The United Kingdom Supreme Court has handed down its much anticipated judgment in Takhar v Gracefield Developments Ltd [2019] UKSC 13 (‘Takhar’). The appeal concerned the test for the admission of fresh evidence in a collateral attack on a judgment (ie, a new action filed to attack a prior judgment). The Supreme Court was asked to decide whether a party seeking to set aside a judgment obtained by fraud must show that it could not have discovered the fraud by the exercise of due diligence at the time of the original trial.
The alleged fraud involved the forgery of the appellant’s signature on a profit share agreement, the validity of which was highly material to the success of the respondent’s case in the original action. After the trial had been decided in favour of the respondent, the appellant obtained a report from a handwriting expert that indicated that the signature was forged and brought a new action to set the judgment aside. The first instance decision to admit the fresh evidence was overturned by the Court of Appeal. That decision was then appealed to the Supreme Court.
As described by Lord Briggs at [68], the appeal turned on:
“the outcome of a bare-knuckle fight between two important and long-established principles of public policy. The first is that fraud unravels all. The second is that there must come an end to litigation.”
The respondent argued that the due diligence requirement helped to strike a balance between the fraud principle and the finality principle by limiting the circumstances in which a judgment could be set aside for fraud. The appellant argued that fraud trumps finality.
The seven member panel of the Supreme Court was unanimous in allowing the appeal, with the majority rejecting any due diligence requirement in the generality of cases. However, there was a divergence of opinions as to how to strike the correct balance between the fraud principle and the finality principle, with Lord Briggs in particular preferring to approach the matter as an exercise of discretion in light of the facts.
Due diligence
At first instance, Newey J had held that there was no requirement to show that the evidence of fraud could not have been obtained in time for the original trial. That finding was reversed by the Court of Appeal (Patten LJ, with whom King and Simon LJJ agreed) on the basis of a line of authority which appeared to impose such a requirement.
In the Supreme Court, the leading decision of Lord Kerr distinguished those authorities (at [19]-[42]) and set out the authorities to the contrary (at [43]-[53]). His Lordship concluded at [54] that, taken together, the authorities did not support a due diligence obligation, and held that if they did:
“they should not be followed. In my view, it ought now to be recognised that where it can be shown that a judgment has been obtained by fraud, and where no allegation of fraud had been raised at the trial which led to that judgment, a requirement of reasonable diligence should not be imposed on the party seeking to set aside the judgment.”
Each of the other Supreme Court Justices agreed with the analysis of the authorities undertaken by Lord Kerr and with his Lordship’s conclusion on the facts of the case. However, Lord Sumption, Lord Briggs and Lady Arden each added their own reasons expressing differing views as to the extent of the court’s discretion whether or not to set aside a judgment affected by fraud.
Discretion
Lord Briggs took issue with what he described as the “bright-line” rule formulated by Lord Kerr and expressed his preference for a more flexible approach that would “weigh the gravity of the alleged fraud against the seriousness of the lack of due diligence” (at [68]). His Lordship was concerned that conduct “just on the wrong side of honesty” might result in a judgment being set aside in circumstances where the other side had failed to raise the matter at trial (at [72]).
In defence of the bright-line approach, Lord Sumption said (at [64]) that he disagreed with:
“Lord Briggs’ view that a more flexible and fact-sensitive approach may be required in order to distinguish between degrees of dishonesty. I think that this would introduce an unacceptable element of discretion into the enforcement of a substantive right. The standard of proof for fraud is high, and rightly so. But once it is satisfied, there are no degrees of fraud which can affect the right to have the judgment set aside.”
As Lord Hodge, Lord Lloyd-Jones and Lord Kitchin agreed with both Lord Kerr and Lord Sumption, the outcome is that the Supreme Court has rejected the need to inquire into various degrees of fraud or to weigh the gravity of the fraud against the appellant’s lack of due diligence.
However, without expressing definite views, Lord Kitchin, Lord Sumption and Lady Arden each thought that the court might have some discretion not to admit fresh evidence where at the time of the original trial a party decided not to investigate a suspected fraud (at [55], [63] and [94]). Lord Kitchin and Lady Arden, but not Lord Sumption, thought there might also be some discretion where the fraud was in fact pleaded but not proved at the original trial (at [55], [66] and [93]).
Materiality
The Supreme Court referred to the dicta of Aitkens LJ in Royal Bank of Scotland Plc v Highland Financial Partners LP [2013] 1 CLC 596 at 106 (‘RBS’) as to the general principles which govern new actions to set aside judgments for fraud (at [56], [67], [76] and [104]). In summary, those principles are that:
Strictly, these general principles were not in issue in Takhar and are therefore not part of the ratio of the Supreme Court’s decision. As noted by the Court of Appeal in Takhar v Gracefield [2018] Ch 1 at [24]-[25], it was common ground between the parties that the principles in RBS were applicable and there was no dispute on the facts that the alleged forgery was highly material to the decision. Rather, the issue in Takhar was whether a failure to raise the fraud in the prior proceedings due to a lack of due diligence should preclude the fraud being relied upon to set aside the judgment in a fresh action.
Significance
The importance of the court’s power to set aside judgments obtained by fraud is emphasised by the fact the Supreme Court’s decision comes just one year on from the High Court of Australia’s decision on the same issue in Clone Pty Ltd v Players Pty Ltd (in liq) [2018] HCA 12; (2018) 353 ALR 24 (see our previous blog post here). Like the High Court in that case, the Supreme Court has rejected the need for the party alleging fraud to demonstrate that it could not have discovered the fraud at trial by the exercise of due diligence. The Supreme Court’s decision thus removes a potential hurdle for litigants wishing to attack a prior judgment on the basis that it was fraudulently obtained. Further, in rejecting the need to establish any particular degree of dishonesty, the Supreme Court has provided clear guidance that a judgment obtained by fraud will not be allowed to stand.
