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20 Aug 2020

Victims of fraud – what do they have to prove in fraud litigation?

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In Bank St Petersburg PJSC & Ors v Arkhangelsky & Ors [2020] EWCA Civ 408, the English Court examined the standard of proof in civil fraud claims.

In England, in criminal trials the prosecution has to prove guilt “beyond reasonable doubt”.  However, the standard of proof in civil fraud claims is the same as in all other civil claims: the balance of probabilities. This means, the claimant has to show that it is more likely than not that the defendant committed a fraud.

In some cases, this is an easy standard to understand.  For example, it may be obvious in a contract claim whether someone has performed or breached a contract.  However, fraud litigation has certain characteristics that makes it less straightforward:

  1. In the vast majority of cases, the victim will not know the full facts: the nature of fraud means that fraudsters hide facts from their victims and/or deceive them.Therefore, when first preparing their case, claimants often have to rely on some facts, but ask the court to infer certain other facts from available evidence.
  2. On the other hand, some claimants try to plead fraud claims on insufficient evidence, so as to put pressure on defendants to settle.For example, some claimants think that a professional services defendant may be more likely to settle a fraud claim than a straightforward negligence claim.Whilst this is often incorrect, it is still a tactic that is sometimes used and the courts generally try to discourage this.

In 2010, in Fiona Trust v Privalov1 the court indicated that claimants who allege fraud and dishonesty need to provide clearer and more cogent evidence than they need to do for most other torts (such as negligence).  The reasoning for this was that, in simple terms, fraud and dishonesty are serious allegations and in the court's view most people are not serious wrongdoers. Put another way: the court assumes that most people are not fraudsters.  (Incidentally, lawyers are also required to treat fraud differently:  pursuant to English regulations, they are not allowed to allege fraud unless they are independently satisfied that there is material that justifies a fraud allegation.)

However, in Bank St Petersburg PJSC v Arkhangelsky, the Court of Appeal made it clear that this principle is only a starting point.

The Court of Appeal partially overturned the High Court's decision in that case (the "First Instance Decision"), and ruled that it was wrong to apply a higher test to fraud than to any other civil claim. Assuming that most people are not fraudsters does not, without more, mean the court will assume that an innocent explanation is more likely than a fraudulent one. This decision is particularly important for those fighting against sophisticated fraudsters, who can often create complex, seemingly innocent, explanations for events. It means that in deciding whether or not fraud has occurred, the court will decide on the evidence alone (which in England includes both documents and witness evidence). It will not be influenced by a presumption that fraud is “unlikely” or that an alternative, innocent explanation is more likely.

Background

The Bank St Petersburg PJSC v Arkhangelsky case arose from the 2008 financial crisis. The claimants were Bank of St Petersburg (the “Bank”), its ultimate beneficial owner, and its long-standing chairman Mr Savelyev. The Defendants were Mr and Mrs Arkhangelsky and their former business, Oslo Marine Group (“OMG”).

In 2008, Mr Arkhangelsky took out a personal loan with the Bank to service a debt owed by OMG to the Bank, and gave personal guarantees to the Bank (the “Agreements”). At the same time, Mr Arkhangelsky agreed to transfer his shares in OMG into an SPV controlled by the Bank.  It was agreed that the shares would be returned to him once the loans were repaid.

The Bank claimed that OMG failed to repay the loan when it fell due.  It obtained judgment against OMG in Russia, and enforced the judgment against OMG.  However, a shortfall of approximately £16.5 million remained. The Bank attempted to recover the shortfall from Mr Arkhangelsky and others in the English proceedings under the Agreements.

Mr Arkhangelsky (a) claimed that the Agreements were forged, (b) claimed that the Bank and the other claimants had conspired to use OMG’s short term liquidity problems to raid the business and seize control over it, and consequently (c) denied that he had any personal liability to the Bank. Mr Arkhangelsky brought a counterclaim of almost USD 500 million. The Bank denied any wrongdoing and asked the Court to make negative declarations to that effect.

