Court of Appeal overturns judgments obtained by fraud

Practical Law UK Legal Update Case Report 7-525-8562 (Approx. 8 pages)

Court of Appeal overturns judgments obtained by fraud

by PLC Dispute Resolution

Background

Summary judgment

The court may grant summary judgment on the whole of a claim or on a particular issue if it considers both that:

The claimant has no real prospect of succeeding on a claim or issue or the defendant has no real prospect of successfully defending the claim or issue.
There is no other compelling reason why the case or issue should be disposed of at trial.

(CPR 24.2.)

When seeking summary judgment, the applicant must state that he knows of no other compelling reason why there should be a trial. This statement may be made in the application notice or supporting evidence but, in each case, should be verified by a statement of truth. For more detail, see Practice note, Summary judgment: an overview.

Equitable maxim of "clean hands"

Where an equitable remedy is sought, the courts may apply the maxim that "a man must come into a Court of Equity with clean hands" (Dering v Earl of Winchelsea [1787] 1 Cox 318). Accordingly, a party may be denied an equitable remedy if he is found to have acted improperly.

The "clean hands" doctrine does not involve a general review of the claimant's character. The court will look to see if there is any inequitable conduct by the claimant that has an immediate and necessary relationship to the equitable relief sought (Dering and Duchess of Argyle v Duke of Argyle [1967] Ch 302 at 332).

The maxim of "clean hands" applies only where the misconduct is "inherently directed to the relief sought" (Fiona Trust & Holding Corporation and others v Privalov and others [2008] EWHC 1748 (Comm), see Legal update, Guidance on the equitable maxim of clean hands).

For more details on the equitable maxim of "clean hands", see Practice note, Remedies: equitable remedies.

Setting aside a judgment obtained by fraud

The principles on which a judgment must be set aside because it was obtained by a party's fraud are as follows:

There was a "conscious and deliberate dishonesty" in relation to the relevant evidence or action, which is relevant to the judgment (Ampthill Peerage case [1977] AC 547).
The relevant evidence, action, statement or concealment (performed with conscious and deliberate dishonesty) must be "material". Accordingly, the dishonesty must be causative of the impugned judgment being obtained in the terms it was (Sphere Drake Insurance plc and another v Orion Insurance Company plc [1999] EWHC 286 (Comm) and Tuvyuhu v Swigi, unreported, 26 October 1998).
Materiality is to be assessed by reference to its impact on the evidence supporting the original decision (Kuwait Airways Corporation v Iraqi Airways Corporation (Perjury II) [2005] EWHC 2524 (Comm)).

Facts

This decision relates a long-standing dispute between the claimant (RBS) and the defendants, various companies in the Highland Group (Highland). The factual background is complex and this update mentions only the most relevant facts to the decision.

Factual background to the dispute

In 2007, RBS and Highland entered into a collateralised debt obligation (CDO) transaction. RBS provided funding to a special purpose vehicle to acquire a portfolio of loans, with a view to issuing securities for which the loans would be collateral.

Among the relevant agreements setting out the parties' rights and obligations was an interim servicing deed. Clause 4.2 of the deed set out the terms on which the loan portfolio would be liquidated in the event the transaction was terminated before the securities had been issued. In essence, clause 4.2(a) provided Highland had a right to buy the loans, failing which RBS would sell the loans in a "commercially reasonable manner". (For more detail, see paragraph 8 and appendix 1 of the judgment.)

On 31 October 2008, RBS served notice on Highland, triggering the repayment provisions. RBS then undertook the process of liquidating the 88 loans held as collateral. This process included offering the loans for sale by auction. It was subsequently held that the auction process in respect of 36 of the loans had been a sham. Before serving notice, RBS had decided to transfer 36 of the loans (which were identified as a good credit risk) to its banking book, taking advantage of favourable accounting treatment. This increased RBS' total income for the relevant period by £1,442 million.

Procedural background

In March 2009, RBS issued High Court proceedings to recover the shortfall between the value of the collateral realised and the loan finance provided. Highland disputed the amount it had been credited as a result of RBS' liquidation process. Highland alleged that, if RBS had properly complied with clause 4.2(a) of the deed, the value realised would have been considerably higher, and there would have been no shortfall due to RBS.

RBS applied for summary judgment on the issue of liability. The application for summary judgment was supported by evidence from Sam Griffiths (SG), an RBS employee who had been directly involved in the liquidation process. At this time, RBS were advised by Herbert Smith (HS). Burton J granted RBS summary judgment on liability in February 2010 (The Royal Bank of Scotland plc v Highland Financial Partners LP [2010] EWHC 194 (Comm)) (the Liability Judgment).

Highland's appeal of the Liability Judgment was dismissed in July 2010 (The Royal Bank of Scotland plc v Highland Financial Partners LP and others [2010] EWCA Civ 809 (the Court of Appeal Judgment).

