Pleading Fraud/Dishonesty, Striking Out & JENE

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Pleading Fraud/Dishonesty

The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him.

There are two distinct and separate rules that apply to pleading allegations of fraud/dishonesty. The allegations must be both:

(i) clearly pleaded; and

(ii) particularised.

If a pleading is ‘equivocal’, i.e. it permits an innocent explanation, it is bad in law, because it is not open to the trial judge to make a finding of fraud.

In Mullarkey & Ors v Broad & Anor[2007] EWHC 3400 (Ch), Mr Justice Lewison stated the primary rules as follows: 

‘Pleading and proving intentional wrongdoing

41.   In Belmont Finance Corporation Ltd. v. Williams Furniture Ltd. [1979] Ch. 250, at 268 Buckley L.J. said:

“An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word ‘fraud’ or the word ‘dishonesty’ must be necessarily used. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.” …

43.   In Paragon Finance plc v D B Thakerar & Co he said on the question of pleading:

“It is well established that fraud must be distinctly alleged and distinctly proved, and that if the facts pleaded are consistent with innocence it is not open to the court to find fraud.”’

Striking Out

The court can strike out a Defence under CPR, r.3.4(2)(a) – if it ‘discloses no reasonable grounds for defending the claim’. 

The legal test for striking out a statement of case for non-compliance with these special pleading rules (which is a power the court may exercise at a CMC of its own initiative), was stated by Sir Julian Flaux (who is now Chancellor of the High Court) in JSC Bank of Moscow v. Kekhman and others [2015]: JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 3073 (Comm) (29 October 2015) (bailii.org) at [20]

‘The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty”. At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge.’

If a Defendant [‘D‘] (whose Defence is based upon an allegation of e.g. deceit by the Claimant), has refused to reply to specific allegations in the Particulars of Claim, and instead pleaded a ‘bare‘ or ‘blanket’ denial, it follows that:

(i) D is deemed under CPR, r.16.5(5) to have admitted the facts to which he has failed to reply; and

(ii) the Defence may be struck out under CPR, r.3.4(2)(a), because D has failed to plead a complete defence to the Claim, by failing to advance an affirmative case.

Blackstone’s Civil Practice 2021, at para 33.7, ‘a defence may be struck out if it consists of a bare denial or otherwise fails to set out a coherent statement of facts, or if the facts set out, even if true, do not amount in law to a defence to the claim. Many institutional defendants have been in the habit of filing short defences making blanket denials without stating any positive case. These defences ought to be a thing of the past.’ 

The approach of the court

The power to strike out is exercised sparingly. An alternative strategy is to apply for JENE (see below).

In Three Rivers District Council v. Governor and Company of The Bank of England [2001] UKHL 16, Lord Hope of Craighead stated:

‘106. … the overriding objective of dealing with cases justly includes dealing with them in a proportionate manner, expeditiously, fairly and without undue expense. … each case is entitled only to an appropriate share of the court’s resources. Account has to be taken of the need to allot resources to other cases. … The most important principle of all is that which requires that each case be dealt with justly. It may well be that the claimants, on whom the onus lies, will face difficulties in presenting their case. They must face the fact that each and every allegation of bad faith will be examined rigorously. A trial in this case will be lengthy and it will be expensive. There is only so much that astute case management can do to reduce the burdens on the parties and on the court. Nevertheless it would only be right for the claim to be struck out if it has no real prospect of succeeding at trial. I do not think that one should be influenced in the application of this test by the length or expense of the litigation that is in prospect. Justice should be even-handed, whether the case be simple or whether it be complex. It is plain that the situation in which the claimants find themselves was not of their own making, nor are they to be blamed for the volume and complexity of the facts that must be investigated. I would hold that justice requires that the claimants be given an opportunity to present their case at trial so that its merits may be assessed in the light of the evidence.

    107. I have taken one other factor into account. The decision which your Lordships are being asked by the Bank to take is to give summary judgment in its favour on the entire claim. It would only be right to strike out the whole claim if it could be said of every part of it that it has no real prospect of succeeding. … I think that that is too big a step to take on the available material. Conversely, I consider that if one part of the claim is to go to trial it would be unreasonable to divide the history up and strike out other parts of it. A great deal of time and money has now been expended in the examination of the preliminary issues, and I think that this exercise must now be brought to an end. I would reject the Bank’s application for summary judgment.