The courts’ decisions

In the First Instance Decision, the High Court granted the Bank’s monetary claim in full and gave judgment against the defendants for £16.5 million. The High Court rejected Mr Arkhangelsky’s counterclaim for conspiracy (in which he made allegations of dishonesty against the Bank). However, the High Court refused to grant the negative declarations on liability the Bank had requested as part of its claim. Highly unusually, despite granting the claim the High Court also concluded the Bank was guilty of dishonesty and falsifying evidence in the Russian proceedings.

Mr Arkhangelsky appealed against the part of the judgment refusing the counterclaim. He argued that the Judge had applied too high a standard of proof in relation to the dishonesty element of the conspiracy claim. The Court of Appeal granted the appeal, and ordered a re-trial of the counterclaim (to be heard by a different judge) to determine whether there was an unlawful conspiracy to deprive Mr Arkhangelsky of his ownership of OMG.

How do you prove dishonesty?

The counterclaim was brought under Russian law. Both parties accepted that for it to succeed, a dishonest conspiracy would need to be proved. What was not agreed was how dishonesty should be proved.

Most cases go to court because the parties present (and often believe) different versions of events. If the evidence unquestionably shows that one version of events is the correct one, the case is unlikely to go to a full trial. This means that the English courts are used to analysing different explanations for the same evidence and deciding which explanation is most likely to be true.

The problem with the First Instance Decision in this case is that the judge did not consider the evidence in an even-handed manner (i.e. he did not apply the same test to the parties’ evidence, which meant the way he approached the evidence was unfair). Instead, he incorrectly decided that he could only make a finding of dishonesty if he was satisfied that the facts were “incapable of innocent explanation”.

He also stated that the Bank’s alternative explanations for the alleged dishonesty were “not so implausible that they must be rejected”.

In essence, the judge ruled that because there was a possible innocent explanation, he was obliged by law to choose the innocent explanation.

The Court of Appeal decided this was wrong. It confirmed that even in cases of fraud or dishonesty, the correct test is whether the allegation has been proven to be more likely than not. There is no requirement to prove that fraud or dishonesty has occurred beyond all possible doubt, or to prefer an innocent explanation instead of a dishonest one.

In this case, the Court of Appeal speculated that part of the problem may have been that the High Court Judge considered each piece of evidence separately. He did not step back and look at the whole picture. It observed that the fact that the judge took some 22 months to write his judgment may have contributed to this problem. Such a significant delay giving judgment is rare in the English courts and the Court of Appeal said that it was inexcusable. However, the Court of Appeal found that the delay by itself was not a reason to overturn the judgment.

Lessons to be learned

This case clearly shows that the test the English courts will apply to evidence in a fraud case is the same as in all other civil claims. All a claimant needs to prove is that it is more likely than not to have happened. But what does this mean in practice?

Clearly, a claimant does not need a signed confession from the alleged fraudster to bring a fraud claim. However, they will need detailed evidence of facts or circumstances which, looked at together, suggest fraud or dishonesty has occurred. For example, this may include evidence that the defendant has lied to the court previously, or multiple examples of suspicious behaviour.  In simple terms, the Court will weigh up the evidence for the claimant and for the defendant – there must be enough to make the claimant's case look stronger (i.e. more likely to be true) than the defendant's.

The Court of Appeal in this case distinguished between (a) lawyers’ professional duties in alleging fraud (described above) and (b) the standard of proof that the Court applies itself. The recent decision in National Bank Trust v Ilya Yurov & Ors2 (also heard under Russian law, before the English court) confirms that lawyers remain subject to the requirement that they must independently satisfy themselves that there is enough evidence to allege fraud.

In times of economic crisis, fraud is likely to rise (and/or existing frauds are more likely to be discovered).  Furthermore, claimants often fight cases harder in these times, as the economic outcome of a case often matters more when claimants are in financial difficulties. The Arkhangelsky case will now be re-tried, and it will be interesting to see the outcome of that dispute. However, the re-trial will be in the High Court.  The Court of Appeal's decision is therefore extremely unlikely to be changed in the near future.  Therefore, this case has made it easier for claimants to succeed in fraud litigation before the English courts in the future.

 

 

1 Fiona Trust v Privalov [2010] EWHC 3199

2 [2020] EWHC 100 (Comm)

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