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Dishonesty never pays!

Dishonesty never pays!  Setting aside a judgment on the basis that it had been arrived at by fraud and the subsequent costs consequences of dishonesty.

The case of Balber Kaur Takhar v. Gracefield Developments Limited (1), Kewal Singh Krishan (2) and Parkash Kaur Krishan (3) [2020] EWHC 3025 (Ch) provides a useful reminder of the reasoning for the granting of indemnity costs awards and orders for costs thrown away.  Earlier consideration had been made as to whether it was reasonable to set aside a judgment, even if dishonesty could have been discovered by reasonable diligence during the original trial.

It is necessary to “briefly” set out the background of this matter.  The First Defendant is a company, incorporated in 2005, the Second and Third Defendants, and initially the Claimant, were directors and shareholders of the First Defendant company. In the early action (claim 8BM30468), the Claimant alleged she had been the registered proprietor of some commercial properties that had been transferred to the First Defendant on trust for her, on the basis that the Defendants would, via the First Defendant, manage and renovate them, with reimbursement for the costs of such to be made out of the rentals of the properties.  The Claimant pleaded that the Defendants had procured the transfer of the properties to the First Defendant by undue influence or that they represented unconscionable bargains.  The Claimant alleged that she had at some point in time been removed as a director of the First Defendant company and her shares transferred to the Second and Third Defendants without her knowledge. The Defendants said that the properties had been transferred to the First Defendant legally and beneficially pursuant to an agreement made with the Claimant.  They denied any wrongdoing.

 

Within their Defence, (and in pre-action correspondence) the Defendants referred to a document between themselves and the Claimant.  The agreement, drafted by a member of a firm of accountants, was headed Profit Sharing Agreement.

A copied document seemingly bearing the Claimant’s signature (as well as a separate copy bearing the Defendants’ signatures) was produced by the Defendants only after the action had been commenced.  No original document was ever found.  The Claimant denied signing the Profit-Sharing Agreement.  Permission to adduce handwriting evidence was refused because the application was only made shortly before the trial.  Without expert evidence, forgery could not be proven.  On 28th July 2010 judgment in the claim was given, with the Claimant’s claim dismissed.

The Claimant instructed new solicitors and a handwriting expert was instructed to provide a report.  The expert report concluded that evidence showed that the Claimant’s signature had been forged, having been transposed from other correspondence. The Claimant sought to set aside the original judgment (order of 28th July 2010, claim – B30BM297).

The Defence alleged an abuse of process, on the basis that the Profit-Sharing Agreement had been made available in 2009, well before the trial.  This issue was determined by way of a preliminary issue ([2015] EWHC 1276 (Ch)).  Newey J held therein, that there was no abuse of process, and no requirement that a person seeking to set aside a judgment procured by fraud demonstrate that the fraud was not discoverable by the exercise of reasonable diligence.  On appeal, [2017] EWCA Civ 147, Patten LJ, regarded himself as bound to apply a test of reasonable discoverability.  A subsequent appeal followed in the Supreme Court, [2019] UKSC 13; [2019] 2 WLR 984.  A unanimous decision was reached that a litigant can apply to set aside a judgment procured by fraud even if the fraud was discoverable by reasonable diligence during the trial.

At the hearing of the Claimant’s claim to set aside the judgment obtained against her, Mr Steven Gasztowicz QC, determined that the signature on the Profit-Sharing Agreement document was forged, however, there was inconclusive evidence as to whether the Claimant’s signature had been forged on other disputed documents.

The Defendants position was that even if the Claimant’s signature on the Profit-Sharing Agreement was forged, that they were not responsible, claiming that they did not know who had carried out the forgery, if indeed it was.  Suggestion was made that someone at the accountant firm who had drafted the agreement may have had motive or opportunity to do so.  Having considered all the evidence, it was decided that, on the balance of probabilities, not only did the Defendants have strong motive, and opportunity, to forge the document, but they did so.  The Defendants were responsible for the forgery of the signed Profit-Sharing Agreement.  This amounted to “conscious and deliberate dishonesty” as per Aikens LJ (paragraph 106) Royal Bank of Scotland v. Highland Financial Partners LP [2013] EWCA Civ 328.

When considering whether the correct test for materiality had been met, as a condition for setting aside the judgment on the grounds of fraud, it was found that had the original Judge known that the Claimant’s signature on the copy had been forged, for which the Defendants were responsible, that would have “entirely changed the way in which the first court approached and came to its decision” and was also an “operative cause of the court’s decision to give judgment in the way that it did” (as per the words of Aikens J in RBS).

The original judgment and order of 28th July 2020 (for claim 8BM30468) was set aside on 23rd October 2020 and an order made that the Defendants pay 90% of the Claimant’s costs of the action.

The matter (claim B30BM297) came back before the court on 11th November 2020 to determine outstanding issues in relation to costs.

Indemnity Costs – An award of indemnity costs on the indemnity basis is significant as the principle of proportionality is disapplied (CPR 44.3(3)).

