THE DANGERS OF PLEADING DISHONESTY: PART OF REPLY TO DEFENCE STRUCK OUT
In Canary Riverside Estate Management Ltd v Circus Apartments Ltd  EWHC 1376 (Ch) Master Shuman provides an succinct summary of the principles relating to pleading dishonesty. Part of a Reply that alleged dishonesty was struck out.
The claimant landlord brought proceedings against the defendant tenant alleging breaches of a lease. The defendant filed a defence and counterclaim and the claimant filed a Reply to that Defence alleging dishonesty by the defendant. The defendant issued an application to strike out that part of the Reply alleging fraud.
THE PRINCIPLES RELATING TO STRIKING OUT A STATEMENT OF CASE
One area of agreement between counsel is the evidential test that I should consider when a party makes an allegation of dishonesty in their statement of case. In Three Rivers District Council v Bank of England  UKHL 16 the House of Lords restated the principles on when fraud can be pleaded.
“The principle to which those remarks were directed is a rule of pleading. As the Earl of Halsbury LC said in Bullivant v Attorney General for Victoria  AC 196, 202, where it is intended that there be an allegation that a fraud has been committed, you must allege it and you must prove it. We are concerned at this stage with what must be alleged. A party is not entitled to a finding of fraud if the pleader does not allege fraud directly and the facts on which he relies are equivocal. So too with dishonesty. If there is no specific allegation of dishonesty, it is not open to the court to make a finding to that effect if the facts pleaded are consistent with conduct which is not dishonest such as negligence. As Millett LJ said in Armitage v Nurse  Ch 241, 256G , it is not necessary to use the word “fraud” or “dishonesty” if the facts which make the conduct fraudulent are pleaded. But this will not do if language used is equivocal: Belmont Finance Corporation Ltd v Williams Furniture Ltd  Ch 250, 268 per Buckley LJ. In that case it was unclear from the pleadings whether dishonesty was being alleged. As the facts referred to might have inferred dishonesty but were consistent with innocence, it was not to be presumed that the defendant had been dishonest. Of course, the allegation of fraud, dishonesty or bad faith must be supported by particulars. The other party is entitled to notice of the particulars on which the allegation is based. If they are not capable of supporting the allegation, the allegation itself may be struck out. But it is not a proper ground for striking out the allegation that the particulars may be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence.”
“…Where an allegation of dishonesty is being made as part of the cause of action of the plaintiff, there is no reason why the rule should not apply that the plaintiff must have a proper basis for making an allegation of dishonesty in his pleading. The hope that something may turn up during the cross-examination of a witness at the trial does not suffice. It is of course different if the admissible material available discloses a reasonable prima facie case which the other party will have to answer at the trial.”
“184. It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney Genera; for Victoria  AC 196; Armitage v Nurse  Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.
185. It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means “dishonestly” or “fraudulently”, it may not be enough to say “wilfully” or “recklessly”. Such language is equivocal. A similar requirement applies, in my opinion, in a case like the present, but the requirement is satisfied by the present pleadings. It is perfectly clear that the depositors are alleging an intentional tort.
186. The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved. Can ship There is a wide range of cases that fall within ground (a), disclosing no reasonable grounds for bringing or defending the claim.”
These principles were reviewed by Mr Justice Flaux in Jsc Bank of Moscow v Vladimir Abramovich Kekhman & ors  EWHC 3073. The claim originally made was of an unlawful means conspiracy on the part of the first defendant with a number of companies in the group which the claimant alleges that he controlled to defraud the claimant bank. It was alleged that the conspiracy caused the claimant loss and damage consisting of an unpaid judgment debt of some US $144 million and 328 million Roubles. In both the original conspiracy plea and the proposed plea of fraudulent misrepresentation fraud is alleged. At paragraph 20 he stated,
“The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty”. At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge.”
(1) The hope that something may turn up during cross-examination of a witness at trial does not suffice.
(2) The allegation of fraud must not be equivocal.
(3) There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.
(4) At an interim stage the court is only considering whether the facts as pleaded would justify the plea of fraud.
THE ALLEGATION OF DISHONESTY IN THE CURRENT CASE
The Master struck out the allegation of dishonesty in the claimant’s Reply. The allegation (that the defendant was secretly providing 10 year leases to sub-tenants)”
“In relation to the email about the term “3+3+3+ 1 =10″ I fail to see how this is evidence supporting the claimant’s contention that the defendant is dishonest. It demonstrates the mechanics of the agreement between the defendant and Bridgestreet and specifically refers to the fact that the defendant is awaiting the consent of the claimant which would alter these mechanics and therefore provide a single term of 10 years rather than a multiple of different terms adding up to 10 years.”
” … the claimant’s pleaded case hinges on the one email from Mr Wallace, a junior employee in sales writing an informal email to a potential client. I do not see how this email can be said to tilt the balance and justify an inference of dishonesty. I accept Mr Rainey QC’s submissions that this email is wholly insufficient to tilt the balance and wholly insufficient to mount a case that the defendant is dishonestly concealing a 10 year agreement for lease.”
THE ALTERNATIVE GROUND FOR STRIKING OUT – THIS IS SOMETHING THAT SHOULD BE IN THE PARTICULARS OF CLAIM NOT THE REPLY
The Master did not decide this issue, however it is likely that this part of the Reply would have been struck out on a second ground.
It is not necessary for me to deal with the second part of the defendant’s strike out application under CPR 3.4(2)(c). However I will comment that had I found that the reply disclosed a reasonable cause of action I would have required the claimant to amend its particulars of claim to plead this allegation in the particulars of claim, where it should have been pleaded in the first place. The allegation of dishonesty was a fresh allegation of breach and as such it should not have been pleaded in the reply.”