A SECOND ACTION TO SET ASIDE AN EARLIER JUDGMENT OBTAINED BY FRAUD: SUPREME COURT DECISION: THE “BARE KNUCKLE FIGHT” OF THE LAW

In Takhar v Gracefield Developments Ltd & Ors [2019] UKSC 13 the Supreme Court held that a claimant could bring an action to set aside an earlier judgment which, it is alleged, was obtained by fraud.  The judgment deals with two important principles colliding: the finality of a judgment and the importance of being able to set aside judgments that could have been obtained by fraud.

   “This appeal turns on the outcome of a bare-knuckle fight between two important and long-established principles of public policy. The first is that fraud unravels all. The second is that there must come an end to litigation.”

THE CASE

The claimant in this action had been unsuccessful in an earlier action where her case was that certain properties had been transferred to the defendant due to undue influence.

THE EVIDENCE IN THE “FIRST ACTION”

The claimant’s signature on a document was a central part of the first action.

8. A significant item of evidence in the hearing before Judge Purle was a written profit share agreement dated 1 April 2006. It provided for an initial purchase price of £100,000 for the properties. This was to be placed on a loan account with Gracefield. Further sums totalling £200,000 as deferred consideration were also provided for. The total of £300,000 was to be paid to Mrs Takhar on completion of the sale of the properties. She was also to receive 50% of the profits on the sale of each property.

9. The circumstances in which this written agreement was discovered and Mrs Takhar’s evidence about it were described by Judge Purle in paras 21 and 22 of his judgment:

“… no case of forgery is advanced. Only the last page of the version of the agreement signed by Mrs Takhar appears to have survived and that is in the form of a scanned copy, which has emerged in the files of Sue Bowdler’s firm [the Krishans’ solicitors]. It was misfiled, apparently. Sue Bowdler had not seen the copy with Mrs Takhar’s signature on it before until it was found, misfiled. However, there is no doubt that the agreement was prepared for signature. There is no doubt also that the agreement was prepared for signature in or around April 2006 and there is no doubt, in my mind, that it faithfully reflects the oral agreement that had been made.

22. In the absenceof Mrs Takhar giving a coherent explanation as to how her signature came to be on the scanned copy, I conclude that the Krishans’ evidence, which I believe anyway, should be accepted and that Mrs Takhar took the copy of the agreement that she was to sign away, which was returned, probably by her in some way, duly executed to Sue Bowdler’s firm, which then ended up misfiled. At all events, I am satisfied that that was the agreement that was made. The properties were transferred by Mrs Takhar in to Gracefield’s name before the written joint venture agreement was prepared, and the only credible explanation that I have heard is that they were so transferred on the terms subsequently set out in the joint venture agreement, which were previously agreed orally.”

23. This was, therefore, powerful evidence in support of the Krishans’ case. And it is unsurprising that it was heavily relied on by the judge. As the quoted passage shows, he found that the written agreement represented what had earlier been agreed orally between Mrs Takhar and the Krishans. The judge therefore held that Mrs Takhar had transferred the properties to Gracefield for the sum of £300,000 and that she was to receive 50% of the profits when the properties were sold. He dismissed Mrs Takhar’s claim based on undue influence or unconscionable bargain and held that the properties had been transferred to Gracefield both legally and beneficially. That transfer was, he held, subject to the terms of the oral agreement made between the parties, as reflected in the written profit share agreement.

24. The original of the profit share agreement said to have been signed by Mrs Takhar has not been found. The Krishans claim that it was prepared by accountants at a time when Mrs Takhar was in India and then handed to her when she returned. She was asked to consider it and return it to the accountants. Mrs Takhar’s case is that she did not sign the document and had never seen it until the dispute arose. The authenticity of the document and whether it had been signed by Mrs Takhar are central issues in the dispute between the parties, therefore.

25. In advance of the trial before Judge Purle, Mrs Takhar had sought permission to obtain evidence from a handwriting expert to examine the signature on the profit share agreement which had been attributed to her. That application was refused because it had not been made until the trial was imminent. On the trial, Mrs Takhar gave evidence that she could not say that the signature on the profit share agreement was not hers, but she was unable to explain how it had got there.

EVIDENCE OBTAINED AFTER THE FIRST ACTION

The events are described in the judgment of Lord Kerr (with whom Lord Hodge, Lord Lloyd-Jones and Lord Kitchin agreed).

13.             After the trial Mrs Takhar instructed new solicitors and asked them to obtain a report from a handwriting expert. Robert Radley is such an expert and he was engaged to inspect and report on various documents. His subsequent report stated conclusively that the signature on the profit share agreement which purported to be that of Mrs Takhar had been transposed from a letter of 24 March 2006 which she had sent to the Krishans’ solicitors. He was also of the opinion that there was strong evidence that Mrs Takhar did not sign a 2006 bank inquiry form and that the signatures of both the Krishans and Mrs Takhar on later 2011 bank inquiry forms had also been transposed from previous forms.

THE CLAIMANT’S SECOND ACTION

The claimant then brought a second action seeking to set aside the first.

