MAKING A FINDING OF FRAUD WITHOUT EVIDENCE 3: THE COURTS ARE NOT EASILY AFFRONTED
For the third time in a fortnight the courts have sent out a clear message of the dangers of judges making findings of fraud without having all the evidence to hand.
In Alpha Rocks Solicitors -v- Alade  EWCA Civ 685 the Court of Appeal overturned a decision of the judge striking out a claim by solicitors to recover their costs. The judge had found that the bills were fraudulently exaggerated and misstated.
COURT OF APPEAL’S CONSIDERATION OF THE AUTHORITIES
The principles on which the court should act
- It is important first to emphasise, as did Lord Clarke in Summers supra, the range of available remedies when a situation arises in which a party to litigation thinks that his opponent has exaggerated his claim, whether fraudulently or otherwise. Establishing fraud without a trial is always difficult. And it is open to a defendant to seek summary judgment on the claim under CPR Part 24.2(a)(i), without seeking a strike out for abuse of process. As Masood and Summers supra also demonstrate, striking out is available in such cases at an early stage in the proceedings, but only where a claimant is guilty of misconduct in relation to those proceedings which is so serious that it would be an affront to the court to permit him to continue to prosecute the claim, and where the claim should be struck out in order to prevent the further waste of precious resources on proceedings which the claimant has forfeited the right to have determined. The other available remedies for such a default follow the proceedings once they have run their course, but are nonetheless important. They include costs and interest penalties and proceedings for contempt of court or criminal prosecution.
- Returning to the early stages of proceedings, it is, of course, always open to the court to strike out or grant summary judgment in respect of the impugned part of the claim, as opposed to the whole. In my judgment, the court should exercise caution in the early stages of a case in striking out the entirety of a claim on the grounds that a part has been improperly or even fraudulently exaggerated. That is because of the draconian effect of so doing and the risk that, at a trial, events may appear less clear cut than they do at an interlocutory stage. The court is not easily affronted, and in my judgment the emphasis should be on the availability of fair trial of the issues between the parties. As CPR Part 3.4(2)(b) itself says, “[t]he court may strike out a statement of case if … the statement of case is an abuse of the court’s process or is otherwise likely to obstruct the just disposal of the proceedings” (emphasis added).
- There is an analogy with the court’s approach in Denton v. TH White Ltd.  1 WLR 3926, where the court considered the circumstances in which relief from sanctions should be granted under the new CPR Part 3.9. That rule says that the court “will consider all the circumstances of the case, so as to enable it to deal justly with the application, including the need — (a) for litigation to be conducted efficiently and at proportionate cost; and (b) to enforce compliance with rules, practice directions and orders (“factors (a) and (b)”). The first two stages recommended by the court require the court to consider the seriousness or significance of the breach and any explanation offered for it. At paragraph 32, Lord Dyson MR and I said this in relation to the third stage of the process:-
“Although the two factors may not be of paramount importance, we reassert that they are of particular importance and should be given particular weight at the third stage when all the circumstances of the case are considered. That is why they were singled out for mention in the rule. It is striking that factor (a) is in substance included in the definition of the overriding objective in r 1.1(2) of enabling the court to deal with cases justly; and factor (b) is included in the definition of the overriding objective in identical language at rule 1.1(2)(f). If it had been intended that factors (a) and (b) were to be given no particular weight, they would not have been mentioned in rule 3.9(1). In our view, the draftsman of rule 3.9(1) clearly intended to emphasise the particular importance of these two factors”.
- The cases I have mentioned were right to emphasise in the context of striking out what is effectively factor (a), namely the need for litigation to be conducted efficiently and at proportionate cost. The need for compliance with rules and orders is equally important. But it must be remembered that the remedy should be proportionate to the abuse. In the context of this case, it is also worth emphasising before I turn to the particular circumstances that litigants should not be deprived of their claims unless the abuse relied upon has been clearly established. The court cannot be affronted if the case has not been satisfactorily proved. This aspect is obviously inter-related with whether or not a fair trial remains possible. Moreover, the fact that solicitors have signed bills that appear to be inaccurate or worse is obviously a matter for concern, but that concern does not abrogate the need for the issue of whether the bills were indeed inaccurate to be fairly resolved between the parties, if that remains possible.
DISCUSSION OF THE CURRENT CASE
- In my judgment, it is perfectly apparent from a reading of the judgment itself that the judge forgot his own repeated warnings to himself about not conducting a mini-trial and about the draconian nature of what he was contemplating doing. He did conduct an inappropriate mini fraud trial without hearing any witnesses. He decided that a solicitor was lying and that other witnesses were untruthful without their being cross-examined. In my judgment, that was a most unsatisfactory state of affairs. Of course, it can very occasionally be appropriate to conclude that there has been fraud without oral evidence being heard, but in this case the judge relied on forensic deduction in a case where oral evidence at least might have put a different complexion on the allegations made.
