The Asset Tracing and Recovery Review: United Kingdom - England & Wales
The courts of London have become a focus for fraud litigation since the growth of electronic banking transfers in the mid 1980s. One reason for this has been the relative ease with which the English courts have taken jurisdiction over defendants overseas (see Section V). Another was the development by the English courts of international freezing orders in the late 1980s and early 1990s. However, the principal reason has perhaps been cultural. Judges in England have shown a determination to adapt the law to ensure that its historical and outmoded features do not prevent victims from obtaining remedies for fraud, particularly international fraud, when they can fairly be provided.
The following features of English fraud litigation commonly strike litigants from overseas as unusual.
First, where victims of fraud wish to seek compensation for what has happened to them, they have commonly done this through civil rather than criminal proceedings. Aside from the lower standard of proof applicable in civil courts, there are a number of reasons for this. While it is open to a private individual or business entity to bring a criminal prosecution, this has traditionally been a matter that is left to state prosecuting authorities. While those state authorities are pursuing the prosecution, the victim who has made a complaint to them will have very little influence over how the prosecution is conducted and, in particular, on whether it is pursued or abandoned. It is therefore not possible for a fraudster to compromise criminal proceedings commenced by state authorities by paying the victim. Moreover, while it is possible to obtain compensation for victims of fraud after a conviction, the state prosecution process has typically not been as responsive to victims' needs as civil proceedings; the criminal courts exercise a fairly rough and ready approach to compensation. That said, in part because of budgetary restraints, there has been a degree of retrenchment on the part of state authorities from fraud prosecutions. Victims of fraud offences – Virgin Media being one example2 – have increasingly used the criminal courts' range of powers both as a deterrent and as a means of depriving fraudsters of their gains. A private prosecutor will necessarily have far greater control of the conduct of proceedings, and may make pragmatic decisions. Criminal courts' powers of confiscation and enforcement are increasingly robust, and compensation to victims may be awarded from sums confiscated.
Second, very large parts of English law are not codified. Most criminal law relevant to fraud claims is set out in statutes, the most notable being the Fraud Act 2006 and the Proceeds of Crime Act 2002. Civil remedies, however, have evolved by a system of precedent whereby judges decide what the law is in a series of decisions in cases that are reported and relied upon subsequently. Thus, for example, it is possible to trace the modern action for deceit back to a remedy that used to be available in medieval times against people who lied in court proceedings. Similarly, remedies for breach of trust and breach of fiduciary duty (described below), which have their own specific history under the law of equity, can be traced back to decisions that were made in the Middle Ages. This system of precedent, whereby judges have traditionally been said to discover the law (but in reality make it), relies on strict rules about each case having to conform to the principles decided in previous cases depending upon whether the court that decided the previous case was a superior or inferior one.
Finally, English civil remedies for fraud generally split into two categories: first, there are remedies that are available for those who commit wrongs (most notably deceit, breach of trust and breach of fiduciary duty); second, there are those that exist for people who receive money to which the victim has a better claim. These remedies are called remedies in restitution, or sometimes remedies for unjust enrichment.
Legal rights and remedies
i Civil remedies
The tort3 of deceit
To be liable to the victim of a fraud in the tort of deceit:
- the fraudster must have made a representation that is untrue (or, in some situations, failed to correct a representation that he or she knows has become untrue);
- the representation must have been made by the fraudster knowing it to be untrue (or to have become untrue) or being indifferent as to whether it was true;
- the representation must have induced the victim to act in a manner that harmed him or her, or his or her interests; and
- the victim must have suffered damage in consequence.4
While English lawyers are generally familiar with this or similar formulations of the tort of deceit, it contains a substantial amount of legal jargon that requires explanation.
A representation is a statement of some kind.5 For example, if a fraudster tells his or her victim that his or her funds will be invested in a profitable scheme, when in fact he or she knows it will simply be spent on luxuries for the fraudster, the statement would be an untrue representation or misrepresentation. A representation usually applies to past or present events, but can sometimes simply be one of the fraudster's own beliefs. Promises are not misrepresentations unless the person who makes them knows that they will not be fulfilled (in which case he or she has misrepresented his or her state of mind).6 In the example given, the fraudster has lied about what he or she believes will happen to the money, and hence the representation will be false even though the money has not yet been given to the fraudster, invested or spent. Similarly, a representation can be by conduct alone rather than spoken or written words. Leaving falsified accounts for a due diligence team to discover and act upon in a corporate acquisition would usually be a representation by conduct that the accounts were genuine.7 Sometimes representations will not be outright lies, but half-truths that a fraudster knows will be misunderstood by his or her victim.8 Statements of this kind would be regarded as false because of how the fraudster knew they would be interpreted, even if it was possible to interpret them in a way such that it was not untrue.
Difficulties exist where a statement is made that is true when it is made, but becomes untrue before the victim of fraud acts upon it. However, statements of this kind are capable of giving rise to fraud claims.9 Much of the emphasis of a claim against a fraudster will be upon his or her dishonesty (see below).
Knowledge of untruth
This relates to the knowledge or indifference of a fraudster that his or her representation was false:10 carelessness is not enough. It is necessary to demonstrate that the fraudster either knew that what he or she said was untrue, or did not know because he or she did not care one way or the other whether it was true or false.11 Little difficulty exists where it is possible to show on present facts that the fraudster said something that he or she was aware was not the case. However, it is often possible for fraudsters to say that they made statements that were false believing what other people had told them themselves or having forgotten information that was inconsistent with them. In these situations, the court will decide whether it believes the fraudster having heard all the evidence and, most importantly, witness evidence at trial.12
Greater difficulties arise where a fraudster does not know whether a statement was true or false because he or she has failed to look into the matter. Sometimes, a situation will arise because the fraudster has been careless, and mere negligence will not be enough to make him or her liable. On other occasions, however, the fraudster will have suspected what he or she said to be false but made no enquiry as to the facts for fear of finding out this was the case. Situations of this kind are called wilful blindness or blind-eye knowledge. The general rule is that it is not enough for a fraudster to be generally uneasy about what he or she said: he or she must have actually entertained a specific suspicion as to the fact that it would make what he or she said untrue, and deliberately decided not to investigate that suspicion before making a representation.13
Inducement and reliance
It is commonly thought by those who defend fraud claims against them that it will assist them to prove that the victim would have acted as he or she did even if he or she had not been lied to. Indeed, this kind of assertion is frequently made in cases where the fraud has induced the victim to enter into a contract with the fraudster (see below). The court will ask two questions. First, it will consider whether the representation was material. A representation is material where it would naturally induce someone to act on it in the way that the victim acted. Hence, a statement by a fraudster that investment A is more profitable than a competitor's investment B would be material to an ordinary investor's decision to purchase investment A, but not to purchase investment B. Second, the representation must have actually induced the victim to have acted upon it. If the statement is material, it will be assumed that it did unless the defendant proves otherwise.14 It is sufficient to show that it was simply a significant part of this decision-making.15 Many victims of fraud will say that the lie that was made to them made them more comfortable about coming to a decision that they might have come to in any event. This does not stop their actions succeeding. Indeed, it is often the reason the lie has been told.16 The victim does not need to prove that he or she believed the lie to be true, just that it influenced him or her.17
While the test of inducement is often a light one, it must still be the case that a fraudster's misrepresentation played a part in a victim's decision to act as he or she did. Cases in which the victim has been lied to after he or she has acted do not usually give rise to fraud claims. Hence, where a victim has invested in some dubious scheme and those running it have lied to him or her about why they cannot return his or her funds, an action based upon those lies alone will not usually result in a fraud claim, because the victim had already parted with his or her money before he or she was lied to.18 It is necessary to found the action on something that the victim has done in consequence of the lie that was told to him or her.
It is not possible to bring civil proceedings (at least of this kind) where no damage has been suffered simply to prove a moral point.19
Where fraud leads to a victim entering into a contract with a fraudster, this is a form of the tort of deceit known as fraudulent misrepresentation.20 The victim has the right to monetary damages and has an option to rescind the contract.21
Rescission is the reversal of a contract so that the parties are put back in the position they were in before they entered into it. Rights and assets transferred under the contract are returned to their original owners, and future obligations are no longer binding.22 The victim of a fraudulent misrepresentation has a right to require rescission even if this is inconvenient or disproportionate, but not where it is impossible.23
Under Section 2(1) of the Misrepresentation Act 1967, a victim of any misrepresentation will have the right to the same level of damages that would be awarded in the case of a fraudulent misrepresentation unless the misrepresentor can prove that he or she had, up until the point the contract was made, reasonable grounds to believe the representation was true. This gives the more generous measure of damages to victims of negligent misrepresentations, but in such cases the court will have discretion to refuse rescission.24
Special feature of actions in deceit
There are several unusual features relating to an action for the tort of deceit, which are described below.
