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Ghosh test overturned: dishonesty according to the standards of ordinary, reasonable and honest people

14 December 2017. Published by Sarah Shaul, Associate and Davina Given, Partner

The Supreme Court has held that the test for dishonesty should be assessed only by reference to whether or not the defendant's conduct is dishonest by the objective standards of ordinary, reasonable and honest people. The Court concluded that there were convincing grounds for holding that the second limb of the longstanding Ghosh test did not correctly represent the law and that directions based upon it ought no longer to be given. The Court further stated that the assessment of dishonesty in criminal and civil proceedings should be made by reference to the same test.

The facts

Over the course of two days in August 2012 the claimant, Mr Ivey, played a game called Punto Banco, a variant of Baccarat, at a London casino, Crockfords Club.  While playing, Mr Ivey persuaded the croupier to rotate the cards in a systematic way on the basis of the very small differences he noticed in the decorative pattern printed on the back of the card (a difference which resulted from the manufacturing process).  The result of this careful process ('edge-sorting') was that all cards were eventually sorted by the croupier to display a different 'edge' (Type A or Type B) according to whether they were high or low cards.  When these cards were used, Mr Ivey took advantage of this distinctive sorting to gain a competitive advantage, knowing from the edge of each card whether it was high or low.  It was agreed at trial that such knowledge will give a punter a long-term edge of about 6.5% over the house if played perfectly accurately and in fact Mr Ivey won approximately £7.7m. 

However, the casino refused to pay out on the basis that Mr Ivey had cheated.  Mr Ivey argued that what he had done was not cheating and that he had simply deployed a perfectly legitimate advantage.  He issued proceedings against the casino.

The judge at first instance found that Mr Ivey had given truthful evidence of what he had done and accepted that he was genuinely convinced that what he did was not dishonest.  The judge concluded that it was cheating, however, as did the majority of the Court of Appeal.  The decision for the Supreme Court was whether they were right or wrong in this conclusion.

Mr Ivey's argument

Mr Ivey argued as follows:

The test of what is cheating must be the same for the implied contractual term between a gambler prohibiting cheating and a casino as for the criminal offence of cheating at gambling under section 42 of the Gambling Act 2005;

Cheating necessarily involves dishonesty;

The judge found that Mr Ivey was truthful when he said that he did not consider what he did to be cheating; therefore dishonesty and in particular the second leg of the test established by R v Ghosh had not been demonstrated;

It follows that what was done was not cheating, and Mr Ivey ought to recover the £7.7m.

Section 42 and the implied term

The Supreme Court agreed that cheating carries the same meaning when considering an implied contractual term not to cheat and when applying section 42 of the Gambling Act 2005, even if there will be a difference in standard of proof as between civil and criminal proceedings.

Does cheating require dishonesty?

Can a parallel be drawn with conspiracy to defraud?

The Supreme Court rejected the argument that cheating requires dishonesty.  Mr Ivey had relied on R v Scott in which he argued that it had been decided that dishonesty was an essential element of the common law offence of cheating.  It was the same, he contended, for cheating at gambling.

The Supreme Court rejected this authority on several grounds.  Firstly, they did so on the basis that the charge in that case was not cheating at common law but conspiracy to defraud.  The substantial issue before the House of Lords in that case had been whether conspiracy to defraud required deception, which was recognised as only one form of defrauding.  However, the House of Lords had also stated that defrauding included depriving another, by dishonest means, of something which is his or to which he would or might be entitled but for the fraud.

The Supreme Court noted that to the extent that defrauding someone may take the form of depriving them of something which is his, or to which he might otherwise be entitled; it is wholly unsurprising that a criminal offence of defrauding must contain in addition an element which demonstrates that the means adopted are illegitimate and wrong i.e. proof of dishonest means.  Otherwise, perfectly proper business competition would be caught. 

Although the ancient common law offence of cheating consisted of a particular subset of fraudulently depriving another of property, the Supreme Court concluded that R v Scott was of no help in construing the meaning of cheating in the context of gambling.  The draftsmen responsible for the Gambling Act 2005 would not have intended to adopt an analogy with a common law offence which had been largely abolished 40 years previously (by section 32(1) of the Theft Act 1968) and when the word "cheat" was then used in an entirely different context in the Theft Act 1968.  The Supreme Court held that while it made sense to interpret the concept of cheating in section 42 of the Gambling Act in the light of the meaning over many years, it made none to interpret cheating, as used over many years, by reference to an expression – dishonesty – introduced into the criminal law for different purposes long afterwards in 1968. 

The meaning of 'cheating' in ordinary language

Mr Ivey had further contended that as a matter of ordinary English, cheating necessarily imparts dishonesty.  The Supreme Court gave various examples to show that there will always be debate as to what does and does not constitute cheating such that dishonesty is not always an essential element.  They clarified that the question before the Supreme Court was not a matter of formulating a definition of cheating but whether cheating necessarily requires dishonesty as one of its legal elements.