At the hearing on quantum in December 2010, Burton J held that RBS had acted in breach of both its contractual obligations to Highland, and its equitable obligations as a mortgagee in possession (The Royal Bank of Scotland plc v Highland Financial Partners LP [2010] EWHC 3119 (Comm)) (the Quantum Judgment). See Legal update, High Court tells RBS it cannot rely on sham sale process to price CDO collateral.

In May 2012, Burton J heard the following applications:

RBS' application for an anti-suit injunction to prevent proceedings being brought in Texas by various parties, including one of the Highland defendants. RBS claimed the Texas proceedings were vexatious and oppressive, and in breach of an exclusive English jurisdiction clause.
The Highland defendants' application to set aside the Liability Judgment on the basis that it had been procured by fraud. They claimed that SG had given false evidence.

(The Royal Bank of Scotland plc v Highland Financial Partners LP [2012] EWHC 1278 (Comm), the May 2012 Judgment).

In his May 2012 judgment, Burton J found that SG had lied in the proceedings and that, accordingly, RBS had offended against the equitable maxim of clean hands. He found, in particular, that RBS had failed to disclose the truth about the steps taken in relation to the 36 loans transferred to RBS' banking book (the Suppressed Fact).

Burton J refused RBS's application for an anti-suit injunction. However, he held that the Liability Judgment should not be set aside because SG's misconduct would not have affected the outcome on liability and quantum.

The current Court of Appeal judgment concerns:

RBS's appeal of Burton J's refusal to grant RBS anti-suit injunctions to prevent proceedings in Texas in the May 2012 Judgment (see Legal update, No equitable relief for party with unclean hands (High Court)).
Highland's cross-appeal of the May 2012 Judgment, refusing to set aside the Liability Judgment.

Decision

The Court of Appeal unanimously allowed Highland's cross-appeal, finding that the Liability Judgment had been obtained by the fraud of RBS through the misstatement and concealment of facts by SG. The Court of Appeal Judgment and the Quantum Judgment were also set aside.

The Court dismissed RBS's appeal, finding that Burton J had been right to refuse to grant RBS an anti-suit injunction, on the ground that SG's misconduct was sufficiently closely related to the equitable relief sought by RBS.

Aikens LJ's leading judgment is summarised below.

Setting aside the Liability Judgment

Aikens LJ considered, in turn, the principles that apply when considering whether a judgment must be set aside because it was obtained by fraud (as summarised in Setting aside a judgment obtained by fraud).

Was there conscious and deliberate dishonesty?

Aikens LJ found that RBS had, in an email to Highland on 6 November 2008, indicated that it was offering each of the 88 loans in the portfolio for sale as part of an auction process, in accordance with clause 4.2(a) of the deed. This constituted a deliberate positive misstatement which RBS reiterated in an email on 26 March 2009, and never corrected.

In the May 2012 Judgment, Burton J had found that SG's concealment of the Suppressed Fact had not been dishonest because SG had believed, on the basis of HS's advice, that information relating to quantum did not need to be disclosed at the time the hearing on liability. Aikens LJ found, however, that SG had deliberately misled HS whose advice had, therefore, been based on incomplete facts.

During a conference call between representatives of HS and RBS, in which SG had participated, it was noted that Highland's approach to the summary judgment application would be to challenge the reasonableness of RBS's valuation method. HS advised that addressing quantum matters at that stage, might "muddy the waters" and affect the timing of the summary judgment application.

Aikens LJ concluded that this advice provided "a convenient excuse" for SG to delay telling the full story. It would be odd to conclude that SG's deliberate concealment of the Suppressed Fact was an honest act, simply because he had been advised that quantum issues need not be disclosed, when he knew the truth and must have known that a false impression had been given in the particulars of claim and his witness statement.

Aikens LJ held that SG's failure to tell HS the full story must be seen as a deliberate decision to mislead HS. This was a situation like that in which Lord Simon of Glaisdale said that "suppression of the truth may sometimes amount to suggestion of the false" (The Ampthill Peerage case).

Aikens LJ concluded that, at the time of the hearing and judgment on liability, SG had been positively misleading both the court and the Highland defendants as to what had happened in relation to the 36 loans, and that he had done so consciously and deliberately. This represented a positive misstatement by RBS of the true position.

Causation

Aikens LJ concluded that, if RBS had revealed the Suppressed Fact, RBS would not have applied for summary judgment on liability at all. This was because it was likely a compromise would have been reached. Also, if HS had known the Suppressed Fact, they would not have advised:

RBS to apply for summary judgment on liability because it would have been obvious that these facts would have formed the basis of a defence by Highland.
That SG could state truthfully in a witness statement that he believed that there was no defence on liability and he knew of no other reason why the issue should be disposed of at trial.

