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No need to plead fraud but a need to tread carefully

The Court of Appeal has confirmed that there is no need for a defendant to plead fraud in order to argue that a claim is fundamentally dishonest for the purpose of the Qualified One-Way Costs Shifting (QOCS) regime. Sunil Nannar and Marcus Davies look at the judgment in Howlett & Anor v Davies & Ageas (2017) in which the Court concluded that, as long as the defendant has filed a defence that provides adequate warning of what its case is and as long as the issues  are explored at trial, a finding of fundamental dishonesty can be reached.

The Court of Appeal also confirmed that the approach taken by HHJ Maloney QC in defining fundamental dishonesty in Gosling v Screwfix (2014) was "common sense". In Gosling, the Judge had said that for a case to be fundamentally dishonest, the dishonesty had to go to the root of the whole, or a substantial part of a claimant's case and not be in respect of a "minor, self contained head of damage".

QOCS and fundamental dishonesty

For some considerable time now, fraud practitioners have been waiting for the Court of Appeal to consider the operation of fundamental dishonesty in the context of the QOCS regime and in particular both what that term meant in practice, and also whether it was necessary to specifically plead a reference to fundamental dishonesty or fraud in order to successfully argue that CPR r.44.16 should apply.

It should be remembered that when the Civil Justice Committee (CJC) came to consider Lord Justice Jackson's proposals on QOCS, at the behest of the MoJ, they agreed that the bringing of a fraudulent claim should cause the loss of QOCS protection where the defendant had proved on the balance of probabilities that the claimant had made false statements or representations which:

• were likely to interfere with the course of justice in some material respects; and

• at the time they were made, the maker had no honest belief in their truth and knew of the likelihood that they would interfere with the course of justice.

The CJC suggested that fraud had to be pleaded and that "mere exaggeration" would not be enough for a claimant to suffer the loss of QOCS.

In the event, the government decided instead that QOCS would be lost "where the claim is found on the balance of probability to be fundamentally dishonest". The rules were silent as to whether fundamental dishonesty needed to be pleaded and no definition of it was provided. These are the points to which we now have answers.

Background

In Howlett & Anor v Davies & Ageas (2017), the claimants both alleged that they were passengers in the first defendant's car when it was in collision with a parked vehicle, as a result of which they both sustained personal injury.

The second defendant in its defence put the claimants to proof, highlighting, amongst other things, that both claimants had been injured in an earlier accident when they had again been passengers in the first defendant's vehicle, that the first claimant had been involved in at least four other accidents between 2011 and 2013 and that the claimants and the first defendant had given unlikely/inconsistent accounts.

The case came before Deputy District Judge Taylor, who dismissed the claims stating "…I do not believe the evidence of Mr and Mrs Howlett, or any of the evidence that was sought to pray in aid of that case … can be relied on", concluding "Consequently I find that no injury was suffered by them as a result of any accident and any claim they make in respect of damages must of course fail in addition".

The judge went on to reject that the submission for the claimant that fundamental dishonesty could not be found because the defence had not pleaded dishonesty, or that defence counsel had not cross examined on that basis, stating that the defence "…does make it clear that it is suggesting in the clearest possible terms to the claimants that they have not been honest".

Further, during the course of giving evidence, the claimant's counsel had asked the first claimant whether she was being honest in her evidence and she had replied words to the effect that she was. In asking that question, the judge said, he was able to consider whether the witnesses were being honest and to consider the honesty of the witnesses was "…the central tenet of the job this court has to undertake".

In respect of costs, the judge found that both claimants had been dishonest and that that dishonesty was fundamental and he made the order that the case was dismissed with costs. The claimants appealed against the costs order and that appeal was dismissed by HHJ Blair QC. They appealed again to the Court of Appeal.

The definition of fundamental dishonesty

The Court of Appeal confirmed that the approach taken to defining fundamental dishonesty by HHJ Moloney QC in Gosling v Screwfix & Anor (2014) was one of "common sense" and thereby gave that definition its approval.  In that case, the judge had stated that it was important to distinguish between dishonesty that was not fundamental so as to expose a claimant to a costs liability and dishonesty that should give rise to a costs liability and he went on to say that:

"The corollary term to 'fundamental' would be a word with some such meaning as 'incidental' or 'collateral'. Thus, a claimant should not be exposed to costs liability merely because he is shown to have been dishonest as to some collateral matter or perhaps as to some minor, self-contained head of damage. If, on the other hand, the dishonesty went to the root of either the whole of his claim or a substantial part of his claim, then it appears to me that it would be a fundamentally dishonest claim: a claim which depended as to a substantial or important part of itself upon dishonesty."

