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Should fraud unravel all? The Supreme Court thinks so

18 April 2019. Published by Andy McGregor, Head of Civil Fraud and Karina Plain, Associate (Australian qualified)

Applying to have a judgment set aside due to fraud? No need to attempt to uncover that fraud prior to judgment, even where it is suspected. That is the position the Supreme Court has taken in the recent decision of Takhar v Gracefield Developments Limited and others [2019] UKSC 13.

Background to the claim

The Claimant, Mrs Takhar, transferred a number of deteriorating properties to Gracefield Developments Limited, a company in which she and the two Respondents (her cousin, Mrs Krishan and her cousin's husband, Dr Krishan) were shareholders. At the time, Mrs Takhar was experiencing significant financial difficulties.

A dispute arose over ownership of the properties; a significant piece of evidence was a profit share agreement apparently signed by Mrs Takhar which outlined the division of profit on the sale of the properties.

During the hearing, Mrs Takhar stated not only had she not signed the agreement but that the first time she had seen it was after the dispute arose. She was, however, unable to explain how her signature had come to be on the document and she could not say that the signature on the document was not hers. She applied for permission from the trial judge to obtain evidence from a handwriting expert to examine the signature on the agreement, but the application was refused because the trial was imminent.

Ultimately, the trial judge held that the properties had been transferred to Gracefield Developments Limited both legally and beneficially, on terms reflected in the profit share agreement.

The unravelling begins

A handwriting expert engaged post-trial concluded that Mrs Takhar's signature was forged; on that basis, Mrs Takhar issued proceedings to have the judgment set aside.

The Krishans contended that this was an abuse of process because the agreement had been available to the Claimant prior to the earlier trial. The application reached the Supreme Court. The Court found 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 applying to set aside a judgment.

The existence of fraud was a new issue to be decided and not a matter that had been raised in the earlier proceedings. This was demonstrated by the differences in relief sought; in the earlier proceedings, Mrs Takhar had sought to avoid the effect of the agreement because of undue influence and unconscionability, whereas in the current proceedings, she claimed that the agreement itself was fraudulent.

The Supreme Court also acknowledged that Mrs Takhar had attempted to bring the matter before the Court in the earlier proceedings, but the Court had refused to grant permission to do so. Therefore, there had not been a deliberate decision on her part not to investigate the fraud.

As the High Court had done, the Supreme Court found the position of Australian and Canadian courts on the matter to be very compelling, both of which have rejected the notion that due diligence is required in order to have a judgment set aside for fraud.

Ultimately, the Supreme Court regarded the idea of a fraudulent party profiting from their opponent's passivity or lack of reasonable diligence to be antithetical to any notion of justice.

When might fraud not unravel all?

While making it very clear that this was not the Court's final view on the matter, the Supreme Court did indicate that there may be instances where fraud doesn't in fact unravel all, and a court could exercise discretion as to whether to entertain a challenge to set aside judgment, for example:

   •   where a deliberate decision is taken not to investigate the possibility of fraud in advance of the first trial even if it has been suspected; or

   •   where fraud was raised at the first trial, but new evidence as to the existence of the fraud is advanced in support of an application to set aside the judgment.

Why does this matter?

The case indicates that fraud should unravel judgments in order to safeguard against injustices, and the Court has made clear that innocent parties should not be burdened with an obligation to keep their eyes peeled constantly for acts of forgery. That being said, a prudent litigator should investigate suspicions of fraud as soon as it first comes to their attention, so as to avoid the time and costs involved in challenging a judgment that has been obtained by fraud.