Civil Fraud Quarterly Round-Up:
Q2 2022

This quarterly civil fraud update provides a summary of reported decisions handed down in the courts of England and Wales in the period April - June 2022.
 

Quincecare Duty and APP fraud

The Privy Council (Isle of Man) decided in Royal Bank of Scotland International Ltd v JP SPC 4 that a bank did not owe a duty of care in negligence, a Quincecare duty or a duty to protect against economic loss to the beneficial owner of money held in an account where the beneficial owner had been defrauded by the bank’s customer.  The Court was not willing to extend those duties beyond the bank’s customer and there had been no express assumption of responsibility by the bank to the beneficial owner of the money in the account.

Issues of the duties owed by banks to those who have been the victim of fraud were also considered by the Commercial Court in Technimont Arabia Limited v National Westminster Bank Plc. However, in this case the Claimant victim of fraud brought an action against the bank who received its funds (which were the proceeds of a fraud). When the fraudster attempted to dissipate the funds received from the Claimant, the recipient bank/Defendant’s own anti-fraud measures were triggered, but with the aim of preventing its own customer from falling victim, rather than as a result of any concern that the funds in the account were the proceeds of a fraud. The Claimant’s claim was framed in such a way that it argued that the recipient bank had been unjustly enriched and the Court rejected that claim, stating that even if there had been enrichment, the recipient bank would be able to rely on the defence of change of position. The Court commented that banks were entitled to focus on protecting, rather than investigating, their customers.

In Federal Republic of Nigeria v JPMorgan Chase Bank the Court dismissed allegations that the Defendant bank should not have trusted the senior officials of the Federal Republic of Nigeria from whom it took instructions. However, rather than deciding the Quincecare issues, the Court rejected the premise that the Claimant had been the victim of a fraud, finding instead that the recipient of funds was entitled to receive them. Nonetheless the Court considered the Quincecare arguments and confirmed that the requirement in respect of notice was that the payment instruction itself might be a fraud (i.e. that it was the actual payment request which was relevant rather than any historical concerns or past issues). 

Breach of Fiduciary Duty

In the now infamous case of Eurasian Natural Resources Corp Ltd v Dechert LLP, Eurasian Natural Resources Corp Ltd v Director of the Serious Fraud Office judgment was entered in favour of ENRC in part. It was found that Dechert had acted in breach of fiduciary duty and/or negligently by leaking evidence to the press and the SFO.  Whilst SFO officers were found to have been in breach of duty, they were not shown to have had the requisite knowledge of loss to have committed the tort of misfeasance. The SFO had, however, induced Dechert’s breach of duty by receiving information which should not have been provided to it.

Contempt of Court

In Al-Rawas v Hassan Khan & Co (A Firm) the Court of Appeal considered issues relating to costs following a withdrawn appeal against findings of contempt and committal orders. The Court of Appeal awarded costs on an indemnity basis following the withdrawal of the appeal, as it was clear that the appeal process had only been engaged in order to prolong proceedings and delay payment of sums owing. This was an abuse of the automatic right of appeal against committal orders for contempt under s.13  Administration of Justice Act 1960.

The Court made a further decision (see my summary in my Civil Fraud Quarterly round up for Q1 2022) in Ocado Group Plc v McKeeve, allowing the Claimant’s application that parts of a committal trial should be heard in private to allow reference to documents which contained commercially sensitive information. The Court was satisfied that there were exceptional circumstances such that it would be unfair and unjust to the Claimant if its documents were aired in public, particularly given the purpose of the search order whose breach gave rise to the contempt action.

Account and enquiry order

In Gangat v Jassat the Court of Appeal upheld the lower Court’s decision to order the Defendant to account to the Claimants for certain assets which were under his control. The Court considered the nature of a document produced earlier and concluded that it was an acknowledgement of what the Defendant was holding for the Claimants.  The Court also considered issues of suppression of documents by the Claimants and commented that the impact would depend on the issues and the other evidence. In this particular case it was entirely appropriate to make findings in the claim on the basis of other evidence, even if allowances were made for what might have been suppressed.

Forgery

In a decision which will please conveyancers, the Court in Ashraf v Lester Dominic Solicitors held that the solicitor acting for a mortgagee did not owe a duty to the seller of the property where it was alleged that the seller’s signature on the transfer document was forged. Nor did a solicitor who witnessed the seller’s signature owe a duty to any party from the consequence of the signature being a forgery. The statutory duty to carry out money laundering checks did not give rise to a private law cause of action.

Misrepresentation

The Court considered various claims in ACL Netherlands BV v Lynch for:

• the liability of persons discharging managerial responsibilities under the Financial Services and Markets Act 2000 (FSMA) brought by way of a “dog leg” claim by which the acquired company admitted liability to the SPV which had been established for the purpose of acquisition and the SPV then sought to recover its losses from the company’s former directors; and
• damages under the Misrepresentation Act 1967.

Under FSMA there was a requirement for actual knowledge of a false statement, and liability would only arise in respect of a statement that the party knew to be false. The party who acquired the relevant securities had to have relied on the false statement and it must have induced the acquisition. There was no defence of contributory negligence available.