First, while it is not necessary to demonstrate that a fraudster actually regarded what he or she did as fraudulent, he or she will generally be regarded as dishonest if the tort of deceit is proved against him or her. Judges tend to the view that, other things being equal, people do not generally act dishonestly. Cogent evidence of all the ingredients of the action will be needed for the court to find dishonesty against a fraudster.25 If there is another plausible explanation for what happened that does not involve the fraudster acting dishonestly, the action may fail.26 While the tort of deceit is therefore difficult to prove, it is often alleged because once it is established, a number of consequences follow that are very much to the victim's advantage. The remainder of the 'special features of claims in the tort of deceit' describe these advantages.
Second, if the tort of deceit is established, the victim will be entitled to all the damage that he or she has suffered as a result of his or her acting on the representation. Hence, for example, if a victim is induced by a fraudulent misstatement to buy a company and, having acquired shares in the company, the business fails, it will not be necessary for the victim to establish that it was foreseeable that the victim would suffer this loss because of the lie that the fraudster told. It will simply be sufficient to show that the loss was caused by the victim's purchase of the shares. Hence, in Smith New Court Securities v. Scrimgeour Vickers (Asset Management) Ltd,27 the claimant bought shares in Ferranti on the basis of false representations made by the defendant. The value of those shares then plummeted following the discovery of a different and entirely unrelated fraud. It was held that the claimant was entitled to be put back in the position that he would have enjoyed had he not purchased the shares at all. In other words, the loss that resulted from the discovery of the unrelated fraud was to be borne by the fraudster.
Finally – and most importantly – it is no defence to an action in the tort of deceit that a victim of fraud was careless. Very frequently fraudsters, particularly those who induce investors to part with their money for shares in worthless companies or investment schemes, will claim that the victim should have made his or her own enquiries about the scheme and that the victim's loss is, in substance, the victim's own fault. Once it has been established that the victim acted on the fraudster's misrepresentation, it will not matter that the victim was careless in believing it, nor that the victim should have made other enquiries in addition to relying upon the representation. It is almost invariably the case that victims of fraud are careless or negligent to some degree, but as a clear rule of law based upon moral principle, the fraudster is the last person to be in a position to complain that the victim believed or relied upon him or her.28
Breach of trust
Many frauds, particularly those relating to investment schemes, work through a fraudster representing to a victim that while the fraudster has control of the victim's money, it will be used only for the victim's benefit, or that it will be held subject to certain securities or used only for specific purposes. If the fraudster obtains the victim's money from him or her having suggested that this will be the case when there is no intention to hold it in that way at all, a claim in deceit can be made by the victim because the fraudster has misrepresented his or her state of mind (see above). However, claims of this kind will also give rise to claims for breach of trust.
A trust usually arises where property (often money) is held by one person for the benefit of another. In situations of this kind, under English law, ownership of the property often splits. The person who is holding the money (known as the trustee) has legal title to it, which usually gives the right to immediate control of the money. The person for whose benefit the money is held usually has a separate property right called an equitable interest or beneficial interest in the property, which usually carries with it the right to enjoy the property. The trust relationship was created by a branch of law known as equity (see above), but it is commonly said that it evolved from situations in medieval times when knights would leave their property under the control of others while they went to fight in the crusades.
A finding by the court that there is a trust relationship will normally (but not inevitably) bring with it a number of assumptions about the parties' rights. It will generally be assumed that the trustee owes a number of duties recognised by the law of equity to the beneficiary. These usually include an obligation not to make any profit from the trust fund to which the beneficiary has not specifically agreed.29 Hence, for example, where a fraudster takes money from a number of different investors saying that he or she will aggregate them for some fictitious investment where, in fact, he or she simply intends to skim the interest from them, this will often be a breach of this duty. Second, a trustee is normally obliged not to put himself or herself in a position where his or her own interests with regard to the money conflict with those of a beneficiary unless, again, this has been explicitly agreed to.30 Finally, and most importantly, the trustee is obliged to hold the money according to the terms of the trust. If he or she does not do so, he or she will face action for breach of trust.
Hence, for example, if a fraudster takes money from a victim on the basis that he or she intends to use it to make a specific purchase or to invest it in a particular fund, if the fraudster uses it for a different purpose, he or she would be liable for breach of trust. If a trustee wrongly transfers property in breach of trust and the transfer causes the property to be lost to the trust fund, the trustee is usually under an immediate obligation to restore to the trust fund whatever has been taken out. If restitution is not possible or appropriate, the victim may entitled to monetary compensation from the trustee to put him or her in the position that would have been obtained had the breach not occurred.31
There is some dispute in English law as to whether, if a transfer of funds is fraudulent, it will not matter that the loss would have happened anyway. In Bairstow v. Queen's Moat House plc,32 company directors, acting dishonestly, had paid money away from the company as dividends. In doing so, they had failed to comply with the relevant laws, but it was probable that the dividends could have been lawfully paid in any event. The question in the case was whether the directors were liable only for the difference between the unlawful dividends and the lawful dividends that they could have paid, or whether they were liable for the full amount. The English Court of Appeal held that they were liable for the full amount.33 The potential availability of arguments of this kind is one of the reasons claimants in fraud cases will often seek to formulate their claims in this way.
Breach of fiduciary duty
Fiduciary duties are part of the law described as equity, as mentioned above. A fiduciary is, under English law, someone who is obliged – in some respects – to put someone else's interests before his or her own. Trustees are therefore fiduciaries, because they are obliged to put the interests of their beneficiary before their own in relation to the property that they hold for them. Agents are also fiduciaries in relation to the interests of their principals, as are company directors who act as the agents of their companies. Under English law, most professionals act as fiduciaries for their clients, as they have an obligation to put their client's interests before their own when giving advice. The significance of these duties is very great in fraud cases where a fraudster will often seek to suggest to the victim that he or she is someone the victim can trust and upon whose advice and guidance the victim can rely.
There is much debate as to the scope of fiduciary duties, but generally speaking they involve an obligation not to act contrary to the interests of the person to whom the duty is owed,34 and not to permit a position in which a fiduciary's interests might come into conflict with those of its principal.35 In each case, it is a defence to show that the principal gave his or her informed consent to what was done. A good example of where a fraud claim will involve a breach of fiduciary duty is where trustees take money for investment purposes but use it for investments in which they themselves are personally interested. Claims of this kind often give rise to secret profits.
Another very common situation involving fiduciary duties is, of course, bribery. In a situation where an agent negotiates a commission for him or herself of which the principal is not informed, in return for committing the principal to a contract of arrangement, the agent has permitted his or her own interests in negotiating the commission to conflict with those of the principal in entering into the most favourable arrangement extracting the best terms available from it.36 The taking of the commission will therefore be regarded as a breach of fiduciary duty.
It is not necessary to succeed in an action for breach of fiduciary duty for the victim of the fraud to show that he or she has suffered loss (although he or she may have done so). The victim may choose to claim from the fraudster or fiduciary either the loss that the victim has suffered or the profit that the fraudster has made. A bribe or secret commission received by an agent is held on trust by the agent for its principal, allowing the principal to claim a proprietary remedy against the bribe or secret commission itself, rather than a personal remedy against the agent.37 Claims of this nature therefore have an advantage over claims in deceit that can be made only if the victim has suffered damage (see above).
Liability of persons who assisted in a fraud
Fraud actions usually involve attempts by victims to establish liability on the part of those who were accessories to the fraudster's activities in some way. The principal means by which they do this are set out below.
The tort of conspiracy
Where a victim of fraud proves that he or she has suffered damage as a result of an unlawful action that has been taken pursuant to a plan made between the defendant and someone else to injure him or her unlawfully, he or she is likely to have an action against that person for unlawful means conspiracy. According to the Court of Appeal in Kuwait Oil Tanker SAK v. Al Bader:
A conspiracy to injure by unlawful means is actionable where the Claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the Defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the Defendant to do so.38
A typical example will be where two or more parties agree to bribe the director of a company to persuade him or her to commit the company to less favourable contractual terms than would otherwise be available. The receipt of a bribe by a director would be a breach of fiduciary duty (see above) and thus unlawful. The situation would, however, give rise to a number of other potential actions that the company, as a victim, could bring against those involved, including actions for deceit and breach of fiduciary duty and dishonest assistance in a breach of fiduciary duty (see below). There is some debate about whether the unlawful means used have to be ones that would give rise to a cause of action of the claimant.39
A broad range of acts may constitute unlawful means. In JSC BTA Bank v. Khrapunov,40 the Supreme Court confirmed that contempt of court – in that case, breaching worldwide freezing and receivership orders – could constitute unlawful means for the purposes of the tort of conspiracy.
