PIBULJ Articles

Tainted by fraud arguments

By Tim Kevan, Duncan McNair and Aidan Ellis

Introduction

It seems to many odd that a party to a contract might have the whole of a claim under that contract dismissed for breach of a term of the contract; often a misrepresentation about the risk to underwriters at the proposal of the policy, or falsification or exaggeration within the process of a claim itself, even if the claim is essentially ‘genuine’. This position, which comes from the operation of the doctrine of utmost good faith contrasts with the general position of claims in tort which on the whole result in a Claimant being compensated for that part of his claim which is genuine even if he has exaggerated or even made up another part of it. It is correct to say that in a claim against a tortfeasor there is no contract and no such duty of utmost good faith. The injured party owes no relevant duty of care to the tortfeasor; the injured party’s claim will thus be governed by the rules of court. For the most part, the penalty tends only to be in costs, if at all. This general position is now being challenged in a growing number of cases.

Tainted by fraud

Defendants may try and resurrect the old Privy Council authority of Hip Foong Hong v H Neotia and Company [1918] AC 889 in which Lord Buckmaster comments on the issue of tainting in the following way:

A Judgment that is tainted and effected by fraudulent conduct is tainted throughout and the whole must fail …

However, that case dealt with the opium trade and was an appeal from a decision in the Shanghai Supreme Court and is arguments along these lines is probably unlikely to find favour at first instance in English law by itself.

Defendants may also try to draw an analogy not only with the insurance line of cases but also with cases in which the courts as a matter of public policy have refused to enforce contracts tainted by illegality (e.g. an illegal purpose). An example is that of Birkett v Acorn Business Machines Ltd [1999] 2 All ER (Comm) 429 in which the Court of Appeal held that the court would not assist the enforcement of a contract tainted by illegality, even where illegality was not pleaded by either of the parties.

Abuse of process

Another potential argument is that the claim should be struck out under CPR 3.4(2)(b) on the basis that arguing that the statement of case is an abuse of process and also limb (c) referring back to CPR 1.1 (the overriding objective) and 1.3, which requires the parties to help the Court to further the overriding objective. In support, a Defendant may also cite Arrow Nominees Inc v Blackledge [2000] 2 BCLC 709 and advance two arguments:

1. It is impossible to have a fair trial of the issues and/or;

b. The Claimant’s conduct amounts to an abuse of the Court’s process; paragraphs 54 & 55 of Arrow Nominees state:

... the object of the Rules is to secure the fair Trial of the accident in accordance with the due process of the Court and that accordingly a party is not to be deprived of its rights to a proper Trial as a penalty for disobedience of those Rules, even if such disobedience amounts to contempt for or defiance of the Court……….. But, where a litigants’ conduct puts the fairness of the Trial in jeopardy where it is such that any Judgment in favour of the litigant would have to be regarded as unsafe, or amounts to such abuse of the process of this Court as to render further Proceedings unsatisfactory, and to prevent the Court from doing justice, the Court is entitled, indeed I would hold bound, to refuse that litigant to take part in the Proceedings and (where appropriate), to determine the Proceedings against him.

The Court may consider, in such cases, two issues in particular:

a. To what extent a Claimant has failed to help the Court to further the overriding objective; and

b. Whether to exercise the discretion to strike out statements of case under CPR 3.4.

Claimants may argue that the appropriate penalty (if any at all) is in costs if the Court accepts that part of the claim is false or exaggerated - see Painting v University of Oxford [2005] EWCA Civ.161 also Molloy v Shell UK Limited [2000] PIQR 56. The Defendants may argue that this might encourage people to use the Court’s process to ‘try it on’ and then still to succeed in part of a claim even if another part of it is presented fraudulently; as Ward LJ put it in Arrow Nominees:

… the attempted perversion of justice is the very antithesis of the parties coming before the Court on an equal footing

An interesting comment from the Court of Appeal on this issue was made by Laws LJ in the case of Molloy v Shell UK Ltd [2001] EWCA Civ 1272 in the Court held that in a claim for damages for personal injury arising out of an accident at work, where a Claimant had deceived the court by exaggerating the extent of those injuries, the judge's discretion had to be exercised so as to award the Defendant its costs in full. However, Laws LJ went further when he stated:

For my part I entertain considerable qualms as to whether, faced with manipulation of the civil justice system on so grand a scale, the court should, once it knows the facts entertain the case at all save to make the dishonest Claimant pay the Defendant’s costs.

The Claimant's position

The Claimant will argue that a conduct point should not influence the Court’s decision in the award of damages and that an overstatement or fabrication of a small part of an otherwise genuine claim, should only result in that part being struck out. The result of the strike out may be that the Defendant succeeds on that issue in costs, though not necessarily. Indeed a Claimant may be entirely innocent in the fraud and in those circumstances his argument becomes even stronger. Further, there may be human rights arguments such as the right to a fair trial if the tainted with fraud argument were to succeed. There may also be more imaginative arguments which may develop. A good example of litigation in which imaginative human rights arguments went all the way to the House of Lords is that of Wilson v Secretary of State for Trade & Industry [2003] 3 WLR 568.

Credibility

Ultimately, this whole issue may boil down to one of the Claimant’s credibility. If one part of a claim is fraudulent, it is likely to affect the credibility of the rest of the Claimant’s claim. Faced with a fraudulent part of a claim the courts can either dismiss just that part or they can knock down the rest of the claim. The easiest way is through finding that the Claimant’s credibility was so affected that the rest of his claim was not believable. Alternatively, a court may decide to strike out the claim as an abuse of the process of the court. Beyond this, it remains to be seen whether the courts decide to extend the effect of tainting further, by analogy either with insurance contracts, illegal contracts or old Privy Council authority.