Costs risks of pleading fraud or dishonesty

In May, the Court of Appeal considered the issue of indemnity costs where allegations of dishonesty failed in Thakkar v Mican [2024] EWCA Civ 552. While the underlying case related to personal injury following a road traffic accident, it offers an opportunity to consider the risks of pleading fraud or dishonesty and in what circumstances an indemnity costs award might follow the dismissal of such claims.

Conduct issues

The April 2024 SRA guidance on abusive litigation lists, as an example of conduct which might indicate abusive litigation, allegations which are made without having made sufficient enquiries of, or with a lack of consideration of their merits.

Rule 2.4 of the Code of Conduct for Solicitors states that a solicitor must only make assertions, put forward statements, representations or submissions to the court or others which are properly arguable.

The Bar Standard Board’s Code of Conduct specifically mentions fraud, saying: ‘You must not draft any statement of case, witness statement, affidavit or other document containing any allegation of fraud, unless you have clear instructions to allege fraud and you have reasonably credible material which establishes an arguable case of fraud.’

CPR16 PD 8.2 sets out certain facts which if alleged must be set out, including any allegation of fraud, the fact of any illegality, details of any misrepresentation, breach of trust or notice or knowledge of a fact.  The King’s Bench Guide (2023) states at paragraph 5.32 that allegations of fraud are required to be particularised, meaning that the relevant allegations be set out (which may include listing the facts from which the court is asked to infer dishonesty). Similar statements appear in the Commercial Court Guide (at paragraph C1.3(c)) and the Chancery Guide (at paragraphs 4.8-4.9)

Indemnity costs

The general rule about costs is set out in CPR44.2 – that the court will have regard to all the circumstances, including the conduct of the parties. The question of conduct includes whether it was reasonable for a party to raise (or pursue or contest) a particular allegation, as well as the manner in which the parties pursued their cases.

A costs award on the indemnity basis offers a ‘considerably more favourable’ regime of assessment for the receiving party than an award on the standard basis (Lownds v Home Office). The more favourable regime of assessment can

arise from unreasonableness in the conduct of the paying party or in the allegations raised, and can include the raising of ill-conceived and/or supported allegations of dishonesty.

One of the spokes in the test for an award of costs on the indemnity basis (that test being usefully set out in Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd), is that the receiving party demonstrate ‘some conduct or some circumstance which takes the case out of the norm. That is the critical requirement’.

The sort of features that would take conduct out of the norm and which might justify indemnity costs include the factors listed in Three Rivers DC v Bank of England which are in turn set out in the White Book at paragraph 44.3.10:

• Where a claimant advances and aggressively pursues serious and wide-ranging allegations of dishonesty… over an extended period of time;
• Where a claimant advances and aggressively pursues serious and wide-ranging allegations of dishonesty despite the lack of documentary evidence and maintains the allegations, without apology, until the end;
• Where a claimant pursues a claim which is weak, opportunistic or far-fetched; or
• Where a claimant pursues a claim which is irreconcilable with the contemporaneous documents.

Likewise, where a claimant has ‘an irrational desire for punishment unlinked to the merits of the claims themselves’, as described in Lejonvarn v Burgess, such conduct might be sufficient to justify indemnity costs.

Thakkar v Mican

In this case the Court of Appeal was asked to determine whether, where allegations of dishonesty had been made and rejected, there was in fact a presumption that indemnity costs should be awarded.

The Court of Appeal confirmed the position set out in previous cases – that there was no reversal of the standard costs position. The issue of whether it would be appropriate to make an indemnity costs award would depend on the circumstances of the case. While a failed allegation of fraud or dishonesty might be the starting point for a consideration of whether it was appropriate to make an order for indemnity costs, that did not mean that indemnity costs would be the default or reverse the burden of proof so that the paying party would need to explain why indemnity costs should not be ordered.

Previous cases

The 2023 decision of Libyan Investment Authority & Others v Mr Roger Milner King & Others was one in which the court found that the claimants’ conduct strayed far enough from the norm to justify an indemnity costs award. The judgment suggested that the claimants should have re-evaluated their position after a failed application to strike out the claim and commented that the claimants had ‘pursued speculative theories and hoped that the evidence would come out in their favour’.

The 2021 judgment in Bishopsgate Contracting Solutions Ltd v O’Sullivan provides a further example that, while cases would be determined on their facts, the sort of conduct which might merit an indemnity costs order includes where the claim was speculative, weak, or opportunistic or where the claim involved failed allegations of fraud or dishonesty. Natixis SA v Marex Financial Limited and Access World Logistics (Singapore) PTE Ltd and Clutterbuck v HSBC Plc provide further guidance.

The Court of Appeal in Thakkar v Mican has confirmed that there is no automatic reversal of the approach to costs, and that indemnity costs will still need to be argued for even where allegations of dishonesty or fraud are made and rejected. To this end, it is important to heed the comments of Mr Justice Mann in Mortgage Agency Services Number One Limited (trading as Britannia Commercial Lending) v Cripps Harries LLP in which he described the claimant as donning its fraud detection goggles, turning the sensitivity up to high, and attributing a dishonest motive to every interesting feature in the case. It is the job (and indeed the regulatory obligation) of a claimant’s lawyer to ensure that claims stand up to scrutiny and are consistent with the evidence.

However, this is not a one-off exercise: a claim should be reviewed on an ongoing basis in order to ensure the claims being pursued are meritorious, consistent with the contemporaneous documents and, where the court is being asked to infer dishonest motives, whether there are in fact innocent explanations given which are more probable than dishonesty. Careful review and the pursuit of only the supportable claims should not only ensure the best chance of success, but also protect against the risk of adverse indemnity costs awards if the claims fail.

Mary Young, a committee member of the London Solicitors Litigation Association, is a partner at Kingsley Napley. Michael Tyler is a partner at Kingsley Napley