Exploring the Crucial Principle in Proving Fraud
The Court of Appeal’s ruling in the case of Bank St Petersburg PJSC v Vitaly Arkhangelsky & Ors  EWCA Civ 408 delves into a fundamental aspect of proving fraud: the standard of proof applied to civil fraud claims.
The case centered around a £16.5M fraud claim, which led the defendants to counterclaim against the bank, alleging dishonesty. In this regard, the Court of Appeal disagreed with the High Court’s standard of proof regarding dishonesty.
Criminal vs. Civil Standard of Proof
The burden of proof is the legal obligation on a litigant to substantiate their claim. Two standards of proof are recognized by English courts:
- The criminal standard, requiring allegations to be established “beyond reasonable doubt.”
- The civil standard, necessitating allegations to be established “on the balance of probabilities.”
In criminal proceedings, the defendant is presumed innocent unless proven guilty beyond a reasonable doubt. This standard is exceptionally high, requiring the court to be entirely convinced of the veracity of the allegation. Conversely, in civil proceedings, the claimant must prove, based on the available evidence, that their case is more likely than not to be true. If the court finds it more probable than not that the event occurred, the case succeeds. However, if the probabilities are equal, the case fails.
Understanding Civil Fraud Claims
The standard of proof in civil fraud claims aligns with that of all other civil claims. Claimants must demonstrate that it is more likely than not that the defendant committed fraud (Re B (Children)  UKHL 35). Notably, in Fiona Trust v Privalov  EWHC 3199, it was established that “cogent evidence is required to justify a finding of fraud or other discreditable conduct.” This requirement arises because fraud and dishonesty are grave allegations, demanding clearer evidence than other torts such as negligence or innocence.
However, the Court of Appeal in Bank St Petersburg PJSC v Vitaly Arkhangelsky clarified that cogent evidence and discreditable conduct merely serve as the starting point when establishing civil fraud.
In this case, the first claimant, Bank St. Petersburg PJSC, filed a claim of approximately £16.5M against the first defendant, Dr. Vitaly Arkhangelsky, a Russian shipping entrepreneur. The claim was based on six personal guarantees and a loan. Dr. Arkhangelsky, along with his wife Julia Arkhangelskaya and their company, Oslo Marine Group Ports LLC, counterclaimed against the bank and its chairman, Alexander Savelyev. They sought damages of US$467 million, alleging an unlawful corporate raid to seize the assets of their main Russian business. The bank denied any wrongdoing.
The High Court, with Hildyard J presiding, granted the bank’s monetary claim in full and ruled against the defendants for £16.5M. Hildyard J rejected the counterclaim for conspiracy made by the applicants, stating that it had not been established to the necessary strength of evidence required to discharge the burden of proof. The counterclaim relied on proof of the inherently improbable and a burden of proof that necessitated showing the facts were incapable of innocent explanation, thereby inferring a conspiracy.
An appeal was lodged against the judgement, contesting the refusal of the counterclaim on two primary grounds:
- The judge applied the wrong standard of proof, setting an excessively high bar for dishonesty. The judge also employed a narrow piecemeal approach to the evidence, preventing an assessment of the alleged fraud as a whole.
- The Court of Appeal determined that the approach taken by the High Court was incorrect. It confirmed that even in cases involving fraud or dishonesty, the correct test is whether the allegation has been proven to be more likely than not. There is no need to prove the fraud beyond all possible doubt or to favor an innocent explanation over a dishonest one.
Addressing the second ground, the Court of Appeal held that Hildyard J’s piecemeal approach to the counterclaim resulted in a failure to consider how the extraordinary facts discovered at one stage affected the likelihood of the applicants’ allegations at a later stage. Consequently, the judge’s failure to consider these factual findings made his conclusions unreliable.
The case of Bank St Petersburg PJSC v Vitaly Arkhangelsky is now set for retrial in the High Court.
This decision carries significant weight for those fighting against sophisticated frauds, where defendants often craft intricate, seemingly innocent explanations for their actions. It emphasizes that while honesty is inherently less likely than an innocent explanation, compelling evidence (including both documents and witness testimony) of dishonesty will tip the scales.
Claimants pursuing fraud litigation in English courts may find it easier to succeed following this precedent. This development is particularly welcome given the anticipated rise in fraud litigation due to the pandemic and the prevailing economic downturn.