Another issue relates to the level of knowledge required by the defendant of the unlawful means for him or her to be said to be party to the conspiracy. In the case just cited, the Court of Appeal approved a statement by the judge at first instance:
If several people agree to enable each other to steal from their employer, lending their support in different ways at different times and taking different shares of the proceeds (or even each retaining for himself what he takes), each of them is party to the agreement pursuant to which all of the thefts take place. In those circumstances there is in my judgement no need for each to be fully aware of the circumstances of each theft in order for him to be liable as a conspirator provided that the theft in question falls within the scope of the agreement.
Similarly, the courts are resistant to arguments by defendants that they should be liable simply for those parts of the conspiracy that they have assisted in. There is also authority to suggest that when new people become parties to an existing conspiracy, they may be liable for damage caused by it prior to them joining it.
A further requirement is that the defendant must have intended to injure the victim. However, for the purposes of the kind of conspiracy described above, it does not need to be shown that the infliction of damage was his or her sole intention, or even his or her predominant purpose. In Lonrho Plc v. Al-Fayed (No. 1),41 Lord Bridge stated:
[W]hen conspirators intentionally injure the plaintiff and use unlawful means to do so, it is no defence for them to show that their primary purpose was to further or protect their own interests, it is sufficient to make their action tortious that the means used were unlawful.
Procuring a breach of contract
It is very commonly the case that accessories will persuade directors or employees of the victim of a fraud to break their contractual obligations to him or her. In these circumstances, they are often joined to the proceedings in an action for inducing a breach of contract.42 For these purposes, it will not matter that the precise terms of the contract are not known to the defendant.43 It will be enough that he or she knows enough about the relationship to appreciate that what he or she is doing would be a breach of the contractual obligations that are owed to the victim. It will also be sufficient if the defendant does not know of the contract because he or she has turned a blind eye (see above) to the possibility that it might exist.44 Recently, the courts have limited the type of act that can amount to a sufficient inducement to breach a contract. The inducement should normally be a promise or reward of an obvious tangible benefit, rather than vague enticements.45
Note that when a director is acting within his or her authority and bona fide interests of his or her company, he or she cannot be liable for inducing a breach of contract on the part of his or her company.46
There is some debate as to whether, when a contractual duty is one that is also fiduciary, it is possible to sue a defendant for procuring a breach of contract.47
The tort of negligence
Finally, it is common to see actions brought against accessories for the tort of negligence. In some situations, English law imposes an obligation upon parties to take reasonable care not to damage the interests of others. However, the courts have been concerned, in cases where a loss is purely economic rather than financial, to avoid circumstances in which parties, particularly professionals, can be liable to anyone for their carelessness damages. The question that the court will address in deciding whether a defendant's carelessness should make him or her responsible for the financial loss of the claimant is usually expressed as whether the defendant owed the victim of fraud a duty of care.
It is clear that a duty of care may arise where the defendant has made a negligent misstatement to the victim of fraud in circumstances where it is obvious that he or she will rely upon it and might suffer loss if the statement is wrong, as in the case of Hedley Byrne & Co Ltd v. Heller & Partners Ltd.48 It is plain that in some circumstances, auditors may owe a duty of care to a company to identify fraud discovered in their audit. However, it will usually be extremely difficult to establish that third parties, other than the company that has relied upon audited accounts that have been negligently prepared and thereby concealed the existence of fraud, should be liable to them.49
In the many and varied situations in which parties' carelessness (and in particular failure to spot fraud) may damage other parties, it is difficult to predict with certainty when a duty of care will be owed. Popular tests currently include the assumption of responsibility test, in which the court will look at the facts to determine whether a defendant assumed any responsibility towards a claimant,50 and the incremental approach, by which the court tends to see whether there have been previous similar cases, and follows them rather than extracting some fundamental principle from them.
The following, however, are situations that are commonly encountered in fraud litigation where negligence claims may be asserted:
- Where a customer company of a bank has an employee who, despite the fact he or she is acting within the scope of the bank's mandate, is engaged in a fraud, the bank may owe the customer a duty of care to alert it to the fraud if it should have been spotted. However, the courts have repeatedly emphasised that bankers are not detectives, and that the basis of the relationship between a banker and its customer is one of trust. Strong evidence will therefore be needed to show that a bank was, or should have been, alerted to impropriety.51
- A bank receives funds from a third party who is not a customer who has (untruthfully) been told by a fraudster that the sums will remain in a blocked account. The bank fails to spot that the customer is engaged in a fraud on the third party. In these circumstances, it is usually very difficult to assert the duty of care to the third party.52
- A surveyor who is responsible for certifying that goods have been loaded on board a ship by issuing a certificate to that effect without inspecting them is liable to the buyer under a documentary credit. This is because he or she knew the seller would use the certificate to obtain payment via the letter of credit.53
- A bank is served with a freezing injunction (see below) but carelessly fails to comply with it, with the consequence that the defendant fraudster was able to withdraw money from the frozen accounts that should have become available to the claimant. The bank owed the claimant no duty of care.54
The varied outcomes of these cases illustrate how policy greatly influences the court's decision as to whether there is a duty of care.
Where the claim arises from a fraud to which the claimant has been a party, difficult issues arise relating to public policy that may afford the defendant the defence of illegality.55
Third-party recipients, transmitters of the proceeds of fraud and other accessories
The traditional trust arrangement has been described above. One person, a trustee, agrees to hold property on behalf of someone else, a beneficiary. In these circumstances, the trustee is usually holding the legal interest in the money and has control of it, while the beneficiary usually holds the equitable interest in the property and has the right to enjoy it. In some situations, the court will hold that someone is acting as a trustee when he or she did not agree to do so, simply because he or she should regard him or herself morally as holding the money for someone else. These situations are sometimes referred to as constructive trust situations, although the term is an English law construct used to describe a variety of very different things.
Many cases of fraud involve constructive trusts, and the victim of fraud will be regarded as holding the equitable or beneficial interest in the money, notwithstanding that the victim no longer has it. If the money can be identified as having been received by a third party who still retains it, the claimant can sue not only for its return but also for any profit the recipient has made with it. The question of whether the money the third party received can be treated as the same money that the victim parted with under English law can be complex. The same is true of whether the money the third party retains is the same as he or she received. Both are usually decided under the 'rules of equitable tracing'. These are complex, but it is important to note that under them, the victim's title is not lost simply because the money has been mixed with other money before it reached the third party or mixed when it was in the third party's hands. Nor is it lost if the money has been used to acquire an asset – the victim will often be able to claim that he or she has an interest in that asset because it was acquired with the victim's money. Claims by the victim that someone else (whether a fraudster or someone innocent of the fraud) holds the victim's money or an asset acquired with it are called 'proprietary claims'.
The principal defence to a proprietary claim is that the person who has the victim's money is a 'bone fide purchaser for value without notice'. In essence this means that he or she gave something in return for the victim's money or asset when they had no reasonable means of knowing or suspecting that it might belong to the victim. Obviously, gifts to third parties do not trigger the defence because nothing is given in return for them.
Relying on their interest in the money, victims can also often sue someone who has taken the money for themselves under a claim for knowing receipt or sue someone who has helped to keep the money from them under a claim for dishonest assistance.
Knowing (or unconscionable) receipt
To succeed in a claim for knowing receipt, a claimant has to show first of all that there is a trust or constructive trust relationship of the kind just described; secondly, that the money that he or she parted with is the same money as the defendant received; thirdly, that the defendant's receipt was beneficial; and fourthly, that it was unconscionable. The first of these requirements has been described above. The second has in the past depended upon the application of rules described as the tracing rules of equity. Space does not permit a description of these here. The third requires a defendant to have taken the money for him or herself. Hence, a bank that takes money to discharge a customer's overdraft will have engaged in a beneficial receipt of the money, while a bank that simply transmits money through a customer's account will not, because it has not taken the benefit of the money for itself. Much debate arises regarding the fourth requirement. If the recipient knows that the money is the proceeds of fraud, then it is almost certain that his or her receipt is unconscionable. It also seems likely that a careless failure to appreciate that the money constitutes the proceeds of fraud may also suffice, although it will depend upon the seriousness of the circumstances and the conduct of the recipient.56
People who induce others to commit breaches of fiduciary duty can be liable if they act dishonestly when they do so. To decide whether the conduct of a defendant was dishonest, the court will first reconstruct the defendant's knowledge, beliefs and suspicions about the situation in which he or she acted. His or her actual understanding will not include matters that, through his or her own carelessness, he or she failed to appreciate. It will include what he or she would have learned from enquiries that he or she chose not to make because he or she did not want to know what they might reveal. Having reconstructed the defendant's understanding of the situation in this way, the court will then apply a test of dishonesty based upon the knowledge, belief, suspicion that he or she had. For this purpose, following the decision of the Supreme Court in Ivey v. Genting Casinos, the test of dishonesty no longer involves the subjective question of whether the defendant appreciated that what he or she is doing is wrong, but whether the court would regard it as so from an objective viewpoint.57 Such claims are very commonly made against parties who seek to conceal or divert the proceeds of fraud to ensure that a victim is unable to recover them. Frequently, therefore, they are seen against banks and professionals who are engaged in what are, in effect, money laundering schemes. Claims of this nature need strong evidence to succeed.58
In the case of knowing receipt, the victim can recover the amount that the defendant received. In the case of dishonest assistance, the victim is entitled to recover the loss that he or she suffered as a result of the scheme in which the defendant persisted. The victim may also be able to claim an account of profits from a dishonest assister, provided the profits in question have a sufficient causal connection with the dishonest assistance.59 This can result in difficult considerations in determining what exactly the scheme was and whether there were one or several schemes involved.
