Graeme Johnston / 20 March 2023
The question sometimes arises whether the ordinary law in an area should apply where someone is said to have done something fraudulent, illegal or otherwise questionable.
The general idea that ‘fraud unravels all’ is often mentioned in English law, but its application varies with context.
This post gathers together materials on that topic from various English civil law contexts and puts them into a succinct list. Some caveats:
- I put it together on a wet Sunday afternoon and evening out of curiosity and a wish to update my knowledge in this area. I have attempted no more than to make a short statement about the law in each context and to provide a suggested entry point for finding out more. The suggested entry points are typically decisions of a high appellate court, but sometimes they are lower in the hierarchy where I found that a judge had helpfully pulled together some legal threads on a topic not yet addressed on appeal.
- Obviously, do not rely on this list for anything that matters. Some of the underlying law is very complex and nuanced. This list is no more than an incomplete series of pointers: a sketch map of parts of the forest. You’ll need to look at the trees and other woodland life for yourself.
- Scope: this list just addresses some aspects of English civil law: not public, tax or criminal law and not the law of any other part of the UK. I have entirely omitted consideration of the law relating to real estate.
- Illegality (general rule). The English courts’ modern approach to considering whether a civil claim (e.g. under a contract, unjust enrichment or inheritance law) is barred by reason of some illegal circumstance is to look, first, at the purpose of the prohibition which was transgressed, secondly at any other relevant public policy and thirdly at overall proportionality. Suggested introduction: Henderson v Dorset Healthcare  UKSC 43
- Confidentiality (general exception). Confidentiality obligations do not apply where the public interest in disclosure outweighs that in confidentiality, for instance on disclosure of fraud or other iniquity. Suggested introduction: Saab v Dangate  EWHC 1558 (Comm)
- Confidentiality (lawyers). The rule just mentioned also applies to lawyers’ confidentiality obligations – these cannot prevent disclosure of fraud or other iniquity even if the information would otherwise be privileged. That said, a lawyer whose client has informed them of their guilt and of an intention to lie in court must withdraw from the case rather than disclosing the lie. Iniquity here extends to things which may not be crimes: for example, there was iniquity where a director of a company deliberately attempted to exploit a corporate opportunity by implementing a secret plan to put the company into administration and acquire its principal asset. The burden is on the disclosing lawyer to show a strong prima facie case of fraud or other iniquity, but ‘strong prima facie case’ is a lower standard than balance of probabilities. Suggested introduction: Barrowfen v Patel  EWHC 2536 (Ch), a first instance decision considering the matter in detail. Some aspects are also addressed at the end or the Saab judgment in 2. above.
- Misuse of private information. There may also be a similar iniquity rule in claims based on the modern tort of misuse of private information, though the details of this have not been fully resolved. Suggested introduction: Brake v Guy  EWHC 670 (Ch), though note that this is only a first instance decision on a preliminary issue in which a deputy judge held that the claimant had failed to show that such a defence could not succeed as a matter of law.
- Exclusion of liability. You cannot exclude or limit liability for your own fraud or dishonesty. Suggested introduction: HIH v Chase Manhattan  UKHL 6
- Settlement discussions. Although the content of discussions held on a ‘without prejudice’ basis to settle a dispute is generally inadmissible, this is not so if (1) the discussions were not a genuine effort to settle a dispute (i.e. a species of sham), or (2) its suppression would conceal perjury, blackmail or other ‘unambiguous impropriety.’ Suggested introduction: Motorola v Hytera  EWCA Civ 11 – emphasising the ‘unambiguous’ point, in an effort to avoid satellite litigation about settlement discussions.
