Court of Appeal finds subsequent events should not be taken into account to reduce defrauded claimant’s damages

The Court of Appeal has held that a defrauded purchaser's damages should not be reduced on the basis that, as matters transpired, the purchaser was not as badly off as a result of the fraud as might have been expected as at the transaction date: OMV Petrom SA v Glencore International AG [2016] EWCA Civ 778.

The decision sheds light on when subsequent events will be taken into account in determining the extent of the defrauded party's loss, and the flexible approach that can be taken in favour of defrauded claimants. In particular, it suggests that the courts will be unwilling to take subsequent events into account where that would give the fraudster a windfall.

Gareth Keillor and Tom Brown, a senior associate and associate in our dispute resolution team, consider the decision below.

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Supreme Court holds that a settlement may be set aside for fraud even if fraud was suspected

The Supreme Court has held unanimously that, where a party seeks to set aside a settlement agreement on the grounds that it was induced to enter into it by its opponent’s fraudulent misrepresentations, it will not necessarily be a bar to the claim that the party did not fully believe the representations: Hayward v Zurich Insurance Company plc [2016] UKSC 48.

Overturning the Court of Appeal’s ruling on this point, the Supreme Court identified the appropriate question as whether the party was “influenced by” its opponent’s representations in entering the agreement.  There is no independent requirement that the defrauded party actually believed the representations to be true. The fact that it had doubts or suspicions may be highly relevant to the court’s assessment of whether it was influenced, but it will not be determinative.  In particular, in the specific context of an agreement to settle court proceedings, a party may have been influenced in the sense that it took into account the risk that the court hearing the claim would believe the representations, even if the party itself did not. Each case will however turn on its facts.

The Supreme Court’s decision clarifies an uncertain area of the law regarding misrepresentation and deceit in a settlement context and will be particularly welcomed by insurers and other parties involved in proceedings where an element of fraud is suspected.

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Supreme Court upholds celebrity injunction

The Supreme Court has today allowed an appeal by a celebrity (PJS) seeking an injunction preventing publication of details of his private life, by a majority of four to one: PJS v News Group Newspapers Ltd [2016] UKSC 26

In its decision, the Supreme Court has sought to balance what it considers a robust prima facie case for the right to privacy against the practical limitations facing the enforcement of court orders in the modern world. The court's focus on whether an injunction can still serve a useful purpose if defeated in part is useful to claimants.

The decision also emphasises the distinction between the law of confidence and of privacy.  In the case of confidential material, whether an injunction is likely to be lifted will depend on the proportion of the confidential material that has already been disclosed. The court contrasted this with invasion of privacy, where an injunction may be granted if it will prove useful in preventing intrusion and distress.

Considerable emphasis was placed on the Article 8 right to a family life, with significant weight given to the potentially harmful effects of publication on PJS's children.  The court dismissed media complaints that children can be used as "trump cards" by parents seeking injunctions.  In reaching its decision, the court considered the children's own Article 8 rights and reinforced for newspaper editors the exceptionally high bar which must be met to justify infringement. However the decision raises the question of whether the outcome of the appeal might have been different had PJS not had children.

Alan Watts, Neil Blake and Rebecca Murtha consider the decision further below.

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Court of Appeal rejects illegality defence in claim against liquidator

The Court of Appeal has refused to allow a liquidator of a company that was the vehicle for a VAT fraud to rely on the defence of illegality in defending a claim for breach of duty under section 212 of the Insolvency Act 1986: Top Brands Ltd and others v Sharma (as former liquidator of Mama Milla Ltd) [2015] EWCA Civ 1140.

In delivering judgment, the Court of Appeal echoed the plea of the Supreme Court in Jetivia SA v Bilta (UK) Limited [2015] UKSC 23 for clarity as to the proper approach to the defence of illegality (see our previous blog post here), which is currently a matter of great uncertainty. However the court held that, whichever approach was correct, the defence clearly did not apply on the facts of the present case, as there was no need to rely on facts which disclosed illegality in order to bring the claim, and there was no inextricable link between the relief sought and the illegal actions of the company and its directors.

In Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391, the House of Lords held that liquidators were prevented from claiming against a company’s auditors for failing to spot its sole director’s fraud (see post), but the Supreme Court in Jetivia v Bilta concluded that Stone & Rolls should be treated as turning on its own particular facts and not authority for any general principle. The present case is helpful in continuing the trend toward a limited application of the illegality rule, and the Stone & Rolls decision, which is good news for creditors of companies used as a vehicle for fraud. Tom Henderson, a senior associate in our dispute resolution team, considers the decision further below.

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Supreme Court clarifies scope of “assets” covered by a freezing order

In a unanimous decision, the Supreme Court has confirmed that the right to draw down under loan agreements is caught by the expanded definition of "asset" contained in the current standard Commercial Court form of freezing order which includes "any asset which it (the respondent) has the power, directly or indirectly, to dispose of or deal with as if it were its own": JSC BTA Bank v Ablyazov [2015] UKSC 64. The decision helpfully clarifies that:

  • freezing orders will be construed strictly in accordance with what the words in fact mean;
  • in the absence of the expanded wording now contained in the standard form of order, the right to draw down loans will not be frozen; and
  • the expanded wording does widen the scope of the order meaningfully and can include assets not "owned" by the respondent.

From a practical perspective, great care needs to be taken when drafting freezing orders to ensure that assets which the respondent is suspected of having are clearly within the scope of the order. It will be dangerous to assume that the word "assets" will necessarily have its everyday meaning in the context of a freezing order. Gareth Keillor, a senior associate in the dispute resolution team, outlines the decision below.

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Privy Council confirms availability of backward tracing

“Happy is he who can trace effects to their causes”, Virgil observed. Well, victims of fraud will certainly be happy with the Privy Council’s decision in The Federal Republic of Brazil v Durant International Corporation (Jersey) [2015] UKPC 35. In an appeal from the Court of Appeal of Jersey, the Board confirmed the availability of “backward tracing”. This enables claimant beneficiaries under a trust (including victims of a fraud relying on a constructive trust) to avoid the strict rules of equitable tracing by pointing to the substance of the overall transaction rather than its form.

While the Privy Council’s decision is not binding as a matter of English law, it is persuasive and provides an indication of how the Supreme Court may decide the issue in the future.  

Tom Wood, an associate in our corporate fraud and asset recovery team, considers the decision further below. Continue reading

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Upcoming webinars: freezing orders, class actions and contracts

Over the next few weeks we will be delivering a number of disputes-related webinars for Herbert Smith Freehills clients and contacts, including on: what to do when you’ve been given notice of a freezing order; the increasing risk of class actions in the UK; and how to know when you have a binding contract.

In relation to freezing orders, on Tuesday 9 June Robert Hunter will consider a string of decisions in recent years which have clarified much of the uncertainty as to what freezing orders actually prohibit, and will offer practical advice to those who want to know what they can do after being served with a freezing order.

In relation to class actions, on Thursday 18 June Kim Dietzel, Damian Grave, Kirsten MasseyMaura McIntosh, John Ogilvie and Gregg Rowan will look at a number of current developments which, taken together, increase the potential for large group actions to be brought in this jurisdiction, including competition law claims, securities claims, and claims arising out of human rights and environmental issues, and will consider what businesses can do to manage or mitigate the risks.

In relation to contracts, on Monday 22 June Tim Parkes, Chris Bushell and Robert Moore will look at the requirements for a binding contract and the problems that can arise when what appears to be an agreement is not in fact binding, or vice versa, and look at some practical steps that can be taken to minimise the risks.

All of the webinars are 12.45 – 1.45pm BST. They are part of our series of “Soundbite” webinars, which are designed to update clients and contacts on the latest developments without having to leave their desks. The webinars can be accessed “live”, with a facility to send in questions by e-mail, or can be downloaded as podcasts after the event. If you would like to register for a webinar, or to obtain a link to the archived version, please contact Jane Webber. The webinars, both live and archived, also qualify for one CPD point.