ii Defences to fraud claims
Limitation of actions
As a matter of policy, English law provides that wrongdoers should not be subjected to the threat of legal action for an indefinite period after the actions to which they relate occur. For example, a general claim in tort will only be able to be brought within six years of the loss being suffered by the victim, this being the accrual of the cause of action.60 However, where the cause of action is based on the fraud of the defendant, such as in a claim for deceit, policy dictates that different rules should apply and time will not start to run until the victim discovers, or could, with reasonable diligence, have discovered the actions of the fraudster.61 This means that the victim has to show that unless he or she took exceptional measures, not reasonably to be expected of him or her, he or she would not have discovered the fraud.62
Therefore, where a fraudster carefully and effectively hides his or her scheme from a victim, such that the victim is unaware of the deceit, time will not start to run until the victim becomes aware of, or had he or she been taking reasonable care in his or her affairs would have become aware of, the fraud.
Additionally, where a fraudster has deliberately concealed any fact relevant to a victim's right of action, time does not start to run until the victim discovers, or should have discovered, the concealment.63
For claims of fraudulent breach of trust by a fiduciary, there is no time limit on the victim's ability to bring a claim against a fraudster.64 The limitation defence will, however, be available to dishonest assistors and knowing receivers of trust funds.65
This also applies to what is referred to as a breach of constructive trust.66 However, a critical distinction must be drawn. In a case where a transfer of money held on trust (trust property) is made as part of a fraudulent breach of trust, where no limitation period applies. Where a fiduciary fraudulently receives money to which a victim may have a claim for knowing receipt or dishonest assistance a six-year limitation period will apply. Confusingly, both cases are described as a fraudulent breach of constructive trust. However, in the latter case the property is not trust property. An example of this would be where the director of a company improperly receives a bribe to secure the company agreeing to a waiver of debt; as a director, he or she has fiduciary duties to his or her company, and the money he or she receives is in breach of those duties; however, the money itself was never trust property.67
iii Criminal remedies
In addition to civil claims brought by a victim of fraud, a fraudster may also be subject to criminal prosecution under a number of different offences.
The fraudster will commit the criminal offence of fraud if he or she carries out the fraud through a false representation to the victim (or anyone else) as to a fact, law or state of mind, or a failure to disclose information that he or she is under a legal duty to disclose.68 In each case, the fraudster must have the intention to make a gain for him or herself or another, or to cause loss to another, or to expose another to the risk of loss. The first of these offences would clearly very frequently be the case where the fraudster lies to the victim to make a profit.
These offences require proving that the fraudster has acted dishonestly. Dishonesty in criminal law received substantial scrutiny by the Supreme Court in Ivey v. Genting Casinos.69 The test has been brought in line to reflect civil law (above), and now only requires that an act was objectively dishonest, applying the standards of ordinary reasonable people. The magistrates' court or jury now has to consider only whether a defendant's conduct was dishonest by the standards in the light of what he or she knew or believed about the situation in which he or she acted. This test removes the previous 'second limb'70 of the test of dishonesty, which required proof that a defendant realised that what he or she was doing was wrong by those standards.71
There is a further offence if a fraudster is in a position where he or she is expected not to act against the financial interests of the victim: for example, if the fraudster is an employee, or is under a fiduciary duty such as an agent or trustee (discussed above) and dishonestly abuses that position, even by omission, with the requisite intention.72 Each of these three offences can carry a term of imprisonment of up to 10 years.
If a fraudster has created, copied or used a false document to mislead his or her victim into thinking it is genuine, and thereby to cause the victim to act in some way prejudicial to his or her interests, he or she is guilty of the offence of forgery.73 Such an offence can carry a term of up to 10 years' imprisonment.74 Other commonly seen offences include the common law – and self-explanatory – offence of conspiracy to defraud and the offence of fraudulent trading,75 which, although primarily designed to target the carrying on of a business with the intention of defrauding creditors, is drafted widely enough to capture all manner of fraudulent trading practices.
Beyond these more specific offences, it will often be possible to rely on the simple criminal charge of theft, where the fraudster has dishonestly taken someone else's property intending to keep that property permanently.76
There are also very wide provisions in English law criminalising acts that consist of the giving or receiving of bribes. Space does not permit a full outline of these offences, but broadly, where a fraudster gives a bribe to someone who is in a position of trust, or of whom there is otherwise a reasonable expectation that he or she will act in good faith or impartially in carrying out any activity connected with a business or trade, and hopes by giving the bribe to secure improper performance of any such activity, the fraudster will be guilty of an offence of bribery.77 This will also be the case where the fraudster him or herself requests, agrees to receive or receives a bribe in connection with the improper performance of any such activity.78 These offences extend to bribery involving public officials, employees and other people representing corporate bodies. The Bribery Act 2010 is noteworthy for its novel 'failure-to-prevent' provisions, criminalising commercial organisations that do not have in place adequate procedures to prevent persons acting on their behalf from offering bribes.79
More recently, the Criminal Finances Act 2017 amended the Proceeds of Crime Act 2002.80 Part 3 of the 2017 Act makes both UK and non-UK companies criminally liable for failing to prevent the facilitation of UK or foreign tax evasion in circumstances where the company neglects to have reasonable prevention policies in place.81
The introduction of these new failure-to-prevent offences represents a continuing departure from the longstanding 'directing mind' concept of corporate criminal liability. The expanded scope of corporate criminal liability may result in more deferred prosecution agreements, which are an alternative to prosecution for corporate entities and which, although introduced by the Crime and Courts Act 2013, have been only rarely used since.
There are also criminal law provisions that allow for the restraint and recovery of money that constitutes, or represents, the proceeds of crime. Restraint – akin to an interim freezing injunction in civil proceedings – can be sought by certain state agencies at the investigation stage, or by a prosecutor once criminal proceedings have commenced.82 Confiscation proceedings arise upon conviction.83 Alternatively, the state can bring a claim in a civil court to recover any money that is, or represents, property obtained through unlawful conduct even where no criminal conviction has been secured.84 To make such a claim, it will suffice to show that on the balance of probabilities the unlawful conduct has occurred and that this is the gain from that conduct.
Property obtained through unlawful conduct may be followed into the hands of third parties who receive the property from a fraudster, or receive the property from the first recipient, and so on. Significantly, it is not necessary to prove that the receipt by the third party of the property was unconscionable; indeed, it is not necessary to establish the state of mind of the recipient at all. Recovery will not be possible, however, where the third party purchases any property for valuable consideration. The property may also be traced into any funds that represent the original property.85
The Criminal Finances Act 2017 introduces unexplained wealth orders (UWOs).86 UWOs apply to politically exposed persons, or persons suspected of being or having been involved in serious crime, or persons connected with a person so suspected. A UWO requires a respondent to explain his or her interest in property. The property identified in a UWO may then become subject to an interim freezing order while restraint or confiscation proceedings are pursued.
