English Supreme Court rules that there is no reasonable diligence requirement barring a fresh action to set aside a judgment obtained by fraud.
Oliver E. Browne and Alex Cox
In Takhar v Gracefield Developments Limited and others  UKSC 13, the English Supreme Court considered whether a party applying to set aside an earlier judgment on the basis of fraud is required to show that it could not have discovered the fraud by the exercise of reasonable diligence. The court unanimously ruled that there is no reasonable diligence requirement barring fresh actions based on fraud, and allowed the appeal.
The appellant, Mrs. Takhar, acquired a number of properties in Coventry as part of a separation from her husband in 1999. She subsequently suffered personal and financial problems, largely as a result of the poor condition of the properties. In 2004, she became reacquainted with her cousin, Mrs. Krishan, whom she had not seen for many years. Mrs. Krishan and her husband, Dr. Krishan, agreed to provide financial help and practical assistance to Mrs. Takhar.
In November 2005, Mrs. Takhar and the Krishans agreed that legal title to the properties would be transferred to Gracefield Developments Limited (Gracefield), a newly formed company. Mrs. Takhar and the Krishans were the directors and shareholders of Gracefield.
Mrs. Takhar claims that the agreement was for her to remain the beneficial owner of the properties, which were to be renovated and then let. The Krishans claim that Gracefield was set up as a joint venture, and that the properties were to be sold after they had been renovated.
In October 2008, Mrs. Takhar issued proceedings claiming that the properties had been transferred to Gracefield as a result of undue influence or other unconscionable conduct on the part of the Krishans. Judge Purle QC rejected her claim in July 2018 ( EWHC 2872 Ch).
A significant item of evidence at the trial was a scanned copy of a written profit share agreement dated 1 April 2006, which had apparently been signed by Mrs. Takhar. This document supported the Krishans’ case. At trial, Mrs. Takhar was unable to explain how her signature came to be on the document. In the absence of an alternative explanation, the judge accepted the Krishans’ evidence that Mrs. Takhar had executed the agreement, and relied heavily on this evidence in reaching his judgment.
As the court had refused leave to obtain evidence from a handwriting expert prior to the trial, following the judgment Mrs. Takhar engaged an expert to analyse the scanned document. The expert concluded that the signature had been transposed from an earlier document, and identified a number of other potentially suspect documents.
Mrs. Takhar subsequently applied to have Judge Purle’s judgment set aside on the grounds that it had been obtained by fraud. Gracefield and the Krishans contested the application, claiming that it was an abuse of process because the documents on which the expert’s report was based were available to Mrs. Takhar before the trial, and so the alleged fraud could have been discovered with reasonable diligence.
This matter was tried as a preliminary issue. The High Court rejected the argument that the application was an abuse of process, holding that there is no diligence requirement for a party seeking to have a judgment set aside for fraud. The Court of Appeal disagreed and allowed the respondents’ appeal. Mrs. Takhar then appealed to the Supreme Court.
The Supreme Court unanimously allowed Mrs. Takhar’s appeal. All of the justices agreed that the English cases on which the Court of Appeal’s decision was based did not provide a reliable guide on the issue in question. To the extent those cases did impose an obligation to act with reasonable diligence, the Supreme Court ruled that they should not be followed. Instead, the justices cited with approval a number of Australian and Canadian judgments, particularly the High Court of Australia’s statement in Gould v Vaggelas  HCA 68 that “a knave does not escape liability because he is dealing with a fool”.
Lord Kerr and Lord Sumption (with whom Lord Hodge, Lord Lloyd-Jones, and Lord Kitchin agreed) based their ruling on the following considerations:
- The “classic forms” of the law of res judicata are cause of action estoppel, which prevents a party bringing new proceedings based on the same cause of action, and issue estoppel, which prevents a party re-litigating an issue which has been determined by an earlier judgment. An application to set aside a judgment for fraud is a fresh cause of action that is independent of the cause of action asserted previously. Accordingly, Mrs. Takhar’s application was not barred by the doctrine of cause of action estoppel. There could also be no question of issue estoppel, because “the basis of the action is that the decision of the issue in the earlier proceedings is vitiated by fraud and cannot bind the parties”.
