UNWARRANTED FRAUD ALLEGATION LEADS TO INDEMNITY COSTS BEING AWARDED

In  Natixis SA v Marex Financial & Ors [2019] EWHC 2549 (Comm) an award of indemnity costs was made against a party who had alleged fraud all the way up to closing submissions.   It highlights the dangers of pleading fraud in a case where the case is “inferential”. Even the abandonment of the fraud allegations in closing submissions did not prevent an award for indemnity costs being made.

“It was a case in relation to which, ultimately there was no, or no sufficient, evidence to support or justify the claim for fraud. It was rightly withdrawn. The only pity is that it was not withdrawn at an earlier stage”

THE CASE

Marex was a defendant in a claim brought by the claimant bank. It has issued third party proceedings and in those proceedings alleged fraud. That allegation was continued up to written closing submissions, but dropped in the oral submissions.

THE JUDGMENT ON COSTS AND THE FRAUD CLAIM

The judge noted that the fraud allegation was only abandoned in closing written submissions (it was continued in written submissions). The weakness of the allegation led to indemnity costs being awarded.

1. 1. The next question that arises is the basis on which costs should be awarded in relation to Marex’s fraud claim. That was a fraud claim essentially that the checker, Mr Png, was involved and acting fraudulently when he wrongly identified the warehouse receipts as authentic.

   2. As soon as that plea was made, it was asserted in the correspondence that that was a weak plea that should not have been made, and that in due course, if it was pursued to the end and was unsuccessful, there would be an application for indemnity costs. That situation has come to pass due to the allegation not having been pursued at the time of oral closing submissions.

   3. There is a degree of common ground as to some of the applicable principles in circumstances where Mr Weekes, who acts for Marex, recognises at paragraph 17(d) of his Skeleton Argument that:

“It has been held that the general provision in relation to cases in which allegations of fraud are made is that if they proceed to trial and the case fails, then in the ordinary course of events the claimants would be ordered to pay costs on an indemnity basis. It has been held appropriate for the court to approach the discontinuance of fraud proceedings in the same way (see eg Clutterbuck v HSBC Plc [2015] EWHC 3233 (Ch) per David Richards J at [16] and [18]). The underlying rationale of that approach is that where they fail they should be marked with an order for indemnity costs because in effect the defendant has no choice but to come to court to defend his position (ibid at [17]).”

1. 1. It is said, rightly, that the court retains a complete discretion in the matter and it is submitted there may well be factors which indicate that notwithstanding the failure of a fraud claim indemnity costs are not appropriate. The passage that is being referred to in Clutterbuck is at [15] to [18]:

“15.  Mr Ramsden draws attention also to the sequence of events yesterday; the attempt to take this application out of the list having failed, within a very short period indeed the notice of discontinuance was served. It has all the appearance (and it has not been denied) that a decision had already been taken to discontinue proceedings if the attempt to take the applications out of the list failed.

16.  Mr Ilyas on behalf of the claimants submits that an allegation of fraud being made in the proceedings which are then discontinued is not of itself reason to order indemnity costs. The general provision in relation to cases in which allegations of fraud are made is that, if they proceed to trial and if the case fails, then in the ordinary course of events the claimants will be ordered to pay costs on an indemnity basis. Of course the court retains a complete discretion in the matter and there may well be factors which indicate that notwithstanding the failure of the claim in fraud indemnity costs are not appropriate, but the general approach of the court is to adopt the course that I have indicated.

17.  The underlying rationale of that approach is that the seriousness of allegations of fraud are such that where they fail they should be marked with an order for indemnity costs because, in effect, the defendant has no choice but to come to court to defend his position.

18.  In circumstances where, instead of the matter proceeding to trial and failing, the claimant serves a notice of discontinuance, thereby abandoning the case in fraud, it is in my judgment appropriate for the court to approach the question of costs in the same way.”

1. 1. Reference is made by Mr Weekes to the decision of the Court of Appeal in Kiam v MGN [2002] EWCA Civ 66; [2002] 1 WLR 2810. In particular, reference is made to what was said by Simon Brown LJ, as he then was, at [12]:

” I for my part understand the court there to have been deciding no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight. An indemnity costs order made under Part 44 (unlike one made under Part 36) does, I think, carry at least some stigma. It is of its nature penal rather than exhortatory.”

1. Other relevant lines of authority include the decision of Tomlinson J (as he then was) in Three Rivers DC v Bank of England [2006] EWHC 816 (Comm); [2006] 5 Costs LR 714, and the decision of Andrew Smith J in Fiona Trust v Privalov [2011] EWHC 664 (Comm), which address along with other authorities, conduct which takes matters “out of the norm”.