A fraudster convicted of a criminal charge can be made to pay his or her victim under a compensation order, made upon an application or of the court's own motion.87 An application for such an order is made by the prosecutor rather than the victim unless, in the case of a private prosecution, they are one and the same. There is no upper limit on the amount of compensation the Crown Court may order, but it will only make realistic orders that it believes the fraudster will be able to pay within a reasonable time.88 Compensation orders will also be limited to the loss resulting from, that is to say occasioned directly by, the fraudster's offences of which he or she is convicted or that are taken into account during sentencing.89 The procedure adopted for the making of a compensation order is a summary one, inapt for detailed enquiry,90 and an order will only be made where the loss is readily ascertainable.91 Any award made should not exceed the sum that would be awarded by a court in civil proceedings.92 The court may order both confiscation and compensation arising from the same loss. In the event that the fraudster has insufficient assets to satisfy both orders, the court prioritises the victim in that sums recovered by the state pursuant to a confiscation order may go towards any shortfall in compensation to the victim.93 Separately, where property has been obtained by theft, blackmail or fraud, the criminal court may, upon the application of the victim or of its own motion, make an order for the restitution of the property stolen or its value.94 An order for restitution will, however, only be made in the 'plainest of cases'. Where there is doubt about the rights of the parties or there is an issue in dispute, the matter will be left to be decided in the civil courts.95
Despite the creation by statute of various bodies to investigate and prosecute fraud, the right to bring a private prosecution is expressly preserved in English and Welsh law.96 In recent years, victims of fraud have noticed a reluctance – or lack of resources – on the part of the police in particular to pursue fraud investigations. To a great extent, the nationwide ActionFraud online portal has replaced traditional methods of reporting fraud. Instead, victims of fraud have been increasingly exercising their rights as private prosecutors to pursue justice, punishment, deterrence and – quite properly – compensation and confiscation against fraudsters. There is now a solid body of case law clarifying the scope of the private prosecutor's access to the powers of the criminal courts, particularly in terms of confiscation, as to which see the recent R (Mirchandani) v. Somaia.97 Essentially, almost all the tools of the state prosecutor are available to the private prosecutor. The position is somewhat different in respect of investigatory powers prior to a prosecution. It is also clear that it is only rarely impermissible for criminal and civil proceedings concerning the same subject matter to be conducted concurrently, even if the prosecutor is also the claimant in a civil case.98
Seizure and evidence
i Securing assets and proceeds
In England, it is possible to obtain an order before an action has been started, during the course of the action or after judgment has been granted in favour of a victim of fraud called a freezing injunction, which can freeze all property belonging to the defendant.99 Similar proprietary injunctions can be obtained where a claimant is seeking to freeze property in which he or she has an equitable interest (see above).
Both freezing and proprietary injunctions can apply to assets wherever they are in the world. A freezing injunction affects the defendant and, if he or she does not obey it, makes him or her potentially liable for contempt of court and sanctions involving fines or imprisonment. It would also affect third parties who break the terms of an order, or help or commit the defendant to break them, but only if those third parties are in England or subject to the jurisdiction of the English court. It does not, however, make dealings with the assets to which it applies legally invalid. It is therefore said to operate in personam rather than in rem.
Freezing orders can be granted to freeze assets inside or outside England and anywhere in the world;100 in support of English proceedings or proceedings in other countries anywhere in the world;101 and in support of arbitration proceedings wherever they are taking place.102 They are not, however, available against foreign states unless a state has given written consent.103
Despite the fact that freezing and proprietary orders are available in potentially a broad range of situations, they are granted sparingly.
To obtain a freezing injunction, the applicant must show that:
- he or she has a good arguable case. This does not mean that it necessarily has more than a 50 per cent chance of success, but the case must have some substance to it;
- there are assets that the injunction would catch; and
- there is a real risk that the judgment will not be satisfied in view of what the defendant is likely to do.
The applicant must also provide an undertaking to pay for any damage that the defendant suffers as a result of the injunction having been granted when it should not have been.
There is no right to a freezing injunction; it is very much for the court to decide whether one is appropriate given all the circumstances. In addition, unlike a similar relief in other jurisdictions, a freezing injunction does not give security in the insolvency of the defendant. It is possible to obtain a freezing injunction without notifying the defendant and, indeed, most freezing injunctions are obtained in this way. However, in these circumstances, the applicant will have to satisfy an obligation of full and frank disclosure,104 whereby he or she explains to the court any arguments that the defendant might have made, had he or she been present, as to why the injunction should not have been granted. The requirements for a proprietary order are similar, save that it is sometimes said that the strength of a case to support one need not be so high.
ii Obtaining evidence
A search order is an order available to litigants in England and Wales entitling them and their representatives (usually lawyers and forensic accountants) to enter a defendant's premises and search for a copy of and remove documents or material that may be used in court proceedings.105 They are also available against a third party, even where there is no cause of action against that party and no third-party disclosure order in place.106 To obtain a search order, there must be:
- a very strong prima facie case;
- strong evidence that the defendant's actions have resulted in serious damage to the claimant's interests; and
- very clear evidence that the defendant will have on his or her premises incriminating documents or other items, and that there is a real possibility that he or she will dispose of them if he or she learns that the claimant might apply for one.107
Search orders are therefore almost always granted ex parte, and the duty of full and frank disclosure is taken very seriously.
Search orders are increasingly common in fraud litigation in England and Wales where the claimant wishes to establish what has happened to the proceeds of fraud but believes that the defendant will not comply with court orders of the Norwich Pharmacal kind or otherwise (see below) that are intended to enable him or her to track them down. Almost always, search orders entail copying of computer records held by the defendant.
Because the search order is such an extreme remedy, very careful safeguards are set out to ensure that they are not used oppressively. They will normally be executed in the presence of an independent solicitor (the supervising solicitor) who will ensure that they are not abused and resolve any issues relating to their execution.
Should a defendant fail to comply with the search order by refusing the claimant and the supervising solicitor access to his or her premises, he or she could be found in contempt of court, the punishment for which can be imprisonment or a fine.
Norwich Pharmacal orders
A Norwich Pharmacal order requires someone to disclose documents or information to the applicant, often a victim of fraud. Frequently, they are sought to identify those who have assisted in perpetrating a fraud, to explore the full nature of that fraud or, perhaps most commonly, to trace assets that are subject to proprietary claims (see above). Very commonly, when the victim of a fraud discovers that his or her money has been misappropriated, he or she will apply for a Norwich Pharmacal order against a bank (sometimes called a Bankers Trust Co v. Shapira108 order). The intention of such an order is to obtain information about where funds have gone, or who has received them or assisted in transmitting them for the purposes of no-receipt or no-existence claims.
Again, the order is not available as of right, but the court will decide on the basis of all the information available to it whether it is appropriate to grant it. It will not usually do so unless it is necessary for the order to be made to assist the applicant to trace his or her assets or money so that he or she can protect them or unless it is just and convenient for some other reason.109 To obtain such an order, it is necessary to demonstrate that the respondent is more than a 'mere witness' and this usually means showing that the respondent has been involved in the defendant's wrongdoing, if only unwittingly.110 A bank that innocently transmits funds that later turn out to be the proceeds of fraud would be therefore be involved. However, if it has taken no action in connection with the fraud, the risk is that it will be regarded as a mere witness and a Norwich Pharmacal order will not be available.111 It is also necessary to show that there are no other relevant provisions or procedures available under English law by which information could be obtained, that the respondent is likely to have relevant documents or information, and that there is a good arguable case if there is wrongdoing.
Norwich Pharmacal relief is invariably used in respect of respondents and material within the jurisdiction. Whether it can be used outside the jurisdiction has been seriously doubted.112
In civil proceedings in English courts, parties are typically ordered to disclose a list, to the court and the other parties, of all documents:
- on which they rely and the documents in their control;
- that adversely affect their own case;
- that adversely affect another party's case; and
- that support another party's case.113
This is known as standard disclosure. The court can order, with or without the agreement of the parties, that a different level of disclosure is required, and will often do so to ensure that only a proportionate disclosure exercise is undertaken.114
Of the documents disclosed in the list, the other party will have the right to inspect those documents that are not privileged. There are many grounds of privilege, but the most pertinent are as follows:
- legal advice privilege: communications by which a client seeks or receives legal advice from a lawyer are privileged;115
- litigation privilege: communications made or received by a party that have the predominant purpose of relating to the litigation are privileged;116 and
- privilege against self-incrimination: a party is not required to disclose documents that might incriminate him or her or increase his or her exposure to criminal prosecution. This will be relevant where the conduct complained of would be a crime.117
Disclosure occurs after proceedings have been commenced, so the fraudster will have had time to destroy or conceal evidence. A party can apply to the court for an order for pre-action disclosure,118 but this relies on the cooperation of the party being asked for documents. In cases where there is a risk of evidence being destroyed or concealed, a search order (see above) should be considered.
A party can apply to the court for an order that specific documents are searched for and made available for inspection by another party119 or a third party,120 and there is EU legislation governing the obtaining of evidence from other countries in the EU.121
A letter rogatory is a request from a court in one country to the judiciary of a foreign country to perform a specified act that might otherwise violate the foreign country's sovereignty if done without approval. By way of example, letters rogatory can be used to request evidence from a foreign jurisdiction. In many cases, foreign letters rogatory are sent to firms of solicitors in England who then register them in the English High Court and assist in relation to the implementation of the order. It is similarly possible for a letter rogatory to be sent to the courts of another jurisdiction as part of proceedings in England.
Fraud in specific contexts
i Banking and money laundering
There are two types of cases where English courts have assessed banks' liabilities where fraud is present: first, where a bank acts on forged payment instructions, and secondly, where a bank acting within its mandate fails to spot fraud.