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Court of Appeal refuses to set aside settlement agreement despite new evidence of fraud

The Court of Appeal has refused to set aside a settlement agreement on the basis of new evidence indicating that the claimant’s case had been fraudulently exaggerated:  Hayward v Zurich Insurance Co plc [2015] EWCA Civ 327.

Settlement agreements may be set aside on the same grounds as any other contract, including on the basis that one of the parties was induced to enter into it by a counterparty’s misrepresentation concerning a material fact. However, where the representations relied on comprise the very allegations advanced by the claimant as part of the claim being settled, the courts have generally taken the view that the defendant has, in deciding to settle, taken into account the risk that the statement was false and has foregone the opportunity to challenge it. The issue in the present case was the extent to which the position is different where, as here, the representation was not merely false but could later be shown to have been fraudulently made.

In holding that the innocent party was nevertheless bound by the agreement, the Court of Appeal’s decision shows the limits, in this context, of the principle that “fraud unravels all”.  It confirms that a fraudulently advanced case will not necessarily entitle a defendant to rescind a settlement agreement – particularly in cases where the evidence suggests that, at the time of settlement, the defendant had at least some indication of the possibility of fraud and therefore settled “with its eyes wide open”.

The decision illustrates the courts’ “robust disinclination” to interfere with settlement agreements unless there are exceptional circumstances, given the important public interest in the finality of settlements. Continue reading

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Supreme Court confirms company in liquidation not prevented from claiming against directors on the basis of fraud attributable to the company

The Supreme Court has unanimously upheld a Court of Appeal decision refusing to strike out a claim by a “one-man” company in liquidation, which had been the vehicle for a VAT fraud, against its former directors and overseas suppliers alleged to have been involved in the fraud: Jetivia SA v Bilta (UK) Limited [2015] UKSC 23 (see our post on the Court of Appeal decision here). The Supreme Court's decision confirms that a company in liquidation is not prevented from claiming against its directors on the basis that the fraud of the directors is also attributable to the company.

The decision is welcome in underlining the limited application of the House of Lords ruling in Stone Rolls Ltd v Moore Stephens [2009] 1 AC 1391, in which liquidators were prevented from claiming against a company's auditors for failing to spot its sole director's fraud (see post), and empowering office-holders to pursue claims against fraudulent directors (and their associates) even where all directors and shareholders were involved in the fraud. Tom Henderson, a senior associate in our dispute resolution team, considers the decision further below. Continue reading

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Court of Appeal clarifies jurisdiction to order disclosure in support of freezing injunctions

Very often, when seeking to obtain a freezing injunction, the true extent of the defendant’s assets is unclear. Complex and opaque offshore corporate or trust structures may mask the true ownership of assets. A mere connection between a defendant and assets held by third parties will not be sufficient to freeze those assets: the claimant will need to show a good reason to suppose those assets would be available to satisfy any judgment, which can be a difficult threshold to meet. The risk, however, is that by the time the position has been clarified, the assets may have been dissipated.  What can the court do in such situations?

A recent Court of Appeal decision clarifies the court’s jurisdiction to make wide-ranging ancillary disclosure orders in support of freezing injunctions: JSC Mezhdunarodniy Promyshlenniy Bank & Anor v Pugachev [2015] EWCA Civ 139. The appeal concerned a defendant’s interests in several discretionary trusts. The defendant’s interests in the trusts, but not the trust assets themselves, were subject to the freezing order. The Court of Appeal upheld the first instance decision ordering the defendant to provide detailed information about the trusts, including any trust documents within his control. The threshold for obtaining the disclosure order was lower than the threshold required to freeze the trust assets; all that was required was credible material showing that an application might in due course be made to freeze the trust assets.

The judgment provides welcome confirmation of the English court’s powers to enable the effective policing of freezing injunctions. Disclosure orders may enable claimants to clarify the status of assets which appear closely connected to a defendant and, if appropriate, consider taking further steps to safeguard those assets (e.g. by applying to extend the terms of a freezing order, or applying for Chabra relief against third parties, such as trustees). Tom Wood, an associate in our dispute resolution team, considers the decision below. Continue reading

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