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Dishonesty not required in establishing fraud

The concept of “fraud” is in English commercial law context in a case having an international flavour, was not confined to deceit flowing from fraudulent misrepresentation; it had a much wider application and could extend to cases without the need to establish the element of dishonesty of the person against whom the fraud was alleged.The Court of Appeal so stated in allowing in part the appeal of the defendants, Seaton Insurance Co and Stonewall Insurance Co, from preliminary rulings of Mr Justice Gross ([2009]) Lloyd’s Rep IR 616) as to the meaning of a term sheet signed on behalf of both the defendants and the claimants, Cavell USA Inc and Kenneth Edward Randall, documenting the termination of their contractual arrangements in respect of run offs of the defendants’ insurance business.

The term sheet provided that the second claimant was discharged from all actions claims and demands “whether in law or in equity” save “in the case of fraud”. The term sheet was said to be governed by and constructed in accordance with English law and the parties submitted to the jurisdiction of the English courts.

The judge ruled that on its proper construction the parties had agreed to submit all disputes, including claims in fraud against the second claimant, to the exclusive jurisdiction of the English courts and that the expression “claims in fraud” meant claims in deceit.

After the execution of the term sheet, the defendants instituted fraud proceedings against the claimants in the Southern District of New York. They said they were entitled to bring their fraud claim in New York and that they were not confined to bringing claims which would, as a matter of English law, be regarded as claims in deceit.

The claimants issued proceedings in the commercial court for a declaration that the claims should have been brought in England.

LORD JUSTICE LONGMORE agreed with the judge’s ruling on the first issue that, under the term sheet, the parties had agreed to submit all disputes, including claims in fraud, to the exclusive jurisdiction of the English courts.

As to the second issue, when the parties agreed that all claims whether at law or equity save in the case of fraud were to be released, they did not envisage that the only claims which the defendants could thereafter bring were claims which sounded in the English tort of deceit.

The phrases “or equity” and “in the case of fraud” did not sit well with confining fraud to deceit. Nor could a decision on an English statute entitling someone charged with fraud to a jury trial in a civil action be a decision of the meaning of “fraud” in a commercial document with an international flavour.

The run offs were basically runs offs of the defendants’ American business and were originally subject to New York jurisdiction and arbitration clauses. Despite the fact that the term sheet was drawn up by English lawyers after substantive agreement between two principals had been reached, his Lordship did not think the word “fraud” was ever intended to mean only deceit in the sense of being only liability that followed from a fraudulent representation.

Moreover, dishonesty was not a necessary element in the cause of action of abuse of fiduciary position. There was authority for the proposition that dishonesty was not, as in the common law crime of conspiracy to defraud considered in Scott v Commissioner of Police of Metropolis ([1975 AV 819), the touch-stone of fraud but rather that deception was: see Kensington International Ltd v Republic of the Congo (The Times November 30, 2007; [2008] 1 WLR 1144).

In the commercial context of this case the concept of “fraud” was wider than the concept of the tort of deceit where a fraudulent misrepresentation, or its equivalent, was required.

The court should therefore set aside the second part of the judge’s order, substitute a declaration that the exception “in case of fraud” in the term sheet was not confined to claims in deceit but extended to at least some cases of dishonest abuse of fiduciary position, and allow the proceedings to continue.

Lord Justice Toulson and Lord Justice Mummery agreed.

Cavel USA Inc and Another V Seaton Insurance Co and Another

Before Lord Justice Mummery, Lord Justice Longmore and Lord Justice Toulson

Judgement December 16, 2009

“The Times”: 05.2010