- Moreover, whilst the judge said that the abuses he had identified were a serious misuse of the court’s procedure, he did not consider whether it was proportionate to strike out the entirety of the claims for the Rufus and Catherine fees on the basis of alleged exaggerated and inaccurate claims amounting to no more than a relatively small percentage of them. The judge held that it would be unfair to the client to subject him to the time and cost involved in a detailed assessment without giving any reason for that conclusion. He did not consider whether there were truly exceptional circumstances justifying the course of action he proposed. Moreover he concluded only that the abuses created a risk that a fair trial would be impossible without giving reasons for that conclusion. It was not clear from what he said how he thought that the further conduct of the claims for the Rufus and Catherine fees was likely to obstruct the just disposal of the proceedings.
- In my judgment, whilst the case against the solicitors on the preparation of the bundles in the Rufus claim may look and have looked very bleak, it was not appropriate to find that the Rufus bill was fraudulently exaggerated without directing cross-examination. The fact that the possibility of cross-examination may have been discussed in solicitors’ correspondence does not ameliorate the problem. There was a direct conflict of evidence between the solicitors’ witnesses saying bundles had been prepared and the client’s witnesses saying they had not. The judge could not properly resolve that conflict at an interlocutory hearing without oral evidence.
- Moreover, whilst it appears logical to conclude that the 16th January letter and the 6-page bill have been back-dated, in the absence of cross-examination or even a real explanation for the facts that the judge described, I am not sure that the documents are necessarily falsified by the finding. It is doubtful whether simply back-dating a bill of costs would normally justify striking out a claim for the fees charged if they were otherwise genuine. Moreover, I cannot really see why the now admitted inaccuracies in the Catherine bill cannot properly and fairly be dealt with on a detailed assessment. The confusion arose because the solicitors presented a different bill for the same total amount to the Land Registry Adjudicator, on the basis of which the client was awarded a significant proportion of the costs against his wife. When it came to presenting the bill to the client, the breakdown had changed dramatically, but there was a clear conflict of evidence between the witnesses as to what was the correct position. In particular, there was a serious issue as to which fee earners had actually worked on the case. I do not see why that conflict could not be resolved at a trial, nor do I see how the judge could conclude without cross-examination that the 6-page bill, rather than the bill presented to the Land Registry Adjudicator, was inaccurate.
- Many of the problems in this case have been caused by the procedure adopted. It seems that new points were raised on both sides as the proceedings before the judge progressed. He should, in my judgment, have realised that striking out was too blunt an instrument to deal with the heavily conflicting evidential accounts of the parties.
- Applying the appropriate test, I do not think the judge can properly have been satisfied that the solicitors were guilty of misconduct in relation to these proceedings which was so serious that it was an affront to the court to permit them to continue to prosecute their claims. Even bearing in mind the need for litigation to be conducted efficiently and at proportionate cost, I do not think that it was clear at the stage the proceedings had reached that the solicitors had forfeited their right to have an adjudication of their claims to the Rufus and Catherine fees and a detailed assessment of their bills. I cannot see that the judge was justified in saying that the abuses created a serious risk that a fair trial would not be possible or that it would be unfair to subject the client to the time and cost involved in a detailed assessment; there was no reason why there could not (and cannot) be a determination on the evidence of the disputes that the judge considered in relation to the Rufus and Catherine bills and a perfectly normal detailed assessment of the other parts of them.
- In these circumstances, I have concluded that the judge should not have decided these issues of fraud without disclosure and cross-examination, and the appeal from his judgment must, I think, be allowed. I have not found it necessary to deal with the solicitors’ other grounds of appeal. Suffice it to say, however, that I do not think the application to strike out was itself an abuse. The client was fully entitled to raise the questions he did, but those questions could not be fairly determined without a proper trial.
- If it later turns out that the solicitors have indeed been behaving fraudulently and advancing false claims, they will undoubtedly face the likelihood of penalties in costs and interest, and the serious possibility of proceedings for contempt of court or even criminal prosecution. Moreover, it would call into question the solicitors’ fitness to practice. These risks are real and not illusory. The burden of this judgment, however, is that such a case needs, where there is starkly conflicting witness evidence, to be evaluated after disclosure and the hearing of oral evidence and not by a process of forensic deduction from apparently unsatisfactory documentation.
- As for the future conduct of this case, it seems to me that in the first instance the solicitors should, in the light of the strike out arguments, be given an opportunity to reduce their bills to take account of the points made against them if they wish to do so. If they refuse to do so, then the remaining issues of exaggerated claims, fraudulent claims, and manufactured documentation, raised by the strike out application, will have to be defined and tried after disclosure and on the basis of oral evidence in the usual way.
- In my view, the case should go back to a Chancery judge for directions. That hearing should take place after the solicitors have, if so advised, revised their bills to remove any items that they no longer wish to rely upon. The judge can then decide whether there should be an immediate detailed assessment by the costs judge or how any outstanding challenges to the bills should be determined in the light of this judgment.”
On this case
On civil cases and fraud
- If findings of dishonesty are to be made then witnesses have to be heard.
- Making findings of fraud without a party being represented 2: a hearing in the administrative court
- Pleading and proving allegations of fraud or dishonesty: useful guidance
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