The Supreme Court concluded that it did not need to add to the value judgment whether conduct was cheating a further value judgment as to whether it was dishonest.  If cheating is by definition dishonest, the addition of a legal element of dishonesty adds nothing.  On the other hand, if there are some acts of cheating which are wrong but not dishonest, then the addition would serve to render the illegitimate legitimate.

Was Mr Ivey dishonest?

Although the Supreme Court rejected the submission that cheating required dishonesty, they nevertheless went on to consider Mr Ivey's reliance on the Ghosh test for dishonesty.

There has always been confusion around the definition of 'dishonesty'.  This has been complicated by differing interpretations in civil and criminal proceedings.  In criminal proceedings the leading case was R v Ghosh which stipulated a two limbed test: (1) whether according to the ordinary standards of reasonable and honest people what was done was dishonest; and if so (2) whether the defendant himself realised that what he was doing was by those standards dishonest.  There is precedent in the civil courts for this combined objective/subjective test of dishonesty, notably Twinsectra. However, other cases have favoured an entirely objective test (Royal Brunei and Barlow Clowes).

The Supreme Court set out to eliminate this inconsistency and confusion.  They noted that in the 30 years following the case of Ghosh a number of serious problems with the second limb of the rule have emerged:

It had the unintended effect that the more warped the defendant's standards of honesty are, the less likely it is that he will be convicted of dishonest behaviour.  This is especially problematic given that it is not unusual for such defendants not to share the standards which ordinary honest people hold;

It was based on the premise that it was necessary in order to give proper effect to the principle that dishonesty, and especially criminal responsibility for it, must depend on the actual state of mind of the defendant, whereas the rule is not necessary to preserve this principle;

It sets a test which jurors and others often find puzzling and difficult to apply;

It has led to a divergence between the test for dishonesty in criminal and civil proceedings. The Supreme Court noted that there is some doubt about the freedom of the courts to depart from Ghosh in the absence of a decision from the Supreme Court first;

It represented a significant departure from the pre-Theft Act 1968 law; and

It was not compelled by authority and the better view was that the pre-Ghosh cases favoured the simpler rule that, once the defendant's state of knowledge and belief had been established, whether that state of mind was dishonest or not is to be determined by the application of the standards of ordinary honest person.

In the case of Ghosh it had been assumed necessary to have the second limb of the test in order to preserve the principle that criminal responsibility for dishonesty must depend on the actual state of mind of the defendant.  However, the Supreme Court held that the first limb of the Ghosh test was sufficient for this purpose.  This is because, in order to decide whether someone was dishonest by the standards of ordinary honest people, it would be necessary to establish his own actual state of knowledge. 

In reviewing the post-Theft Act authorities prior to Ghosh, the Supreme Court disagreed with the view that the case law supported a binary dichotomy between those which supported an objective approach and those which supported a subjective one.  In the end, the Supreme Court decided

that there was in fact only one pre-Ghosh case which frankly raised the relevance of the defendant's own view as to the honesty of what he had done (R v Gilks).

The Supreme Court concluded that there were convincing grounds for holding that the second limb of the Ghosh test did not correctly represent the law and that directions based upon it ought no longer to be given.  There was no reason why the law should excuse those who make a mistake about what contemporary standards of honesty are.  The Ivey test for dishonesty is therefore as follows:

"When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts.  The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held.  When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people.  There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest."

Conclusion

Having determined that cheating did not require dishonesty, the Supreme Court agreed with the Court of Appeal that Mr Ivey's actions undoubtedly amounted to cheating.  The game played by Mr Ivey was meant to be one of pure chance and what was in fact undertaken by Mr Ivey was a carefully planned operation.  They concluded that while it was clever and skilful it could not alter the fact that it amounted to cheating.  Mr Ivey could not therefore recover the £7.7m he had won.

However, by its new test for dishonesty, the Supreme Court held that Mr Ivey's conduct was dishonest even if his personal belief that it was not dishonest was truthfully held.  He therefore lost on almost all heads.

Implications

The effect of this decision remains to be seen but will be undoubtedly profound.  In criminal proceedings the new Ivey test may make prosecution easier as the defence of their personal beliefs will no longer be effective for defendants.  The ruling will affect offences which require some indication of dishonesty for conviction (i.e. cheating HMRC, money laundering, fraud).

By this ruling the Supreme Court has underlined that courts will refuse to make any allowances for those who make a mistake about what contemporary standards of honesty are and in doing so cited numerous contexts in which they intend this re-formulated rule to apply including insurance claims, high finance, market manipulation and tax evasion.