- Shams. Documents intended to give a false impression to third parties or a court as to rights and obligations are known in English law as ‘shams’ and will be denied effect if the common, shamming intention of the parties (or, at least, reckless indifference) can be proved. Suggested introduction: JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev  EWHC 2426 (Ch)
- Limitation period. Fraud or deliberate concealment of matters relevant to a claim can postpone the running of a limitation period, though not indefinitely. Suggested introduction: Gemalto v Infineon  EWCA Civ 782
- Judgment (general rule). A judgment obtained by material fraud can be set aside even if the fraud could have been discovered with reasonable diligence prior to judgment. Suggested introduction: Takhar v Gracefield Developments  UKSC 13
- Judgment (matrimonial cases). The scope for setting aside judgments for fraud is narrower in the matrimonial financial relief context. Suggested introduction: Goddard-Watts v Goddard-Watts  EWCA Civ 115
- Settlement agreement (effectiveness). A settlement of a fraudulent claim may in some circumstances be set aside even if the paying party had some suspicion of fraud at the time of settlement, but received further material later. Suggested introduction: Hayward v Zurich Insurance  UKSC 48
- Settlement agreement (interpretation). The question of whether a fraud claim has been settled is one of interpretation of the words used, in context. Fraud claims do not need to be mentioned expressly in order to be settled. That said, it is clearly wise to do so in order to put the question beyond doubt. Suggested introduction: Maranello Rosso v Lohomij  EWCA Civ 1667
- Dismissing litigation for abuse of process. Litigation can sometimes be dismissed if the claim can be shown to be dishonest without the need for a trial, though in practice this is often hard to do. Suggested introduction: Lies, damned lies: Abuse of process and the dishonest litigant, 2012 speech by Lord Reed (now President of the UK Supreme Court)
- Fraudulent insurance claims. There is a distinction between fraudulent insurance claims in which the entire claim is fabricated or its amount is exaggerated (which lead to the whole claim failing under Part 4 of the Insurance Act 2015) and ‘collateral lies’ which are not in the end material to the claim. Although the claim will not fail because of such lies, there may still be some adverse legal consequences for the insured. Suggested introduction: Versloot Dredging v HDI Gerling Industrie  UKSC 45
- Contractual estoppel. This is a concept recognised in recent case law under which contractual parties can be prevented from challenging facts which they agreed to in a contract. This is a very different notion from the traditional legal concept of contracts as rights and obligations, and there has been some controversy about it but the principle has been accepted. The courts are still exploring the meaning of the fraud exception in this context and the possibility of statutory overrides. Suggested introduction: First Tower Trustees v CDS  EWCA Civ 1396 and, briefly in the Supreme Court, Uber v Aslam  UKSC 5 (para 82)
- Equitable remedies. Such remedies (typically, an injunction) will not be granted to claimants who come to the court with ‘unclean hands’ – application of this principle requires having regard to the claimant’s dishonesty, its connection with the relief sought and the impact on other parties. Suggested introduction: RBS v Highland Financial Partners  EWCA Civ 328
- Foreign laws. A foreign law will not be applied in England and Wales if application of the ordinary choice of law rules would be contrary to England and Wales public policy. In practice, this will sometimes involve considerations of fraud and UK illegality. Suggested introduction: The precise application of these concepts across borders is so complicated that it is best to look at a specialist textbook such as Dicey, Morris and Collins, bearing in mind also that certain foreign state acts will not be questioned, for reasons which go beyond considerations of justice between the parties.
- Foreign judgments. Such judgments will not be enforced in England and Wales if they were obtained by fraud. The precise legal basis of this rule varies because there are different legal regimes applicable to judgments from different places, but the principle is broadly the same. Suggested introduction: Dicey, Morris and Collins (mentioned above) covers this in detail, but for judgments within the Administration of Justice Act 1920 or Foreign Judgments (Reciprocal Enforcement) Act 1933, the relevant sections are 9(2)(d) and 4(1)(a)(iv) respectively.
- Arbitration awards. Such awards may be refused enforcement in England and Wales if obtained by fraud, even if a court challenge on the ground of fraud has already failed in the place in which the arbitration was held. This is part of a wider public policy ground which may also lead to non-enforcement of arbitration awards under contracts for illegal purposes. Suggested introduction: Stati v Kazakhstan  EWCA Civ 1896 – though contrast this decision of the same court (though different judges) around the same time in which the fraud was not material to the award – RBRG Trading v Sinocore  EWCA Civ 838. The Basel Institute on Governance’s toolkit on arbitration and money laundering is also worth reading.
- Mediation. At the moment, mediation agreements in England and Wales fall under the same principles as other settlement agreements (above). The UK has indicated, however, that it intends to sign the Singapore Convention on mediation, which provides for expedited enforcement of such agreements. There is a ‘public policy’ exception which will predictably be used by parties wishing to argue that the mediation agreement was a sham, fraud or otherwise illegal (for example, if used as a money laundering mechanism). Suggested introduction: UK government 2022 consultation response on Singapore Convention.
- Whistleblowing. The Public Interest Disclosure Act 1998 does not protect disclosures of ‘information in respect of which a claim to legal professional privilege… could be maintained in legal proceedings’ if the disclosure ‘is made by a person to whom the information had been disclosed in the course of obtaining legal advice.’ This restriction on lawyers disclosing privileged information must, I imagine, be subject to the same ‘iniquity’ exception mentioned earlier in this list, since in such circumstances a claim to privilege could not be maintained. That said, I haven’t found any case law on this. Suggested introduction: section 1 of the 1998 Act, introducing a new section 43B(4) into the Employment Rights Act 1996.
I’m not going to attempt any fancy conclusion, except to observe that the eternal tension, in any justice system, between finality and merit clearly runs through these cases.
I may update the list from time to time. Suggestions for inclusion and any observations as to omissions and errors would be most welcome.
Image: A Cloud Study, Sunset by John Constable. Public domain. Source: Wikimedia Commons.