Consideration was made to Excelsior Commercial Holdings Limited v. Salisbury Hamer Aspden & Johnson [2002] EWCA Civ 879, and Esure Services Limited v. Quarcoo [2009] EWCA Civ 595.  The Defendants, referring to Esure, opposed the application for indemnity costs on the basis that they did not bring the fraud claim but were the Defendants to it, additionally that the Claimant had not been successful in proving that all the documents referred to had been forged.

In Excelsior, the Court of Appeal held that the making of a costs order on the indemnity basis would be appropriate where the conduct of the parties of the particular circumstances of the case are such as to take the situation “out of the norm” in a way that justifies an order for indemnity costs.  In Esure, an appeal from a decision where dishonesty had been found but indemnity costs refused on the basis that the case was now “outside the norm”, the appeal court referred to the language used in Excelsior.  It was recognized that the decision in Excelsior was made in the context of previous decisions, where under the CPR indemnity costs should only be ordered where there was some sort of lack of probity or conduct deserving of moral condemnation on the part of the paying party; that the word “norm” was not intended to reflect whether what occurred was something that happened often, so that in one sense it might be seen as “normal”, but was intended to reflect “something outside the ordinary and reasonable conduct of proceedings”; and that to bring a dishonest claim and to support a claim by dishonesty cannot be said to be the ordinary and reasonable conduct of proceedings”.  Referencing CPR 44.3 and CPR 44.4 as a starting point, it was the decision in the appeal that the rules entitle a court to take account of the conduct of the parties whether that conduct occurs on many occasions or whether it is rare.  The appeal was allowed and indemnity costs awarded.

Consideration was also made to the appeal in Whaleys Bradford Limited v. Bennett (1) and Cubitt (2) [2017] EWCA Civ 2143.  In that appeal regard was given to the fact that when giving judgment in the court below, the Judge did not use the phrase “out of the norm” but rather said that he did not regard the case as “exceptional”, on the basis that that the paying parties’ conduct was not exceptional “because many debtors try to avoid paying that which is due” and that he had “seen more sophisticated attempts to avoid judgment”. Newey LJ affirmed that the Judge could not properly conclude that the circumstances did not take the case “out of the norm in a way in which justifies an order for indemnity costs” on the basis that “many debtors” behave in the same manner.  The indemnity basis was appropriate in this case.  David Richards LJ was in agreement, stating his view that “it was unfortunate that the judge used the word “exceptional” to describe the circumstances that may justify an order for indemnity costs.  The formulation repeatedly used by this court is “out of the norm””.  “Whatever the precise linguistic analysis, “exceptional” is apt as a matter of ordinary usage to suggest a stricter test and is best avoided.  Its use in this case gave rise to an arguable ground of appeal, and while I am satisfied, particularly in the light of submissions made to him, that the judge was not applying a stricter test, for the future it would be preferable if judges expressly used the test of “out of the norm” established by this court”.

Having considered the cases cited above, in the index matter it was determined that there was nothing to confine the principles to the conduct of Claimants, as opposed to Defendants.  If the conduct of a party, on whichever side of a case, is found to take the situation “out of the norm” an order for indemnity costs can be considered appropriate.  The conduct of the Defendants took the case well out of the norm and justified an order on the indemnity basis.

Repayment: In the order dated 28th July 2020, later set aside, the Claimant had been ordered to pay the Defendants’ costs.  The Defendants disputed that the costs paid by the Claimant should be repaid to her, as there was no jurisdiction to order this (and also contended it unnecessary and inappropriate to do so).  This was rejected, it was determined that, to order the repayment of those costs was simply an order being made consequential on, and arising out of, the setting aside of the original order.

With the costs order having been set aside, the parties should fall to be restored to the position they were in had the order not been made.  In his judgment, Mr Gasztowicz QC, affirmed that he was able to make orders that are consequential to the setting aside of the order.  The Defendants were ordered to return to the Claimant any money paid by the Claimant to the Defendants in respect of the earlier action (8BM30468).

Trial Costs thrown away (8BM30468): When considering whether there should be an order for the payment by the Defendants of the Claimant’s trial costs of the earlier action, it was determined that the costs thrown away by the first trial having been ineffective in determining the dispute, due to the fraud of the Defendants in presenting forged evidence, had as a result, been thrown away by reason of the Defendants conduct.

Mr Gasztowicz QC, referred to this being an order which resulted from the setting aside of the judgment, as a result of it, the costs of the first trial had been wasted.  He was satisfied that the court had the jurisdiction to make the order under section 51 of the Senior Courts Act 1981.  The Defendants were ordered to pay the costs of the trial in that action wasted by reason of the setting aside of the judgment.

Key Points

  • A reminder of when and why indemnity costs are an appropriate award – CPR. 44.3 and CPR 44.4 being the starting point.
  • Conduct is not limited to that of the Claimant
  • Should the conduct of either party take a case “out of the norm”, an order for indemnity costs can be considered appropriate

And of course, please always remember to ask for your costs!

Please contact A & M Bacon Limited for advice upon any costs related issue.

Kellie Barnes – Costs Lawyer

 

02.02.21

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