Zenith Personal Injury Current Awareness

Indemnity costs, allegations of fraud and discontinuance: PJSC Aeroflot v Forus and others [2018] EWHC 1735 (Ch)

17 July 2018

Peter Yates

There are lessons for practitioners in all areas in the judgment of Rose J in Aeroflot v Forus and others. That case – a long-running chancery matter concerning skulduggery, political intrigue and alleged fraud –stands as a reminder that parties plead fraud at their peril.

The Claimant, Aeroflot, alleged that the Defendants had perpetrated or facilitated sustained, high-value fraud against it in relation to loan agreements. The action was bitterly fought in the interim stages, with a number of applications and adjournments of the trial. Ultimately, just before 5pm on Friday 13th April 2018 (with the trial due to start the following Monday), and after eight years of litigation, the Claimant discontinued proceedings.

Costs, therefore, fell to be determined. The Claimant had offered to pay the Defendants’ costs on the standard basis (save for one Defendant, in respect of whom no offer to pay costs was made). The Defendants contended that, the allegations of fraud having been pursued up to the eve of trial and then abandoned without explanation, they were entitled to costs on the indemnity basis.

Costs were ordered on the indemnity basis. There were several reasons for this.

First, Rose J referred to Clutterbuck & Paton v HSBC plc and others [2016] 1 Costs LR 13. That case is authority for the general principles which apply when a case alleging fraud is discontinued (although Rose J accepted the Claimant’s proposition that it is wrong to refer to “the rule in Clutterbuck”). In essence, a party who successfully defends a fraud action at trial is, in the ordinary course of events, entitled to its costs on the indemnity basis. There is no reason in principle why the position should be any different where the Claimant discontinues (indeed, arguably in this situation indemnity costs are all the more appropriate, as the Defendant has been deprived of any opportunity to vindicate himself in court). Rose J stated, at paragraph 53:

“Where a claimant makes serious allegations of fraud, conspiracy and dishonesty and then abandons those allegations, thereby depriving the defendant of any opportunity to vindicate his reputation, an order for indemnity costs is likely to be the just result, unless some explanation can be given as to why the claimant has decided that the allegations are bound to fail.”

Second, Rose J considered the separate, more familiar test for indemnity costs as set out in Three Rivers DC v Bank of England [2006] EWHC 816 (Comm). The search is for circumstances that take the case “out of the norm”. Rose J went on (at paragraph 60):

“Conduct need not be such as to attract moral condemnation but includes whether it was reasonable for the claimant to raise and pursue particular allegations and the manner in which the claimant pursued its case and its allegations. As to manner, Tomlinson J [in Three Rivers] referred to where allegations of dishonesty are pursued aggressively over an extended period of time and where the claimant maintains those allegations without apology to the bitter end. He referred also to cases "where a claimant commences and pursues large-scale and expensive litigation in circumstances calculated to exert commercial pressure on a defendant" only later to suffer a resounding defeat”

In determining that this criterion was satisfied, Rose J took into consideration: the (inadvertently) inaccurate statements made in interlocutory proceedings; the aggressive pursuit of the parties (and, once he had died, the estate of one of the parties); and the Claimant’s arguments. As to the latter, it was held that the Defendants’ refusal to mediate the case was not something that could appropriately be taken into account. Once allegations of fraud were made, the case was intrinsically unsuitable for mediation. There was also, Rose J found, no possibility of the parties having agreed on the identity of a mediator.

Allegations of fraud should not be lightly made. Should a Claimant make such allegations and discontinue proceedings (or fail at trial), a hefty costs order is likely to follow.

Current Awareness

By the Personal Injury team