Banks' liabilities for forged payment instructions
In the first scenario, a bank is usually unprotected where, for example, a fraudster forges a signature on a bill of exchange or otherwise lacks authority to draw a bill.122 The bank can, however, attempt to claim an estoppel (e.g., by showing an express representation from the customer accepting the forgery that means it would be unfair to allow the customer to contradict that representation) or adoption (see the Greenwood case below).
Banks' liabilities for fraud when acting within mandate
As a general principle, persons dealing with companies are not bound to inquire into whether the internal procedures of that company to delegate the necessary power to an employee have been followed. However, where for example a payment instruction was fraudulently made by an employee of a company without express authorisation, this general principle has been found not to apply,123 and banks have been found liable to a company for accepting instructions from unauthorised employees of that company.124
Customers' obligation not to act fraudulently
Customers owe their bank a duty to refrain from preparing or ordering individual payment orders in a way that makes fraud or forgery simple or likely: see London Joint Stock Bank Ltd v. Macmillan.125 If a customer writes a cheque in a manner that makes fraud simple or likely (e.g., by leaving blank spaces that make alterations and additions straightforward), he or she may be guilty of a breach of a duty he or she owes to the bank, and may be liable to the bank for any loss sustained by the bank as a natural and direct consequence. The customer does not, however, owe a wider duty to take reasonable precautions in the management of its business to identify forged cheques and prevent them from being presented to its bank.126
Customers also owe their bank a duty to inform it of any known forged payment order as soon as they become aware of it: see Greenwood v. Martins Bank Ltd.127 If they do not, the courts will not allow them to assert that there has been a forgery. However, a customer does not owe a broader duty to the bank in circumstances where a reasonable person would have been merely put on enquiry of fraud.128
Banks and their employees can be criminally liable under the Proceeds of Crime Act 2002 if they accept deposits of that money either knowing or suspecting that it has been generated by criminal activity129 such as criminal fraud, or if they fail to disclose suspicious transactions to nominated officers or the authorities.130 Banks and their employees can also be subject to civil or criminal liability and fines under the Money Laundering Regulations 2007 if they do not have systems and procedures in place to identify customers and suspicious transactions.131
There are various statutory provisions that protect creditors from particular transactions designed to put assets beyond their reach, which are beyond the scope of this book. In addition to these provisions, it is possible for individuals to face liability to a company for fraudulent trading and wrongful trading.
A liquidator of a company can seek a court declaration that anyone who was knowingly party to a fraudulent business must make a contribution to the company's assets.132 Fraudulent trading requires more than simply creating more debts in the company when the directors knew that the company was insolvent: actual dishonesty must be shown. It is not only directors who may be liable; banks have been found to be parties to fraudulent trading as a consequence of their employees' knowledge.133 Any recovery becomes part of the general funds available to the liquidator to distribute to the company's unsecured creditors.
Section 214 of the Insolvency Act 1986 provides for claims to be brought against directors and former directors who continued the trading of a company when they knew, or ought to have realised, that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Liability arises if, on a net basis, it is shown that the company is worse off as a result of the continuation of trading.134 Dishonesty is not required, and accordingly there is a lower burden of proof than that required to prove fraudulent trading.
There are various provisions that assist office holders administering the insolvency of a company to investigate such claims. Section 235 of the Insolvency Act 1986 requires, inter alia, former directors and employees of the company to cooperate with an office holder (without a court order being first obtained) and provide them with such information concerning the company and its promotion, formation, business, dealings, affairs or property as the office holder may at any time after the relevant date reasonably require.135 There are also further wide-reaching provisions allowing office holders to apply for private examinations of directors and secretaries of the company.136
Under the principle of separability, the invalidity or rescission of a contract does not necessarily mean that the agreement to arbitrate contained within it is invalid or unenforceable.137 Separability is a matter for the law governing the contract.138 The arbitration agreement may therefore be affected in instances where the law governing the contract does not recognise the doctrine of separability.
There are also some grounds of invalidity that may affect an agreement to arbitrate itself. These grounds relate to circumstances where the contract itself was never entered into – for example, where a signature was forged or a signatory lacked authority.139 It is also theoretically possible for an arbitration clause to be invalid because of a fraudulent inducement, or if there was a misrepresentation relating to the effect or presence of the arbitration clause itself.
Arbitration awards may be set aside when obtained through fraud.140
iv Fraud's effect on evidentiary rules and legal privilege
A judgment must be set aside because it was obtained by a party's fraud if there was conscious and deliberate dishonesty relating to, for example, evidence or actions relevant to the judgment;141 and the evidence or action was material and causative.142
Materiality should be measured by assessing the impact of a party's fraud on the evidence that supported the original decision.143
In criminal proceedings, the guilt of the defendant must be proved beyond reasonable doubt, and this applies in cases of criminal fraud.144
In civil cases in the English courts, judgment is given on the balance of probabilities. This applies irrespective of the seriousness of the allegation made.145 However, in the circumstances of an individual case, it may be inherently unlikely that fraud or reprehensible behaviour has occurred, and therefore cogent evidence will be required.146
If fraud is alleged in a civil case, it must be specifically pleaded. This means the specific allegation of fraud must be set out in the initial written submissions made by the parties before the trial.147
The ordinary rule of English law is that parties to litigation are not required to disclose legal advice received from their solicitors or communications between client and solicitor relating to the proceedings (see above). However, it has been confirmed that communications between a client and solicitor will not be privileged if the purpose of the client is to seek advice to further or facilitate crime or fraud.148 In Kuwait Airways Corporation v. Iraqi Airways Company, the Iraqi Airways Company's correspondence with its solicitors relating to a trial in which it had conspired with a key witness to deceive the English court was held not to be privileged.
i Conflict of laws149
There is a complex body of law detailing the circumstances in which the courts of England and Wales will accept jurisdiction over foreign fraudsters that can be broadly split into two categories: the traditional common law rules and the European regime, which currently includes the recast Brussels Regulation, the 2007 Lugano Convention and various other conventions with broadly similar terms. The UK left the European Union on 31 January 2020. A revised withdrawal agreement prescribed a 'transition period' until 31 December 2020. Until that date, the EU regulations just referred to remained in place.
In relation to actions commenced before 31 December 2020, the European regime takes precedence over the traditional common law rules, applying to civil and commercial matters principally where a defendant is domiciled in an EU Member State or certain other non-EU European countries. The guiding principle of the regime was that defendants should be sued in the courts of the Member State of their domicile.150 Therefore, if a fraudster is domiciled in Germany, the starting point is that they should be sued in relation to their fraud in Germany. However, the regime also provides various other grounds of special jurisdiction that allow a claimant to start proceedings against a defendant in a different jurisdiction, for example, where the parties have an exclusive jurisdiction agreement. Special jurisdiction is also granted in relation to torts to the place where the harmful event occurred or may occur;151 this would allow a European-domiciled fraudster to be sued under certain circumstances in England so long as it could be shown that the harm caused by the fraud occurred there.
The rules of English common law, the 2005 Hague Convention (which principally deals with contractual jurisdiction provisions) and (potentially) legislation entered into prior to its accession to the EU deal with the situation otherwise. Significantly, English common law rules (which cover the position absent legislation to the contrary) allow the English courts (depending on the circumstances) to take exorbitant jurisdiction over defendants, whether domiciled in the jurisdiction or not, with jurisdiction based on service of proceedings or submission to the jurisdiction by the defendant. A non-European fraudster can, therefore, with the permission of the court, be served abroad with proceedings allowing the English courts to take jurisdiction. In deciding whether to grant permission to serve proceedings abroad, the English court must decide whether it is the most appropriate forum for the resolution of the dispute, or if not, whether justice nevertheless requires that the case be tried in England.152 The court usually assesses factors such as convenience and expense, governing law and the places where the parties reside and carry on business.153 The court retains discretion to stay proceedings on several grounds even if there is effective service, including, for example, where there is a more appropriate forum,154 or where a jurisdiction agreement between the parties points to another forum.155
Foreign judgments can be enforced in England and Wales through various means, depending on the jurisdiction of the original judgment. For judgments covered by the European Enforcement Order Regulation there is a streamlined procedure for enforcing uncontested judgments of a court of an EU Member State in another Member State. Broadly, the recast Brussels Regulation provided that a claimant who has obtained a judgment from a Member State (and certain other jurisdictions) may enforce that judgment in England and Wales without issuing separate proceedings. Otherwise, the position is largely dealt with by English common law rules, which permit the enforcement of foreign judgments by means of fresh proceedings based on the judgment, which is regarded as giving rise to a new claim in its own right. There are, however, limitations on the kind of judgment that can be enforced in this way and much depends on the circumstances in which the foreign court took jurisdiction over the action, the steps that the defendant took in response to it and the circumstances in which the foreign court gave the judgment.