- The rule that a party is precluded from raising in subsequent proceedings matters that were not but could and should have been raised in earlier proceedings does not flow from the law of res judicata, but from the court’s powers to restrain abuses of its process. While res judicata is a rule of substantive law, abuse of process is a concept relating to the court’s procedural powers. Given this procedural character, the court has a “degree of flexibility” in determining whether an application to re-open litigation is abusive.
- The law does not expect people to arrange their affairs on the basis that others may commit fraud. A person is entitled to assume honesty on behalf of others, and a person who obtains a judgment through fraud “has perpetuated a deception not only on their opponent and the court but on the rule of law”. As a result, the majority found the policy arguments for permitting a litigant to set aside a judgment obtained by fraud to be “overwhelming”. Lord Sumption noted the high standard of proof for fraud, but held “once it is satisfied, there are no degrees of fraud which can affect the right to have the judgment set aside”.
- Having reached the general conclusion that the law does not impose any requirement of reasonable diligence on a party seeking to set aside a judgment in circumstances in which (i) that judgment has been obtained by fraud and (ii) no allegation of fraud had been raised in the earlier proceedings, Lord Kerr and Lord Sumption noted, but expressed no final view on, two qualifications to this principle. The first was where fraud had been raised at the original trial, and the application to set aside the judgment is based on new evidence as to the existence of the fraud. The second relates to the possibility that a party had taken a deliberate decision not to investigate a suspected fraud in advance of the original trial.
Lord Briggs agreed that cause of action and issue estoppel did not arise, and that a right to set aside a judgment obtained by fraud is not conditional on any requirement for a party to have exercised reasonable diligence. However, he noted the tension between “two important and long-established principles of public policy … that fraud unravels all [and] that there must come an end to litigation”. He was wary of establishing a “bright-line boundary between types of case where one principle or the other should clearly prevail”.
Instead, Lord Briggs argued for a more flexible approach in which a court should apply a fact-intensive examination of the circumstances of each case, to determine whether a lack of diligence in the earlier proceedings does in fact render a future application to set aside a judgment an abuse of process. This examination would consider a wide range of factors, but in particular, the gravity of the fraud and the extent of the shortfall from the exercise of reasonable diligence. Weighing these factors on the facts of this case, Lord Briggs concluded that Mrs. Takhar’s application “comes nowhere near being categorised as an abuse”, and agreed that her appeal should be allowed.
Lady Arden also agreed that there is no reasonable diligence rule, as it would impose a penalty “wholly disproportionate to the lack of diligence”. While she noted that a judgment obtained by fraud should usually be set aside, she considered that there are some exceptions to the principle that “fraud unravels all”. These include cases in which both parties have colluded to deceive the court, or if fraud is not material to the outcome of a case.
Like Lord Briggs, Lady Arden referred to the importance of finality in judgments, and was mindful that litigation resulting in rescission actions may involve not just one but three actions in all (the original action, the application for judgment to be set aside, and a subsequent re-trial of the underlying claim), with consequent impact on the time and costs of the litigation. She suggested that the Civil Procedure Rules Committee should consider whether further safeguards are needed to prevent vexatious applications to set aside judgments on the basis of alleged fraud.
The judgment clearly confirms that there is no rule requiring an applicant seeking to set aside a judgment based on fraud to show that it exercised reasonable diligence in the original proceedings. The Supreme Court also reiterated the distinction between the substantive law of res judicata, and the court’s procedural powers to prevent abuses of process. When the court is exercising those procedural powers, this ruling suggests that the principle of “fraud unravels all” will almost always prevail, notwithstanding the importance of finality in litigation. It remains to be seen whether the ruling leads to an increase in applications to set aside judgments for fraud, and, if it does, whether the courts will be inclined to move away from a bright-line rule towards the more flexible approach proposed by Lord Briggs.
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