We now have for the first time confirmation from the Court of Appeal that what was widely seen to be a sensible approach to defining fundamental dishonesty arrived at by Judge Maloney has higher court ratification and we can therefore expect this definition to continue in use, now with a formal seal of approval.

Advancing the defence

Rejecting the claimants' submissions that the court should not make a finding of fundamental dishonesty, where fundamental dishonesty or fraud had not been pleaded and dismissing their appeal, Lord Justice Newey giving the judgment of the Court, held that the second defendant had properly pleaded and set out its defence, so as to ensure that the claimants knew what case they faced and they had been given proper opportunity to respond.

The insurers in this case had followed the guidance in Kearsley v Klarfeld (2005) an LVI case, in which judgment  Brooke LJ held that a defendant need not allege fraud for an LVI defence to succeed and instead it was sufficient for it to "…set out fully the facts from which they would be inviting the judge to draw the inference that the plaintiff had not in fact suffered the injuries he asserted". Brooke LJ went on to stress that as long as a defendant complied with CPR r.16.5, there was no need to plead fraud or fabrication.

In Howlett the Court of Appeal in its judgment specifically referred to CPR r.16.5 (2) which provides:

" (2) Where the defendant denies an allegation –
(a) he must state his reasons for doing so; and
(b) if he intends to put forward a different version of events from that given by the claimant, he must state his own version."

It was easy, said the court, to understand why defendants were reluctant to plead fraud when:

• They often lack direct knowledge of events
• Lawyers' professional obligations mean that they must be slow to plead fraud without having evidence in support; and
• Where a fraud defence fails, a trial judge is likely to find for a claimant, without sufficient consideration of whether the claimant has actually made out his case.

The argument that defendants turn away from pleading fraud to avoid allocation to the multi-track was less attractive the court said, but the fact that dishonesty had not been pleaded will "not necessarily bar a judge from finding a witness to have been lying" and judges often reached the conclusion that a witness had been untruthful, absent a pleading of fraud. It was held that in this case, the claimants had been given notice of the points that the defendant would raise and they could not claim to have been ambushed.

In respect of exploring the issues at trial, the court stated that even where "…in a particular context a cross-examination which does not use the words “dishonest” or “lying”", (and those words were not used by defence counsel in this case) it may as in this case be enough to give a witness fair warning that their honesty is being challenged, but it would ultimately be a matter for the trial judge to decide in each specific case.

The appeal was dismissed.

Comment

This Court of Appeal's judgment will be welcomed by insurers and fraud practitioners, who have been waiting for some time for guidance from an appellate level court as to how fundamental dishonesty should be defined and the decision brings certainty in that regard.

Notwithstanding the Court of Appeal confirming that fundamental dishonesty does not need to be pleaded, care still needs to be taken when drafting the defence to ensure that the claimant is given fair warning of the defendant's contentions and the claimant will then need to be cross examined upon them at trial.

In this case, the fact that the insurer had fully pleaded its case, including setting out its version of the accident circumstances,  the contention that the fact that the claimants had been involved in another accident involving the first defendant was indicative of a staged or contrived accident, and that they did not accept that the accident had occurred, meant that the Court of Appeal concluded that the claimants had been given fair warning that the defendant did not accept their account.

In addition to the pleading, the issue of the honesty was expressly explored during the course of the trial, when the claimants were asked by both their own counsel and counsel for the Second Defendant whether what they were saying in their evidence was the truth and the Court of Appeal and the trial judge made reference to that fact. Would the same outcome have been achieved here, had that not been the case?

Whilst not specifically addressed by the Court, it is unlikely that fundamental dishonesty will need to be pleaded in the context of Section 57 of the Criminal Justice & Courts Act 2015 and it is also likely to be defined in the same way.

This decision also appears to have application in those cases where a claimant discontinues and the defendant wishes to seek to set aside the notice of discontinuance and argue fundamental dishonesty. Where defendants seek to take that approach, claimants often argue that, absent the issues being vented fully at trial, it is not appropriate to make a finding of fundamental dishonesty, irrespective of the fact that there is provision in Practice Direction to Part 44 for such an approach to be taken and an order in those terms made.

Contact

For more information about the issues arising from this case and application of fundamental dishonesty, please contact Sunil Nannar on 0161 603 5202, or by email sunil.nannar@dwf.law, or Marcus Davies on 0161 603 5146, or by email marcus.davies@dwf.law

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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