Lord Hutton further stated:

113. The Court of Appeal (Auld LJ dissenting) upheld the decision of Clarke J and delivering the joint judgment of himself and Robert Walker LJ, Hirst LJ stated [2000] 2 WLR 15, 101F:

“… The tort alleged is a tort of dishonesty, and the plaintiffs’ claim must be rigorously assessed on their pleaded case and the evidential material shown to be available to support it.”

In his dissenting judgment, at p 180F, Auld LJ stated:

“As the authorities to which Hirst and Robert Walker LJJ have referred indicate, it is normally only in clear and obvious cases that a court should strike out a claim as incapable of proof at the interlocutory stage and before full discovery. In cases, such as this, of great legal and factual complexity, it requires a justified confidence that the plaintiffs’ case is and will remain incapable of proof and most exceptional circumstances to justify stifling it at an early stage. For the reasons that I have given, I do not consider that the court can be confident that all the evidence material to Clark J’s conclusion about the Bank’s state of knowledge has been gathered in or, which is as important, properly tested.”

    117. The 1999 White Book stated at 18/19/10 with reference to r 19(1)(a):

“A reasonable cause of action means a cause of action with some chance of success when only the allegations in the pleading are considered (per Lord Pearson in Drummond-Jackson v British Medical Association [1970] 1 WLR 688; [1970] 1 All ER 1094, CA). So long as the statement of claim or the particulars (Davey v Bentinck [1893] 1 QB 185) disclose some cause of action, or raise some question fit to be decided by a judge or a jury, the mere fact that the case is weak, and not likely to succeed, is no ground for striking it out (Moore v Lawson (1915) 31 TLR 418, CA; Wenlock v Moloney [1965] 1 WLR 1238; [1965] 2 All ER 871, CA); “

Therefore if a plaintiff would be entitled to judgment if he were successful in proving the matters alleged in his pleadings, the statement of claim could not be struck out under rule 19(1)(a) on the ground that he had no prospect of adducing evidence to prove the matters which he alleged. …

    118. In the present case when Clarke J struck out the action he did so on the ground that even with all the proposed re-re-amendments the plaintiffs’ claim was bound to fail and that in those circumstances it would be an abuse of the process or vexatious or oppressive to allow the action to proceed (see paragraph 6 and 7 at p 172 of his third judgment).

    119. The applications before Clarke J and the Court of Appeal were governed by the Rules of the Supreme Court but those Rules have now been replaced by the Civil Procedure Rules. I think that rule 3.4 (2)(a) of the new Rules corresponds in a broad way to Ord 18, r 19(1)(a) and rule 3.4 (2)(b) and rule 24.2 (a)(i) correspond in a broad way to Ord 18, r 19(1)(b) and (d). Rule 3.4(2) provides:

“The court may strike out a statement of case if it appears to the court—

(a) that the statement of case discloses no reasonable grounds for bringing or defending the claim;

(b) that the statement of case is an abuse of the court’s process or is otherwise likely to obstruct the just disposal of the proceedings;”

Rule 24.2(a)(i) provides:

“The court may give summary judgment against a claimant or defendant on the whole of a claim or on a particular issue if—

(a) it considers that—

(i) that claimant has no real prospect of succeeding on the claim or issue. … 

    122. Bad faith is an essential element in the tort of misfeasance. In accordance with a well established rule it is necessary that bad faith (or dishonesty – the term used in some authorities) should be clearly pleaded. In Davy v Garrett (1878) 7 Ch D 473, 489 Thesiger LJ said:

“There is another still stronger objection to this statement of claim. The plaintiffs say that fraud is intended to be alleged, yet it contains no charge of fraud. In the Common Law Courts no rule was more clearly settled than that fraud must be distinctly alleged and as distinctly proved, and that it was not allowable to leave fraud to be inferred from the facts. It is said that a different rule prevailed in the Court of Chancery. I think that this cannot be correct. It may not be necessary in all cases to use the word ‘fraud’ – indeed in one of the most ordinary cases it is not necessary. An allegation that the defendant made to the plaintiff representations on which he intended the plaintiff to act, which representations were untrue, and known to the defendant to be untrue, is sufficient. The word ‘fraud’ is not used, but two expressions are used pointing at the state of mind of the defendant – that he intended the representations to be acted upon, and that he knew them to be untrue. It appears to me that a plaintiff is bound to show distinctly that he means to allege fraud. In the present case facts are alleged from which fraud might be inferred, but they are consistent with innocence. They were innocent acts in themselves, and it is not to be presumed that they were done with a fraudulent intention.”