Aikens LJ also found ample evidence to conclude that, but for the deliberate, conscious and dishonest suppression of the Suppressed Fact, there probably would have been no summary judgment on liability in favour of RBS (paragraph 139, judgment)

Conclusion on the cross-appeal

Aikens LJ concluded that the Liability Judgment must be set aside as it had been obtained by the fraud of RBS. It followed that the Court of Appeal Judgment must also be set aside.

The Quantum Judgment appeared to have been obtained on the full facts, and there was no suggestion that it could be impugned for fraud. However, Aikens LJ held that it would be wrong, as a matter of principle, to permit RBS to retain the value of a Quantum Judgment which assumed a liability which was no longer established. Accordingly, the Quantum Judgment must also be set aside.

Grant of an anti-suit injunction

Setting aside the Liability Judgment for fraud would have an impact on whether the anti-suit injunction ought to be granted. Aikens LJ, however, considered RBS' appeal on the basis that the Liability Judgment stood, as Burton J had done in May 2012.

RBS submitted that SG had been a "mere witness" whose misconduct was not attributable to RBS. They relied on authority that "a person who gives evidence on behalf of a company does not do so as its agent" (Odyssey Re (London) Ltd v OIC Run-Off Ltd [2000] EWCA Civ 71). Aikens LJ rejected this argument. He noted that, in Odyssey, Nourse LJ had formulated a test for determining whether perjured evidence of an individual should be attributed to a company for the purposes of setting aside a judgment for fraud. This test was whether the individual had the status necessary to make his evidence the evidence of the company.

Applying this test to the facts of this case, Aikens LJ found that, when SG had given evidence in the anti-suit injunction application, he had been part of the RBS litigation team. He also held that SG had the status necessary to make his evidence that of RBS for the purposes of the "unclean hands" issue as well as the issue of whether the Liability Judgment had been obtained by fraud.

Aikens LJ held that Burton J had not misapplied the principles (see Equitable maxim of "clean hands") to the facts of the case. He found that there had been misconduct on the part of RBS because the bank had persisted in challenging the findings of fact in the Quantum Judgment and insisting that there had been no concealment of the Suppressed Fact. He found that SG had perjured himself by sending the November 2008 email, and at the trial in May 2012. This misconduct related to the allegations made against RBS and SG in the Texas proceeding; in fact, it "could not be more immediately related to the equity that is sued for" (paragraph 166, judgment).

Comment

This is an interesting judgment that demonstrates how a judgment may be overturned by fraud. It is also an example of a party's misconduct resulting in that party being denied equitable relief; in this case, an anti-suit injunction to prevent proceedings being pursued in another jurisdiction despite there being a relevant exclusive English jurisdiction clause in the underlying agreement. The judgment approves existing authorities, and confirms that withholding the truth may amount to "conscious and deliberate dishonesty".

The facts illustrate the risks where solicitors acting on a contentious matter receive instructions from a single individual who is also the client's key witness. In this case, the individual withheld material facts from the claimant's solicitors. He then gave evidence, supported by a statement of truth, in support of an application for summary judgment on the issue of liability.

Aikens LJ noted that the integrity of the summary judgment procedure under CPR 24 depends on the truth of the statement of an applicant that he "knows of no other reason why the disposal of the claim or issue [to which the application relates] should await trial" (PD 24.2(3)). It is important, as a matter of policy, to ensure that this requirement is fully and correctly observed to avoid miscarriages of justice.

When advising on summary judgment applications, practitioners should take care to establish whether there are any documents or facts that might afford a complete or partial defence to the claim, and that would have to be disclosed if the claim went to trial. In such a situation, the lawyer should advise his client that he cannot properly sign a statement of truth supporting the application (Scottish & Newcastle plc v Raguz [2003] EWCA Civ 1070). For more guidance, see Practice note, Summary judgment: an overview.

The facts also demonstrates an issue that may become more important since the new approach to disclosure introduced on 1 April 2013 (CPR 31.5). Maurice Kay LJ, Vice President of the Court of Appeal, Civil Division stated:

"In the future, there are going to be more tailor-made directions providing for disclosure on an issue-by-issue basis. .... Used properly, it should result in the reduction of disclosure costs. However, practitioners and judges will have to be on their guard to ensure that issue-by-issue disclosure directions do not create a framework for injustice in which one party’s perception and appraisal of a case is not handicapped by his being kept in ignorance of important material on the ground that it is only relevant to issue B but, for the moment, disclosure is only required in relation to issue A."

Case

The Royal Bank of Scotland plc v Highland Financial Partners LP and others [2013] EWCA Civ 328 (12 April 2013).

Court of Appeal overturns judgments obtained by fraud | Practical Law