Supreme Court applies Patel v Mirza to reject illegality defence where claimant had engaged in mortgage fraud

The Supreme Court has held that a claimant who had engaged in mortgage fraud was not barred from bringing a claim against her solicitors for negligently failing to register the forms transferring the property to her and releasing a prior mortgage: Stoffel & Co v Grondona [2020] UKSC 42.

The decision applies the (relatively) new test for the illegality defence, as established in Patel v Mirza [2016] UKSC 42 (considered here). This replaced the test adopted by the House of Lords in Tinsley v Milligan [1994] 1 AC 340, which turned on the formalistic question of whether the claimant had to rely on the illegality to bring the claim. The current test is described by the Supreme Court as “a more flexible approach which openly addresses the underlying policy considerations involved and reaches a balanced judgment in each case, and which also permits account to be taken of the proportionality of the outcome”.

However, while the test is no longer one of reliance, this question may still have a bearing on whether the fraud is central to the claim, which may in turn be relevant in considering whether it is proportionate to deny the claimant relief. It also suggests that, ordinarily, a claimant is unlikely to succeed in a claim to recover the profits of the fraud – not because the claimant would have to rely on the fraud in order to establish the claim, but because this is likely to be the outcome when the court balances the competing policy considerations.

For more information see this post on our Litigation Notes blog.

Important Supreme Court decision on “Quincecare” duties of care and corporate attribution

The Supreme Court has upheld the first successful claim for breach of the so-called Quincecare duty of care, which requires a financial institution to refrain from executing a customer’s payment mandate if (and so long as) it is “put on inquiry” that the order is an attempt to misappropriate its customer’s funds: Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50. The Supreme Court’s judgment in this case follows hot on the heels of the Court of Appeal’s refusal to strike out a separate claim for breach of a Quincecare duty (see our banking litigation blog post on that decision here).

In the present case, breach of the Quincecare duty was established at first instance and not appealed. The issue for the Supreme Court was whether the fraudulent state of mind of the authorised signatory could be attributed to the company which had been defrauded and, if so, whether the claim for breach of the Quincecare duty could be defeated by the defence of illegality (and certain other grounds of defence). The Supreme Court found against the bank in respect of both points.

The decision has important implications for financial institutions, as it demonstrates the challenges they are likely to face in seeking to establish an illegality defence in circumstances where the existence and breach of a Quincecare duty has been established. It therefore highlights the importance of having in place appropriate safeguards and procedures governing payment processing.

It is also of significance to corporate claimants – and insolvency office holders – in particular in clarifying the test for corporate attribution. The court declared that the often criticised decision in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39 (considered here and here) can “finally be laid to rest”. In particular, it confirmed that whether the knowledge of a fraudulent director can be attributed to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant – even in the case of a “one-man company”.

For more detail on the decision, please see this post on our Banking Litigation Notes blog.

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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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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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

Supreme Court corrects “wrong turn” in English law, holding that bribes received by an agent are held on trust for the principal

Who is the rightful owner of a bribe? Is a bribe or secret commission received by an agent “held on trust” for his principal? Or is the principal’s claim against the agent a personal one for equitable compensation equal to the value of the bribe or commission?

The issue is of critical importance. It affects everything in litigation against dishonest agents, from the nature of the injunctive relief available at the outset to the rights in his insolvency. Perhaps most importantly of all, it affects whether the bribe can be “traced” into the hands of third parties and recovered as “trust” property.

After over 100 years of judicial wrangling and academic debate, the Supreme Court decided last week that bribes and secret commissions are held on trust by an agent for his principal: FHR European Ventures LLP and others (Respondents) v Cedar Capital Partners LLC (Appellant) [2014] UKSC 45. In doing so, the Supreme Court overturned various well-known authorities (including Lister v Stubbs and Sinclair v Versailles – see post) and aligned English law with several jurisdictions which long ago broadened the availability of proprietary remedies.

The implications are significant. Most importantly, the principal can claim a proprietary remedy against the bribe/secret commission itself, rather than a personal one against the defaulting agent. Robert Hunter and Tom Wood consider the decision below. Continue reading

Supreme Court finds trustee fraud exception under Limitation Act does not apply to claims for dishonest assistance / knowing receipt

Often, a substantial time may have passed before a beneficiary becomes aware of a fraudulent breach of trust. Even when the fraud has been discovered, there may be a number of reasons why the beneficiary decides to delay in commencing proceedings. When considering claims against third parties to a fraudulent breach of trust, however, beneficiaries will have to pay close attention to the limitation period in light of the Supreme Court’s decision in Williams v Central Bank of Nigeria [2014] UKSC 10.  

The Supreme Court held that the exception under section 21(1)(a) of the Limitation Act 1980 for “any fraud or fraudulent breach of trust to which the trustee was party or privy” does not apply to actions against third parties based on dishonest assistance or knowing receipt. Such claims are therefore subject to the statutory six-year limitation period. The decision reverses the Court of Appeal on the point, and marks a significant limitation on claims based on ancillary liability for fraudulent breach of trust. Beneficiaries may however still benefit from section 32 of the Act, which suspends the limitation period in cases of fraud or deliberate concealment until the claimant has (or could with reasonable diligence have) discovered the fraud or concealment.  Continue reading

UK Supreme Court confirms FSA not required to give cross-undertaking in damages

In a judgment handed down yesterday, the Supreme Court held that there is no general rule that an authority such as the FSA, seeking an injunction in the course of its public functions, should be required to give a cross-undertaking in damages in favour of third parties affected by the injunction, and that there were no particular circumstances why it should be required to do so in the present case: Financial Services Authority v Sinaloa Gold plc and others (Respondents) and Barclays Bank plc (Appellant) [2013] UKSC 11.

The decision will be of particular interest to banks and other financial institutions which hold client assets, since it limits the protection afforded to them as innocent third parties who may potentially suffer loss or expense following the grant of an injunction in favour of the FSA. Click here to read about the decision on our Financial Services Regulation and Corporate Crime Notes blog.