I would observe that the last two sentences in this passage have to be read together with the sentence which immediately precedes them.

In Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch D 250, 268 A-C Buckley LJ stated:

“In the present case, do the facts alleged in the statement of claim suffice to bring home to the defendants or any of them a charge that (a) the object of the alleged conspiracy was a dishonest one; and (b) that they actually knew, or must be taken to have known, that it was so?

“An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word ‘fraud’ or the word ‘dishonesty’ must necessarily be used: see Davy v Garrett, 7 Ch D 473, 489, per Thesiger LJ. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.”

    124. In Armitage v Nurse [1998] Ch 241, 256G Millett LJ said:

“It is not necessary to use the word ‘fraud’ or ‘dishonesty’ if the facts which make the conduct complained of fraudulent are pleaded; but, if the facts pleaded are consistent with innocence, then it is not open to the court to find fraud.”

Later in his judgment at p 259G the learned Lord Justice said:

“I am of opinion that, as at present drawn, the amended statement of claim does not allege dishonesty or any breach of trust for which the trustees are not absolved from liability by clause 15.”

In Taylor v Midland Bank Trust Co Ltd (unreported, 21 July) 1999 Buxton LJ referred to the first observation of Millett LJ at p 256G and said:

“That, however, was an observation about pleading, not about substance. If (unlike the pleader in our case) the claim does not expressly allege dishonesty, but stands on facts alone, those facts on their face will meet the requirement of a specific allegation of dishonesty only if they can bear no other meaning.”

But in the present case, unlike in Armitage v Nurse, the pleader does expressly allege bad faith because paragraph 37 pleads that “the motives of the Bank in acting as pleaded above were improper and unlawful and in the premises the Bank acted in bad faith” and the paragraph sets out particulars in support of that allegation. In my opinion those particulars are not consistent with mere negligence.

    125. I further consider that if a plaintiff clearly alleges dishonesty or bad faith and gives particulars, the statement of claim cannot be struck out under rule 3.4(2)(a) because the facts he pleads as giving rise to an inference of dishonesty or bad faith may at the trial, after a full investigation of the circumstances, be held not to constitute proof of that state of mind. If a defendant applies to strike out an action on the ground that the plaintiff has no prospect of adducing evidence at the trial to establish the case which he pleads the application should be brought under rule 3.4(2)(b) or rule 24.2(a)(1).’ 

JENE

If D refuses to mediate, then as part of his/her active case-management role, i.e. inherent judicial function, a procedural judge at a CMC, has the power to order a JENE. This does not require an application where the proposal is made in the Claimant’s Proposed Directions, or the procedural judge grants leave to the parties to make representations about JENE. I submit, that even in the County Court, JENE is arguably beneficial, proportionate and will involve a sensible use of the the court’s resources, where a case has been allocated to the Multi Track, i.e. because of the complexity of the: legal; procedural; and evidential issues in the case and consequently the length of the trial. That is because a JENE judge can reality-test the actual litigation risks that will confront the parties at trial, resulting in a re-calibration by each party of their litigation risk calculus, which should focus their minds and those of their legal advisors, upon settlement, rather than going to war. Hopefully, cooler minds will then prevail! See my article:

 ‘Judicial-ENE and the New Normal’, published by Trusts & Trustees (Oxford University Press), 14 December 2020 on the ‘Publications’ page at www.ihtbar.com

 Recent authorities about pleading fraud/dishonesty

See Civil Fraud – Law, Practice & Procedure, edited by Thomas Grant QC and David Mumford QC (2018), published by Sweet & Maxwell, paragraphs 1-008 to 1-017 [The Decision to Allege Fraud].

Recent cases include:

1.        McEaney and Other v. Ulster Bank Ireland Ltd and others [2015]: McEneaney & Ors v Ulster Bank Ireland Ltd & Anor [2015] EWHC 3173 (Comm) (09 November 2015) (bailii.org)

‘It is an ingredient of a claim in fraud that the person making the false representation intended his statement to be understood by the representee in the sense in which it was false (see Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd, [2011] EWHC 484 (Comm) at para 221) and, as it used to be put, there must be “moral obliquity”: (per Lindley LJ in Angus v Clifford, [1891] 2 Ch 449, 468, and see Maple Leaf Macro Volatility Master Fund v Rouvroy, [2009] EWHC 257 (Comm) at para 327). That was not originally alleged.’ Mr Justice Andrew Smith at para 54.