Certain UK statutes provide for the enforcement of foreign judgments obtained in mostly Commonwealth countries in England and Wales. If none of the above provisions apply, the common law regime applies, requiring fresh legal proceedings to be instituted with the judgment creditor suing on the foreign judgment as a debt often on a summary judgment basis.
iii Fraud as a defence to the enforcement of judgments granted abroad
Whether a fraud defence can be raised in relation to the enforcement of a foreign judgment depends on where the judgment was granted.
Where enforcement of a foreign judgment is sought under the Commonwealth-related statutes, there are explicit provisions that provide a defence against enforcement if the judgment was obtained by fraud.156 Where enforcement of foreign judgments not covered by the aforementioned regime or the European regime is sought, the common law similarly provides a defence.157
However, there are no specific grounds allowing a court to refuse to enforce a judgment covered by the Brussels Regulation or Lugano Convention on the basis that the judgment was obtained by fraud. The European regime does, however, provide defences on public policy grounds that allow for a fraud defence to be raised in certain limited circumstances.158
1 Robert Hunter is the principal of Robert Hunter Consultants, Ekaterina Pakerova is a trainee solicitor at Linklaters and Jack Walsh is a senior associate at Edmonds Marshall McMahon Ltd. The authors would like to express their gratitude to Andrew Young, Sam Waudby, Eytan Storfer and Rupert Wheeler, who assisted in the preparation of this chapter.
2 R (Virgin Media Ltd) v. Zinga  EWCA Crim 52.
3 A number of English civil wrongs are classified as 'torts' for reasons that it is not necessary to explore here. Another name for this remedy is 'common law fraud'.
4 Pasley v. Freeman  3 TR 51.
5 The need to identify a representation is critical; see The Kriti Palm  EWCA Civ 1601.
6 Edgington v. Fitzmaurice  29 Ch D 459; Al Khudairi v. Abbey Brokers Ltd  EWHC 1486.
7 Man Nützfahrzeuge AG v. Freightliner Ltd  EWHC 2347 (Comm).
8 Hallows v. Fernie (1867-68) LR 3 Ch App 467.
9 Slough Estates Plc v. Welwyn-Hatfield DC  2 PLR 50.
10 Derry v. Peek  14 App Cas 337.
11 The falsity or otherwise of the statement is judged in the light of how the defendant understood it, not how the claimant or court understood it; Akerhielm v. de Mare  AC 759 (PC).
12 The need for the defendant to know that his or her representation is untrue or to be reckless as to whether it is true or not is not affected by the decision in Ivey v. Genting (see below). It will therefore not be enough that, in the light of information available to the defendant, a reasonable person would have appreciated that what he or she said was untrue or reckless; see Glossop Cartons and Print Ltd & Ors v. Contact (Print and Packaging) Ltd & Ors  EWHC 2314 (Ch) per Judge Hodge QC at para 49.
13 AIC Ltd v. ITS Testing Services (UK) Ltd  EWHC 2122 (Comm).
14 Dadourian Group International Ltd v. Sims  EWCA Civ 169.
15 But see Leni Gas & Oil Investments Ltd and Anor v. Malta Oil PTY Ltd and Anor  EWHC 893.
16 Holmes v. Jones  4 CLR 1692.
17 Hayward v. Zurich Insurance Co Plc  UKSC 48.
18 Museprime Properties Ltd v. Adhill Properties Ltd  61 P&CR 111.
19 Diamond v. Bank of London & Montreal Ltd  QB 333.
20 Ninemia Maritime Corporation v. Trave Schiffahrtsgesellschaft mbH & Co KG (The 'Niedersachsen'  2 Lloyd's Rep 600.
21 Attwood v. Small  6 Cl&F 232.
22 Adam v. Newbigging (1886) 34 Ch D 582, at p. 149.
23 Oakes v. Turquand  LR 2 HL 325.
24 Royscot Trust v. Rogerson  2 QB 297.
25 Hornal v. Neuberger Products Ltd  1 QB 247.
26 It is, however, not necessary to show that the facts are wholly incapable of innocent explanation; see Bank of St Petersburg PJSC & Anor v. Arjhangelsky & Anor  EWCA Civ 408.
27  AC 254.
28 Venezuela Central Ry v. Kisch  LR 2 HL 99.
29 Imperial Mercantile Credit Association v. Coleman (1873) LR 6 HL 189 at 198.
30 Bray v. Ford  AC 44 at 51.
31 AIB Group (UK) plc v. Mark Redler & Co Solicitors  UKSC 58; Target Holdings Ltd v. Redferns  AC 421.
32  EWCA Civ 712.
33 But see, more recently, Auden McKenzie (Pharma Division) Ltd v. Patel  EWCA Civ 2991. The situation may be different where the principal knows that the agent is being paid by some other party, but does not know the exact amount that the agent is to receive as payment; see Medsted Associates Ltd v. Canascord and Gravity Wealth International Ltd  EWCA Civ 83.
34 Bristol & West Building Society v. Mothew  Ch 1 at 18.
35 Bray v. Ford  AC 44 at 51.
36 Ross River Ltd v. Cambridge City FC  1 All ER 1004 at 203.
37 FHR European Ventures LLP and others (Respondents) v. Cedar Capital Partners LLC (Appellant)  UKSC 45.
38  2 All ER (Comm) 271.
39 A wrong that is not actionable only because the third party has not suffered loss is sufficient; see OBG Ltd v. Allen and Others  UKHL 21.
40  UKSC 19.
41  1 AC 448.
42 Lumley v. Gye  2 E&B 216.
43 Stratford & Son Ltd v. Lindley  AC 269 HL.
44 Emerald Construction Co Ltd v. Lowthian  1 WLR 691.
45 R (Emblin) v. Revenue and Customs Commissioners  EWHC 626.
46 Lifestyle Equities v. Santa Monica Polo Club  F.S.R. 15 at –.
47 As to the relationship between procuring a breach of contract, conspiracy and other civil wrongs causing economic loss, see OBG Ltd v. Allen (supra).
48  AC 465.
49 Al-Saudi Banque v. Clarke Pixley (A Firm)  Ch 313 and Ikumene v. Leong  9 PN 181, but see Coulthard v. Neville Russell  PNLR 276.
50 Williams v. Natural Life Foods Ltd  1 WLR 830.
51 Barclays Bank plc v. Quincecare Ltd  4 All ER 363 and Lipkin Gorman v. Karpnale Ltd  2 AC 548.
52 HSBC Bank plc v. 5th Avenue Partners Ltd  EWCA Civ 296.
53 Niru Battery Manufacturing Co v. Milestone Trading Ltd (No. 1)  EWCA Civ 1446.
54 Commissioners of Customs and Excise v. Barclays Bank Plc  UKHL 28.
55 See Staffel & Co v. Grandona  UKSC 42.
56 The common law action for money had and received was, in some respects, similar. It had the advantage or requiring no mental element of unconscionability on the part of the recipient. The problem with it was that the rules of tracing at common law in support of a common law action for money had and received were very restrictive. It was therefore difficult to show that the money the claimant had parted with was the same money that the defendant had received. The tracing rules of equity were more liberal and permitted this more easily: hence, equitable remedies were, in practice, more useful to claimants. There has, however, been growing recognition of a more general common law claim for restitution for unjust enrichment that seems to escape the traditional rules of tracing at common law; see, for example, The Commissioners for Her Majesty's Revenue and Customs (Appellants) v. The Investment Trust Companies (in liquidation) (Respondents) The Commissioners for Her Majesty's Revenue and Customs (Respondents) v. The Investment Trust Companies (in liquidation) (Appellants)  UKSC 29. It is likely that actions at common law for restitution for unjust enrichment will play an increasingly important part in this area of fraud claims.
57 Ivey v. Genting Casinos  UKSC 67; Barlow Clowes v. Eurotrust  UKPC 37; Royal Brunei Airlines v. Tan  2 AC 378; Group Seven Ltd & Ors v. Notable Services LLP & Ors  EWCA Civ 614. The dishonesty of the defendant's conduct is judged in the light of what he or she actually understood and believed about the situation in which he or she acted. For this purpose, however, he or she can have blind-eye knowledge if he or she suspects that certain facts exist but consciously decides not to make any enquiry to confirm their existence; see Manifest Shipping Co Ltd v. Uni-Polaris Insurace Co Ltd  1 AC 469.
58 Abou-Rahmah v. Abacha  EWCA Civ 1492.
59 Novoship (UK) Ltd and others v. Nikitin and others  EWCA Civ 908.
60 Limitation Act 1980, Section 2.
61 Limitation Act 1980, Section 32(1)(a).
62 Paragon Finance v. DB Thakerar & Co (1999) 1 All ER 400.
63 Limitation Act, section 31(b). 'Concealment' may also occur when there is a pre-existing duty to disclose and it may be 'deliberate' if there is wilful blindness or recklessness on the defendant's part, rather than a clear plan to hide something; see Canada Square Operations Ltd v. Potter  EWCA Civ 339.