   1. It is accepted by Mr Weekes that, because of cases such as Clutterbuck, the starting point, at least, is that if you make a fraud claim and pursue it and then either withdraw it or lose at trial, the starting point is that an order for indemnity costs is the appropriate order. Nevertheless he points out, rightly, as I have already foreshadowed, that the court retains a complete discretion as to what the appropriate order as to costs is in all the circumstances.

2. He submits that in the present circumstances an order for indemnity costs is not appropriate. He says that the claim that was advanced was narrow, circumscribed and parasitical upon a negligence case which succeeded (in part). He says that Marex’s decision to bring the fraud claim was not unreasonable, let alone unreasonable to a high degree and certainly not deserving of moral condemnation. He says it was narrow and circumscribed, concerning the conduct of one employee, Mr Png, and it was said that the basis for that was clearly pleaded, i.e. the absence of any other explanation as to the series of failures to identify the obvious differences between the forged and genuine receipts. It is also said that the point was addressed carefully and in a non-hostile cross-examination.

3. He also submitted that there is nothing per se unreasonable, let alone unreasonable to a high degree, in Marex’s abandoning its claim in fraud once Mr Png had been cross-examined. Further, without disagreeing with the approach in Clutterbuck, that case, it is said, provides no assistance. It is submitted that, on the facts, it was an extreme case and it is also said that in any event regardless of the fraud plea, Access World would always have attended court in order to defend its position on the negligence claim. It is also said that it would be unjust for Marex to pay indemnity costs where the conduct of Access World in defending Marex’s claim was, put at its lowest, highly unreasonable and deserving of condemnation.

4. In this regard what is relied upon is a suggestion that Access World and Mr Png were, it is said, grossly negligent, and that in those circumstances one should bear that in mind, and the pursuit by Access World of a plea that it was not negligent through to the end, and though Marex does not invite the court to order that Access World pay Marex’s costs on indemnity basis, the conduct on the part of Access World should be taken into account.

5. I consider that the starting point is indeed that costs should be on an indemnity basis.

6. Turning to the factual background to the fraud plea. It was made from the start and in a way which was purely inferential. I accept that fraud cases are often inferential, but in this case there was not one shred of actual evidence. There was no “smoking gun”. All that there was, was an individual in relation to whom it was submitted that his negligence was so great that an inference of fraud by one individual within an organisation should be visited upon that organisation – in short a plea of deceit, which is by its very nature a very serious allegation to make.

7. The reason why such an allegation was made is not difficult to discern, as Mr Thomas has pointed out, because Marex was being met, in relation to a very substantial claim, with terms and conditions which, of course, might potentially apply, and indeed I found did apply. The result was that even if Marex was successful on its negligence claim it would only recover a very small part of its losses.

8. I consider that are features of this case which are comparable to other cases such as Three Rivers. As Mr Thomas reminds me, there was publicity in relation to this serious allegation. The start of the trial had many members of the Press present and matters were reported in the Trade Press. I consider that it is questionable whether it was appropriate to plead fraud in the first place. Certainly it appeared from the start to be a weak inferential claim of fraud. It was pursued through to trial. It was pursued not only through to trial but through cross-examination of the witness concerned. It was then pursued in the written closing submissions.

9. It was only abandoned when Mr Choo Choy QC stood up to address the Court in oral closings. If, as has been submitted to me, the case in negligence was so strong, that would surely be all the more reason to pursue that claim for fraud because it would be more fuel to the fire that there was no innocent explanation for the actions of Mr Png. That clearly was not the case and the lie to that is told by the fact that having incurred all the cost and expense on both sides of pleading and running a case of fraud it was abandoned after Mr Png had given evidence and at a time when Marex was saying that the claim in negligence was very, very strong. If it had any real faith in the claim of fraud it would surely have carried it through to the end at that point, not least with a view to circumventing the standard terms and conditions.

10. I do not regard it as a strong case of fraud that was advanced. I consider that a very serious allegation was made in circumstances where it was questionable whether it should have been made and thereafter pursued, certainly pursued through to the bitter end in written closing submissions. I have considered carefully the factors identified by Mr Weekes, and as they are developed in his skeleton argument at paragraph 18, but I consider that this is a classic case where Marex’s conduct in pleading and pursuing the claim in fraud takes matters out of the norm, and where the starting point is also the end point.

11. It was a case in relation to which, ultimately there was no, or no sufficient, evidence to support or justify the claim for fraud. It was rightly withdrawn. The only pity is that it was not withdrawn at an earlier stage. In those circumstances, on established principles, and in the exercise of my discretion, I consider the appropriate order in relation to those costs is that they be on indemnity basis, and I so order. I would only add that I do not consider that the points made about the conduct of Access World in its defence of the negligence claim tells upon the application of Marex’s fraud claim (or indeed are made out on the facts of this case).