Jurisdiction

The Court has allowed a bank to bring a claim against shareholders of a company for deceit where only indirect harm was suffered in England, but refused to exercise jurisdiction because Abu Dhabi was the more appropriate forum for the dispute. Abu Dhabi Commercial Bank PJSC v Shetty & Or (mentioned in my Civil Fraud Quarterly round ups of Q2 and Q3 2021) involved loan agreements which were brought into effect in a solicitor’s offices in England, which was, the Court found, enough to allow the case to proceed under the tort jurisdictional gateway, but the claim was scuppered by forum non conveniens, which, the Court found, meant the claim should properly be heard in Abu Dhabi, not least because there were issues of UAE law in dispute.

Freezing Injunctions

The Court in Sweden v Servin refused an application to vary a proprietary freezing injunction to allow the Defendant to re-mortgage a property in order to use the funds for legal expenses, but gave the Defendant a further chance to provide evidence of impecuniosity and that there were no other available funds.

In Ennismore Fund Management ltd v Fenris Consulting Ltd the Privy Council (on appeal from the Cayman Islands Court of Appeal), considered the correct approach to take when assessing damages pursuant to a cross undertaking given when obtaining a freezing injunction. The Privy Council confirmed that the approach should be analogous to a breach of contract claim.  A claim based on a loss of opportunity to invest would require details of the investment and establishment that, on the balance of probabilities, the money would have been invested.

The Court allowed a claim form to be served by email on a Defendant in Taiwan in the case of Lakatamia Shipping Co Ltd v Hsia. The Defendant had conspired to defeat a freezing injunction which had been made against a connected party.

A freezing injunction linked to the enforcement of a US judgment was varied to allow the frozen assets to be used to pay the legal expenses needed to appeal the US judgment and to defend the English proceedings in Moss v Martin.  Caps of £100,000 for the English proceedings and a combined total of £175,000 were imposed, although it was noted that the sum could be increased by agreement or further order.

In Powell v Rad the Defendant sought to discharge a freezing injunction on the basis of material non-disclosure. The Court found that whilst there were additional matters which could have been brought before the Judge at the without notice hearing, there had been no material non-disclosure and ordered that the injunction should continue.

The Court of Appeal set aside an order compelling the Appellants to provide extra fortification for a cross undertaking in damages given to support a worldwide freezing injunction in Claimants listed in Schedule 1 v Spence. The fortification had originally been ordered because the first Respondent had alleged that there was a substantial risk that the existence of the worldwide freezing injunction might cause his bank to call in a large loan and to realise the security provided for that loan, causing him to suffer a loss as a result of unfavourable exchange rates.  However, the Court of Appeal considered what the actual loss might be in circumstances that arrangements had been put in place to hedge against losses caused by exchange rate movements, concluding that the actual loss was the cost of putting a replacement hedge in place rather than the full amount of loss. The Court of Appeal reached the conclusion that there had been no good arguable case put forward that the first Respondent would suffer loss and there was, therefore, no need to require further fortification to be provided.

In Lazuli Properties Ltd v Bhunda the Court required receivers appointed over properties which were subject to a freezing injunction to provide notice to the beneficiaries of that injunction of any exchange of contract of sale or of an intention to put the properties up for auction. The beneficiaries of the freezing injunction had an interest in the sale of the properties and wanted to guard against the possibility of a sale at an undervalue. The Court approved this approach in circumstances in which it was not clear that the beneficiaries of the freezing injunction were owed any duty of care by the receivers such as would give rise to any liability should a property be sold at an undervalue.

The Court refused to grant an information order in Northern Powerhouse Developments Ltd v Woodhouse despite recognising that the Defendant was in breach of a freezing injunction. The injunction had not required disclosure of the information subsequently sought and, as such, disclosure of that information was not necessary for compliance with the disclosure requirements of the freezing injunction.

The Court in Patel v Minerva Services Delaware, Inc also refused to make information orders, after refusing to grant an application for a freezing injunction on the grounds that there was no evidence of a risk of dissipation and no serious issue to be tried.  There was no jurisdiction to make a free-standing information order under CPR r25.1(1)(g) or elsewhere.

Insolvency & Security for Costs

The Court in Kireeva v Bedzhamov (mentioned in my Civil Fraud Quarterly round ups Q4 2019, Q2 2021 and Q1 2022) granted an application for security for costs of the remittal of an application for recognition of a Russian bankruptcy order in England and Wales. The Russian Trustee had no assets in the jurisdiction against which an order for costs could be enforced and there was a real risk of non-enforcement in Russia. Further, the litigation funder might not fund an adverse costs order in the event that recognition was not granted.

Digital Assets

The High Court recognised NFTs as property in Lavinia Deborah Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc trading as Opensea. The Applicant was the victim of a theft of a number of NFTs which were traced to two accounts held with a US based marketplace.  The Court ordered proprietary injunctions restraining the dissipation of the NFTs and a Bankers Trust Order requiring the marketplace operating the accounts to disclose the identity of the account holders. The Court also gave permission for the Bankers Trust order to be served in the US.

The Claimants in Walker v Blockchain.com.Inc. were ordered to pay the Defendant’s costs of a Norwich Pharmacal application on an indemnity basis where they should have realised there was no basis for involving the Defendant, had failed to request the information before making the application and where there was no urgency in the application. The Claimants had acted unreasonably and had made errors which were compounded by a failure to ask the Defendant about its involvement.  This constituted conduct which was out of the norm and, therefore, indemnity costs were appropriate.

About the author

Mary Young is a Partner in the Dispute Resolution team. Her practice covers a wide range of areas but Mary’s particular interests and expertise lie in civil fraud and asset tracing as well as claims against professionals in negligence, breach of fiduciary duty and breach of trust.