observed in Vogon International Ltd v The Serious Fraud Office  EWCA Civ 104:
“It is … elementary common fairness that neither parties to litigation, their counsel, nor judges should make serious imputations or findings in any litigation when the person against whom such imputations or findings are made have not been given a proper opportunity of dealing with the imputations and defending themselves.”
In my judgment the burden of proof lies on the claimants in establishing the fraud that they allege. Mr Goodman suggested that where the misfeasance of a company director is concerned, it is for the director to justify his conduct rather than for the complainant to prove his case. Mr Goodman referred me to the decision of Harman J in Re Barton Manufacturing Ltd  1 BCLC 740. That was a case where the company had made gifts, and Harman J said that it was for the directors to explain why the making of gifts could have been in the best interests of the company. I do not consider that that case in effect reverses the burden of proof in all misfeasance cases; still less where the allegation is one of fraud.
Finally, under this head, I should say something about the standard of proof. Mr Goodman quite properly referred me to Hornal v Neuberger Products Ltd  1 QB 247 where the Court of Appeal held that in civil proceedings the standard of proof is that of the balance of probabilities, even where the allegation is one of fraud. However, as the court pointed out in that case the standard is not inflexible; because the degree of probability required to prove an allegation may vary with the seriousness of the allegation. Lord Nicholls of Birkenhead explained this at greater length in Re H and Others (Minors)  AC 563, 586:
“The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence. Deliberate physical injury is usually less likely than accidental physical injury. … Built into thepreponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation.
Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.”
The pleaded allegations of fraud against Mr Broad
In his final written submissions Mr Goodman made allegations of a widespread dishonest “cover up” by Mr Broad of his previous misdeeds. He advanced a theory about how a sophisticated fraud had been committed by the use of multiple cheques; and how Mr Broad deliberately failed to produce company accounts in order to cover up his misappropriations. None of this was alleged in the pleaded case; and none of these charges of dishonest concealment had been put to Mr Broad in cross-examination. I will not therefore consider much of the voluminous written material that Mr Goodman included as part of his final submissions. The only allegations of fraud and dishonesty that I should properly consider are those that have been specifically pleaded against Mr Broad and put to him in crosS-examination.”
The Claimants’ allegations did not succeed, the judge refused to infer dishonesty.
Although the extent of the loans to persons and companies outside the group may raise suspicions, suspicions are not proof. The relevant papers which would have contained the explanations have now been lost or destroyed; and I do not consider that it would be fair to infer from Mr Broad’s inability to explain the details 16 years later that he exercised his powers as a director dishonestly.
THE PLEADER’S DILEMMA
Dishonesty cannot be pleaded in a vague manner. A trial judge is likely to confine any case on dishonesty to the pleaded allegations. Further there are clear professional duties on the person pleading the case to have evidence before them upon which they can properly found the allegations (see the Bar Council guidance below).
WORTH READING ON ALLEGING, PROVING AND PLEADING FRAUD
- James Petts’ article on When to Plead Fraud at the Barrister Hub
- Ian Clarke in PI Blawg on Insinuation, Allegations and the Pleading of Fraud
- Steven Warne on the obligation not to plead “fraud” without an appropriate evidential foundation: what is fraud? (An Australian view)
- The useful review of the case law and principles by Howard Cohen of Farrar’s Buildings in Fraud & Surveillance Evidence
- Professional Negligence on Fraud in Civil Proceedings
- Andrew McKie on Fraud, Burdens of Proof and Pleadings
- Andrwe Mckie on Low Velocity Impacts: an Update
BAR COUNCIL GUIDANCE
Guidance on Pleading Fraud
In the case of Medcalf v Mardell, the House of Lords considered paragraph 704(c) of the Code of Conduct and a barrister’s duties in considering whether or not to draft a document including an allegation of fraud.
Paragraph 704(c) states that a barrister should not draft a document containing any allegation of fraud “unless he has clear instructions to make such an allegation and has before him reasonably credible material which as it stands establishes a prima facie case of fraud”. In this case, the Court of Appeal had taken the view that a barrister in making such an allegation should have before him “evidence which can be put before the court to make good the allegation”.
The House of Lords rejected this interpretation. Lord Bingham of Cornhill, with whom the other law lords agreed, said that:
“… the requirement is not that counsel should necessarily have before him evidence in admissible form but that he should have material of such a character as to lead responsible counsel to conclude that serious allegations should properly be based upon it”.
The Professional Standards Committee (PSC) takes the view that there is no litmus test for determining whether it is proper to allege fraud. As Lord Bingham made clear:”Counsel is bound to exercise an objective professional judgment whether it is in all circumstances proper to lend his name to the allegation”. That decision will depend on the individual facts of each case.
It should be noted that although paragraph 704 refers specifically to fraud, the same principle would apply to any other allegation of serious misconduct.
First issued: March 2003
Last reviewed: September 2008