64 Limitation Act 1980, Section 21(1)(a).
65 Williams v. Central Bank of Nigeria  UKSC 10.
66 Limitation Act, Section 38.
67 See Sinclair Investments (UK) Ltd v. Versailles Trade Finance Ltd (In Administration)  EWCA Civ 347 and in the High Court at  EWHC 1614 (Ch), where this distinction was drawn with particular reference to limitation periods.
68 Fraud Act 2006, Sections 1, 2 and 3.
69  UKSC 67; see also DPP v. Patterson  1 Cr.App.R. 28, DC (per Sir Brian Leveson P).
70 The second limb was set out in R v. Ghosh  Q.B. 1053.
71 The Court of Appeal has recently followed Ivey v. Genting Casinos (see above) in R v. Barton (David)  EWCA Crim 575. The jury must consider all the facts that were known to the defendant before deciding whether she acted dishonestly by the standards of a reasonable person. Permission for an appeal to the Supreme Court was refused, and so the test in Ivey v. Genting Casinos remains. The test was more recently followed by the Court of Appeal in Natwest Markets Plc v Bilta (UK) Ltd (In Liquidation)  EWCA Civ 680.
72 Fraud Act 2006, Section 4.
73 Forgery and Counterfeiting Act 1981, Sections 1–4.
74 Forgery and Counterfeiting Act, Section 6.
75 Companies Act 2006, Section 993.
76 Theft Act 1968, Section 1.
77 Bribery Act 2010, Sections 1, 3–5.
78 Bribery Act 2010, Section 2.
79 Bribery Act 2010, Section 7.
80 See introduction to Criminal Finances Act 2017.
81 See Criminal Finances Act 2017, Sections 45–47.
82 Proceeds of Crime Act 2002, Sections 40–41.
83 Proceeds of Crime Act 2002, Sections 6–13B.
84 Proceeds of Crime Act 2002, Sections 240–245.
85 Proceeds of Crime Act 2002, Sections 300–310.
86 Criminal Finances Act 2017, Sections 1–3.
87 Powers of the Criminal Courts (Sentencing) Act 200, Sections 130–133.
88 R v. Hackett  10 Cr App R (S) 388.
89 R v. Graves  14 Cr App R (S) 790.
90 R v. Stapylton  EWCA Crim 728.
91 R v. Donovan  3 Cr App R (S) 192.
92 R v. Flinton  1 Cr App R (S) 96.
93 Proceeds of Crime Act 2002, Section 13.
94 Sentencing Act 2000, Section 149, read together with the Theft Act 1968, Section 24(4).
95 See R v. Ferguson  54 Cr App R 410; R v. Calcutt and Varty  7 Cr App R (S) 385.
96 Prosecution of Offences Act 1985, Section 6.
97  EWCA Crim 741. See also R (Virgin Media) v. Zinga, referred to at footnote 2.
98 See the line of cases including Mote v. Secretary of State for Work and Pensions  EWCA Civ 1324.
99 Civil Procedure Rules Part 25 and Practice Direction 25A.
100 Derby & Co Ltd and Others v. Weldon and Others (No. 6)  3 All ER 263.
101 Civil Jurisdiction and Judgments Act 1982, Section 25.
102 Kastner v. Jason  EWCA Civ 1599.
103 State Immunity Act 1978, Section 13(2)(a).
104 Siporex Trade SA v. Comdel Commodities Ltd  2 Lloyd's Rep 428.
105 Anton Piller KG v. Manufacturing Processes Ltd  Ch 55.
106 Abela v. Fakik  EWHC 269.
108  1 WLR 1274.
109 See Cpod SA v. de Hollanda J  EWHC 1247 (Ch) at para 44.
110 Norwich Pharmcal Co v. Customs and Excise Commissioners  AC 133.
111 The boundaries of the mere witness rule have been the subject of some debate. The balance of authority is currently to the effect that the respondent must have been involved in the wrongdoing, but that his or her involvement can be innocent (see above) and need not have helped the wrongdoing to happen; see, for example, The Right Honourable the Countess of Caledon v. The Commissioner of Police for the Metropolis  EWHC 2214 (QB).
112 AB Bank v. Abu Dhabi Commercial Bank PJSC  EWHC 2082 (Comm).
113 Civil Procedure, Rules 31.6. A company can be ordered to request employees and ex employees to deliver up personal devices that potentially contain documents of this kind to the company's IT consultants so that disclosure may be given; see Phones 4 U Ltd v. EE Ltd  EWCA Civ 116.
114 Civil Procedure Rules 31.5.
115 R (Prudential Plc) v. Special Commissioner of Income Tax  UKSC 1.
116 Wheeler v. Le Marchant (1881) 17 Ch D 675.
117 Lamb v. Munster [1882–83] LR 10 QBD 110, but see Fraud Act 2006, Section 13, for an important exception to this rule.
118 Civil Procedure, Rules 31.16.
119 Civil Procedure, Rules 31.12.
120 Civil Procedure, Rules 31.17.
121 Council Regulation (EC) No. 1206/2001.
122 Bills of Exchange Act 1882, Section 24; Paget's Law of Banking, 13th edition, pp. 485, 508.
123 Ruben v. Great Fingall Consolidated Ltd  AC 549.
124 This is the so-called 'Quincecare' duty; see Barclays Bank plc v. Quincecare Ltd  3 All ER 363. For recent cases on the uncertain scope and application of the duty see Hamblin v. World First Ltd  EWHC 2383 (Comm) and Stanford International Bank Ltd (In Liquidation) v. HSBC Bank Plc  EWHC 2232 (Ch).
125  AC 777.
126 Tai Hing Cotton Mill v. Liu Chong Hing Bank Ltd  AC 80, PC.
127  AC 51.
128 Patel v. Standard Chartered Bank  Lloyd's Rep Bank 229.
129 Proceeds of Crime Act 2002, Sections 327–329.
130 Proceeds of Crime Act 2002, Sections 330–332.
131 Money Laundering Regulations 2007/2157, Regulations 42 and 45.
132 Insolvency Act 1986, Section 213(2).
133 Bank of India v. Morris  EWCA Civ 693.
134 Re Marini Ltd (the liquidator of Marini Ltd v. Dickenson and Others)  EWHC 334. The pandemic resulted in a succession of provisions that stipulated that the Court should not state that any person was responsible for the worsening of a company's financial position between 1 March 2020 and 30 June 2021; see, for example, the Corporate Insolvency and Governance Act 2020 (Coronavirus) Suspension of Liability for Wrongful Trading and Extension of the Relevant Period regulations (subsequently extended).
135 Insolvency Act 1986, Section 235(2).
136 Insolvency Act 1986, Section 236.
137 Premium Nafta Products Ltd v. Fili Shipping Co Ltd  UKHL 40.
138 Astrazeneca UK Ltd v. Albemarie International  EWHC 1028.
139 Nigel Peter Albon v. Naza Motor Trading SDN BHD  EWHC 665 (Ch).
140 Celtic Bioenergy Ltd v. Knowles Ltd  EWHC 472; Section 68(2)(g) Arbitration Act 1996.
141 Ampthill Peerage case  AC 547.
142 Sphere Drake Insurance plc and another v. Orion Insurance Company plc  EWHC 286 (Comm).
143 Kuwait Airways Corporation v. Iraqi Airways Corporation (Perjury II)  EWHC 2524 (Comm).
144 Serious Organised Crime Agency v. Gale  1 WLR 2760.
145 Hornal v. Neuberger Products Ltd  1 QB 247.
146 H (Minors), Re  AC 563.
147 D & G Cars Ltd v. Essex Police Authority  EWCA Civ 514.
148 Kuwait Airways Corporation v. Iraqi Airways Company  EWCA Civ 286.
149 The rules relating to choice of law in connection with fraud claims cannot be summarised usefully within the space available here.
150 Article 2 Brussels Regulation.
151 Article 5(3) Brussels Regulation.
152 This doctrine is known as forum non conveniens.
153 Spiliada Maritime Corp v. Cansulex Ltd (The Spiliada)  AC 460.
155 The Eleftheria  1 Lloyd's Rep 237.
156 See, for example, Administration of Justice Act 1920, Section 9(2)(d) and Foreign Judgments (Reciprocal Enforcement) Act 1933, Section 4(1)(a)(iv).
157 Jet Holdings Inc v. Patel  1 QB 335 (CA).
158 Interdesco SA v. Nullifire Ltd  1 Lloyd's Rep. 180.