2.        JSC Bank of Moscow v. Kekhman and others [2015]: JSC Bank of Moscow v Kekhman & Ors [2015] EWHC 3073 (Comm) (29 October 2015) (bailii.org)

‘2.     CPR 3.4(2) gives the court power to strike out a statement of case which discloses no reasonable grounds for bringing or defending a claim or a statement of case which is an abuse of process. Where, on the material before the court, there are disputed issues of fact, the court should not strike out a claim unless certain it is bound to fail: see per Peter Gibson LJ at [22] in Colin Richards & Co v Hughes [2004] EWCA Civ 226. The test is similar but not identical to that for summary judgment where the court will not grant summary judgment, here in favour of a defendant, unless the claim has no real prospect of success. It is well established that where it is clear that there are disputed issues of fact between the parties, the court should not engage in a mini-trial of the merits at an interlocutory stage …

14.            However, Mr Swainston QC for Mr Kekhman submits that in a case where fraud is alleged (as is the case with both the original conspiracy plea and the proposed plea of fraudulent misrepresentation) there is an anterior question as to whether fraud is properly pleaded at all, in other words whether the requirements imposed by the rules of Court and as a matter of law in respect of pleading fraud have been satisfied. In that context, Mr Swainston QC relies upon the principles as to the pleading of fraud restated by the House of Lords in Three Rivers District Council v Bank of England[2001] UKHL 16; [2003] 2 AC 1.

15.            At [55]-[56], Lord Hope of Craighead stated the principles as follows:

“As the Earl of Halsbury LC said in Bullivant v Attorney General for Victoria [1901] AC 196, 202, where it is intended that there be an allegation that a fraud has been committed, you must allege it and you must prove it. We are concerned at this stage with what must be alleged. A party is not entitled to a finding of fraud if the pleader does not allege fraud directly and the facts on which he relies are equivocal. So too with dishonesty. If there is no specific allegation of dishonesty, it is not open to the court to make a finding to that effect if the facts pleaded are consistent with conduct which is not dishonest such as negligence. As Millett LJ said in Armitage v Nurse [1998] Ch 241, 256G, it is not necessary to use the word “fraud” or “dishonesty” if the facts which make the conduct fraudulent are pleaded. But this will not do if language used is equivocal: Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, 268 per Buckley LJ. In that case it was unclear from the pleadings whether dishonesty was being alleged. As the facts referred to might have inferred dishonesty but were consistent with innocence, it was not to be presumed that the defendant had been dishonest. Of course, the allegation of fraud, dishonesty or bad faith must be supported by particulars. The other party is entitled to notice of the particulars on which the allegation is based. If they are not capable of supporting the allegation, the allegation itself may be struck out. But it is not a proper ground for striking out the allegation that the particulars may be found, after trial, to amount not to fraud, dishonesty or bad faith but to negligence. …

 16.      At [160] Lord Hobhouse stated:

“Where an allegation of dishonesty is being made as part of the cause of action of the plaintiff, there is no reason why the rule should not apply that the plaintiff must have a proper basis for making an allegation of dishonesty in his pleading. The hope that something may turn up during the cross-examination of a witness at the trial does not suffice. It is of course different if the admissible material available discloses a reasonable prima facie case which the other party will have to answer at the trial.”

17.      The fullest statement of the relevant principles upon which Mr Swainston QC relied is that of Lord Millett from [184] onwards:

184.  It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney Genera; for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

185.  It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means “dishonestly” or “fraudulently”, it may not be enough to say “wilfully” or “recklessly”. Such language is equivocal. …

186.  The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.”

20.      … The correct test is whether or not, on the basis of the primary facts pleaded, an inference of dishonesty is more likely than one of innocence or negligence. As Lord Millett put it, there must be some fact “which tilts the balance and justifies an inference of dishonesty”. At the interlocutory stage, when the court is considering whether the plea of fraud is a proper one or whether to strike it out, the court is not concerned with whether the evidence at trial will or will not establish fraud but only with whether facts are pleaded which would justify the plea of fraud. If the plea is justified, then the case must go forward to trial and assessment of whether the evidence justifies the inference is a matter for the trial judge. This is made absolutely clear in the passage from Lord Hope’s speech at [55]-[56] which I quoted above.’

The Honourable Mr Justice Flaux (who is now Chancellor), at [12] –[23].