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Proving Fraud in the English Courts – a higher standard?

The Court of Appeal has confirmed in Bank St Petersburg PJSC v Vitaly Arkhangelsky that the correct standard of proof where issues of dishonesty arise is not a ‘heightened’ civil standard, but the balance of probabilities.

In our last client alert we explored the key principles that arise when pleading and proving fraud in the English Court (as summarised in National Bank Trust v Ilya Yurov & Or1).  The Court of Appeal’s recent decision in Bank St Petersburg PJSC v Vitaly Arkhangelsky2  provides the opportunity to examine one of these key principles in more detail – the standard of proof applicable to civil fraud claims.

It is well established that “cogent evidence is required to justify a finding of fraud or other discreditable conduct”3  This is because fraud and dishonesty are both very serious allegations. Most people are not serious wrongdoers and, as such, clearer evidence is required to prove fraud or dishonesty than (for example) negligence or innocence.

This principle is, however, only the starting point. An innocent explanation should not be favoured over compelling evidence of fraud or dishonesty simply on the basis that innocence is inherently more probable. The pertinent question is whether fraud or dishonesty has been proved on the balance of probabilities; put simply, was fraud or dishonesty more probable than not?

 

Background

The first Claimant, Bank St. Petersburg PJSC (the “Bank”), brought a claim for approximately £16.5 million against the first Defendant, Dr Vitaly Arkhangelsky a Russian shipping entrepreneur, under six personal guarantees and a loan. Dr Arkhangelsky, his wife, Julia Arkhangelskaya, and their company, Oslo Marine Group Ports LLC (together, the “Appellants”) brought a counterclaim against the Bank and its Chairman, Alexander Savelyev (together, the “Respondents”), for damages arising from an alleged conspiracy to seize the assets of the first and second Appellants’ main Russian business in an unlawful corporate raid. The Appellants sought damages of US$467 million from the Respondent for unlawfully causing them harm under Article 1064 of the Russian Civil Code.

The Appellants’ pleaded their counterclaim in three alternative ways. However, following concessions by the Appellants during the first instance hearing, the counterclaim only survived in its third formulation, namely that the Bank had colluded with Russian private equity firm Renord-Invest4 dishonestly to sell the Appellants’ assets in auction at an undervalue.

 

First Instance Decision

Following a trial over 46 sitting days held between January and July 2016, Hildyard J ruled in favour of the Claimants/Respondents (in a 390-page judgment delivered almost 22 months later, in May 2018), upholding all of the Bank’s debt claims whilst dismissing the Appellants’ counterclaim for damages. Significantly, however, Hildyard J did not make the negative declaration sought by the Respondents as to the absence of any dishonesty or deceit on their part. 

In dismissing the counterclaim, Hildyard J held that it had “not been established having regard to the strength of the evidence that was necessary to discharge the burden of proof.”5  He went on to state that the counterclaim “always faced the difficulty that it relied on proof of the inherently improbable, and a burden of proof that could only be discharged by showing the facts to be incapable of innocent explanation such as to give rise to the inference of the conspiracy.”6

 

Appeal

Ground of Appeal

The Appellants appealed the first instance decision on two central grounds:

  • the judge applied the wrong standard of proof, setting too high a bar for dishonesty; and
  • the judge adopted a narrow piecemeal approach to the evidence which prevented him from standing back and assessing the alleged fraud as a whole.

These in turn raised a number of further issues. 
 

The Standard of Proof

In his leading judgment, the Chancellor of the High Court, Sir Geoffrey Vos, found that Hildyard J had erred in his application of the standard of proof when considering the viability of the Appellants’ pleading of dishonesty against the Respondents’ purported innocence.8  The correct standard was not “whether the [innocent] justification is a plausible one” (as Hildyard J had referred to throughout his judgment), but “what explanation was more probable than not, having taken account of the nature and gravity of the allegation” (emphasis added).9  

The implication from the first instance decision was, according to Sir Geoffrey Vos, that while Hildyard J “may well not have considered the conspiracy alleged by the appellants to be in the least improbable…”, he had nevertheless felt unable to determine that the alleged conspiracy had happened, because of the incorrectly high standard of proof he was applying.10

By way of example, in respect of the auction sales, Hildyard J had held that the Respondents’ justifications of their conduct were “not so implausible that they must be rejected, bearing in mind the heavy onus of proof [on the Appellants] in the context of an assertion of dishonesty”.  This distorted the appropriate standard of proof, particularly in light of the judge already having determined that the Respondents had behaved dishonestly.12   

In that regard, Lord Justice Males aptly summarised the correct approach that the Court should take: “once other findings of dishonesty have been made against a party, or he is shown to have given dishonest evidence, the inherent improbability of his having acted dishonestly in the particular respect alleged may be much diminished and will need to be reassessed” (emphasis added). 13

 

Approach to Evidence

On the second ground of appeal, Sir Geoffrey Vos held that Hildyard J’s piecemeal approach to the counterclaim (he had compartmentalised it into 16 factual silos) led to “a failure to consider how the extraordinary facts that he had found at one stage affected the likelihood of the appellants’ allegations at a later stage.”14  The judge had “failed adequately to stand back from his sequence of factual findings so as to consider them as a whole”,15 resulting in a number of the judge’s conclusions being unreliable. 

Accordingly, in light of his finding on the standard of proof and the approach to evidence, and rejecting the Respondents’ argument of illegality, Sir Geoffrey Vos ordered certain matters to be remitted to a new judge to determine the Respondents’ liability for dishonest conspiracy under Article 1064 of the Russian Civil Code.16  

Notably, the first instance judgment was not rendered unsafe – as the Appellants also sought to argue – solely on the grounds of the 22-month delay between trial and judgment, regrettable as the Court of Appeal considered that delay to be.  The Court reminded the parties of the “unwritten rule” in the Business and Property Courts (which includes the Commercial Court) that any judgment should generally be produced no more than three months from trial, even in long and complex cases.17 

 

Comment

This judgment highlights the difficulties faced by judges in complex civil fraud proceedings in which parties allege dishonestly and those allegations are borne out in the evidence.  While establishing that the civil standard of proof does not change, it provides useful guidance on how it is applied in certain circumstances.  In particular, it emphasises that while dishonesty is inherently more improbable than an innocent explanation, compelling evidence of dishonesty will shift this balance. It is nonetheless important to remember that cogent evidence is still required to make out a pleading of fraud, even on the balance of probabilities.

 

1 [2020] EWHC 100 (Comm).
2 [2020] EWCA Civ 408.
3 Fiona Trust v Privalov [2010] EWHC 3199 at 1438 – see Arkhangelsky, paragraph 46.
4 The Renord-Invest group companies had acquired the Appellants’ assets when the Bank’s security was enforced.
5 Bank St Petersburg PJSC v Arkhangelsky [2018] EWHC 1077 (Ch) at 1633 (“First Instance Decision”), cited in Arkhangelsky at 4.
6 First Instance Decision, 1634, cited in Arkhangelsky at 5.
7 Arkhangelsky, 7 and 39.
8 Ibid., 48.
9 bid., 51.
10 Arkhangelsky, 55.

11 First Instance Decision, 1525(5) cited in Arkhangelsky at 54.
12 Idem
13 Lord Justice Males summarising the principles arising from JSC BM Bank v Kekhman [2018] EWHC 791 (Comm) in Arkhangelsky at 120.
14 Ibid., 70.
15  Ibid., 106.
16 lbid., 103.
17 lbid., 84.

 

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