15.             After receiving Mr Radley’s report, Mrs Takhar issued proceedings in which she sought to have Judge Purle’s judgment and order set aside. She claimed that she was entitled to this relief on the ground that it was obtained by fraud, the principal forgery relied upon being that of the copy of the profit share agreement. (Later Mrs Takhar applied for permission to amend her claim to allege an unlawful means conspiracy and deceit. That application was refused and no longer features in the appeal.)

16.             The respondents served defences in which they pleaded that Mrs Takhar’s claim is an abuse of process, inter alia because the documents on which Mr Radley’s report was based were available to Mrs Takhar and her legal team since at least 12 July 2009 (approximately 12 months earlier than the trial before Judge Purle).

17.             It was ordered that the question whether Mrs Takhar’s claim amounted to an abuse of process be tried as a preliminary issue. That trial took place before Newey J in February 2015. In his judgment, ([2015] EWHC 1276 (Ch)), Newey J held that a party who seeks to set aside a judgment on the basis that it was obtained by fraud did not have to demonstrate that he could not have discovered the fraud by the exercise of reasonable diligence. The present claim was therefore not an abuse of process

THE CLAIMANT’S LOSS IN THE COURT OF APPEAL

The decision in favour of the claimant was overturned in the Court of Appeal .  ([2018] Ch 1; [2017] 3 WLR 853; [2017] CP Rep 23).

THE CLAIMANT’S SUCCESS IN THE SUPREME COURT

The Supreme Court allowed the claimant’s appeal.  Lord Kerr stated:-

54. For the reasons that I have given, I do not consider that the Etoile and Bracco cases are authority for the proposition that, in cases where it is alleged that a judgment was obtained by fraud, it may only be set aside where the party who makes that application can demonstrate that the fraud could not have been uncovered with reasonable diligence in advance of the obtaining of the judgment. If, however, they have that effect, I consider that they should not be followed. In my view, it ought now to be recognised that where it can be shown that a judgment has been obtained by fraud, and where no allegation of fraud had been raised at the trial which led to that judgment, a requirement of reasonable diligence should not be imposed on the party seeking to set aside the judgment.

55. Two qualifications to that general conclusion should be made. Where fraud has been raised at the original trial and new evidence as to the existence of the fraud is prayed in aid to advance a case for setting aside the judgment, it seems to me that it can be argued that the court having to deal with that application should have a discretion as to whether to entertain the application. Since that question does not arise in the present appeal, I do not express any final view on it. The second relates to the possibility that, in some circumstances, a deliberate decision may have been taken not to investigate the possibility of fraud in advance of the first trial, even if that had been suspected. If that could be established, again, I believe that a discretion whether to allow an application to set aside the judgment would be appropriate but, once more, I express no final view on the question. In Mrs Takhar’s case, she did suspect that there may have been fraud but it is clear that she did not make a conscious decision not to investigate it. To the contrary, she sought permission to engage an expert but, as already explained, this application was refused.

56. At para 26 of his judgment, Newey J said that the principles which govern applications to set aside judgments for fraud had been summarised by Aikens LJ in Royal Bank of Scotland plc v Highland Financial Partners lp [2013] 1 CLC 596, para 106. There, Aikens LJ said:

“The principles are, briefly: 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. Thus the relevant conscious and deliberate dishonesty must be causative of the impugned judgment being obtained in the terms it was. 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.”

57. I agree that these are the relevant principles to be applied. I also agree with Newey J’s view (expressed at para 47 of his judgment) that Mrs Takhar’s application to set aside the judgment of Judge Purle has the potential to meet the requirements which Aikens LJ outlined. She should not be fixed with a further obligation to show that the fraud which she now alleges could not have been discovered before the original trial by reasonable diligence on her part.

58. I would therefore allow the appeal and restore the order of Newey J that Mrs Takhar’s case should be allowed to proceed to trial.

THE BARE KNUCKLE FIGHT: LORD BRIGGS

There were differences of emphasis in some of the judgments. All, however, agreed in the outcome, with the claimant’s appeal against the Court of Appeal decision being allowed. Lord Briggs was clear that there was a major conflict between two important legal principles.

68.             This appeal turns on the outcome of a bare-knuckle fight between two important and long-established principles of public policy. The first is that fraud unravels all. The second is that there must come an end to litigation. I will call them the fraud principle and the finality principle. On the facts of this case I agree with Lord Kerr that the fraud principle should prevail. As will appear I also agree with most of his reasoning. But I have been unable to follow him all the way down a path which seeks to erect a reliable bright-line boundary between types of case where one principle or the other should clearly prevail. There will be too many cases where that supposed bright line is either invisible, or so technical that it fails to afford a basis for choosing between the two principles which accords with justice, common sense or the duty of the court to retain control over its own process, and thereby protect it from abuse. I would have preferred a more flexible basis upon which, recognising that many cases will straddle any bright line, the court can apply a fact-intensive evaluative approach to the question whether lack of diligence in pursuing a case in fraud during the first proceedings ought to render a particular claim to set aside the judgment in those proceedings for fraud an abuse of process. This approach would in particular seek to weigh the gravity of the alleged fraud against the seriousness of the lack of due diligence, always mindful of the principle that victims of a fraud should not be deprived of a remedy merely because they are careless.