Civil Fraud - A drastic revision of the standard of proof required.
by Gavin Jay Anand Jayapal ~ 27 August 2013
The law on civil fraud and the standard of proof required has seen a sea-change in recent days. The Federal Court has drastically up-ended the law via the decision of Sinnaiyah & Sons v Damai Setia [2015] 5 MLJ 1. This case is one that should cause every civil litigator to sit-up and take notice. In this short article, I discuss the law as it was and the changes brought about by Sinnaiyah.
Definition of civil fraud
Before one can undertake a dissection of Sinnaiyah, it is important to first consider what constitutes civil fraud. In Barclays Bank v Cole [1966] 3 All ER 948, the Court of Appeal was tasked with deciphering the term “civil fraud”. On the facts, the defendant was an employee of the bank who had pleaded guilty to receiving proceeds from a bank robbery.
The bank sued him (civil suit) and alleged that he had robbed their agent. The defendant denied this and claimed trial by jury in a civil case. Essentially, what the defendant sought to do was to challenge the guilty finding in the criminal trial via the civil suit.
Diplock LJ provided a succinct definition of civil fraud, which bears repeating here:
For at least one hundred years (see Bullen & Leake (3rd Edn)) “fraud” in civil actions at common law, whether as a cause of action or as a defence, has meant an intentional misrepresentation (or, in some cases, concealment) of fact made by one party with the intention of inducing another party to act on it, which does induce the other party to act on it to his detriment.
Barclays Bank was considered and I would say accepted, by Gross J in Cavell USA v Seaton Insurance [2008] All ER (D) 138 (Dec).
So much for definition.
The standard of proof for civil fraud
In the UK, the standard of proof for civil fraud will depend very much on the nature of the issue before the Court. An increasingly serious charge will necessitate a higher standard of proof. This was outlined by the Court of Appeal in Hornal v Neuberger Products [1957] 1 QB 247:
Nevertheless, the judge having set the problem to himself, he answered it, I think, correctly. He reviewed all the cases and held rightly that the standard of proof depends on the nature of the issue. The more serious the allegation the higher the degree of probability that is required: but it need not, in a civil case. reach the very high standard required by the criminal law.
Hornal has been applied by the Court of Appeal in R v Hampshire County Council, ex p Ellerton [1985] 1 All ER 599 and considered by Morgan J in IT Human Resources v Land [2014] All ER(D) 182 (Nov).
From the above, it may be seen that the UK has a protean standard of proof. The more serious the allegation of fraud, the higher the standard of proof required.
The Federal Court in Sinnaiyah has stated that this is not the position following the case of Re B (Children) [2003] 1 AC153. However, I would argue that a closer look at the position today, together with the cases that have recently surfaced, will allow one to appreciate that in the UK, the position is very much hybrid. There is no fixed standard, wherein it is a foregone conclusion that the balance of probabilities will be applied.
The Malaysian position
Ang Hiok Seng
The Malaysian position has seen vacillation. To take matters chronologically, one must first consider the case of Ang Hiok Seng v Yim Yut Kiu [1997] 2 MLJ 45. Here, the Federal Court considered the standard of proof for civil fraud and came to the conclusion that it would also be a protean standard. As was put by His Lordship Mohd Azmi:
in civil proceedings concern[ing] criminal fraud such as conspiracy to defraud or misappropriation of money or criminal breach of trust, it is settled law that the burden of proof is the criminal standard of proof beyond reasonable doubt, and not on the balance of probabilities. It is now well established that an allegation of criminal fraud in civil or criminal proceedings cannot merely be based on suspicion or speculation. In allowing the appeal in Lau Kee Ko & Anor v Paw Ngi Siu, the Federal Court reversed the judgment of the High Court on the finding of a civil fraud in a non-disclosure dispute wherein the plaintiff was led to think that he was contracting with the owner when in point of fact he was contracting with an agent. The fraud alleged was purely civil in nature and based on whether there was any personal consideration when the plaintiff entered into the contract, and on that basis the burden of proof was the civil burden. We agree with both counsel that to the extent that the general statement of the law in Lau Kee Ko is understood to mean a total rejection of the criminal burden in all cases of fraud, it is no longer good law. But where the allegation of fraud (as in the present case) is entirely founded on a civil fraud – and not based on a criminal conduct or offence – the civil burden is applicable.
From Ang Hiok Seng, it may be distilled that where the allegation of civil fraud is quasi-criminal (i.e., where a finding of civil fraud by the trial judge may lead to a criminal charge being brought against the defendant), then the higher standard of beyond reasonable doubt would apply.
However, where there is a lowered “risk”, so to speak, of a criminal charge, then the standard of proof required would also be reduced. It would vacillate between the standard of on a balance of probabilities right up till beyond reasonable doubt.
A sliding scale, if you will.
The waters are muddied
In Yong Tim v Hoo Kok Chong [2005] 3 CLJ 229, the Federal Court switched gears and held that where civil fraud was alleged, the standard of proof would be beyond reasonable doubt. Referring to the Privy Council decision of Saminathan v Pappa [1981] 1 MLJ 121, the Federal Court held that the standard of proof for fraud in civil proceedings would be beyond reasonable doubt.
This was a substantial misdirection. It is pertinent to note that the Federal Court in Yong Tim did not consider Ang Hiok Seng.
Turbid lavings
After Yong Tim, there was considerable confusion; was the standard of proof for civil fraud on a balance of probabilities, beyond reasonable doubt or somewhere in between?
The Federal Court in Asean Securities Paper Mills v CGU Insurance [2007] 2 MLJ 301 had the opportunity to correct this. However, this was not to be. The Federal Court applied and affirmed the decision of Yong Tim and for all intents and purposes, the standard of proof for civil fraud was set impossibly high: beyond reasonable doubt.
Backlash
One would expect that a pronouncement of the Federal Court would effectively bind all lower courts. However, this was not so.
In Modern Universal v MSIG Insurance [2014] 11 MLJ 186, Prasad Abraham J (as His Lordship was then known) considered Ang Hiok Seng, Asean Securities and Yong Tim. His Lordship noted that the Federal Court in Asean Securities and did not refer to Ang Hiok Seng.
His Lordship also noted that the standard of beyond reasonable doubt departs from an established line of cases. I can do no better than to reproduce His Lordship's excellently-analysed judgment:
[19] This suggest a very high standard proof and all a plaintiff has to show that if at all there is any other explanation as to how the fire could have been caused other than by the plaintiff, the respondent would fail in its defence. This case on the face of it departs from a long line of authorities both in this country and the Commonwealth that maintain in essence, as long as it was highly probable the fire was caused by arson it would suffice. I need only refer to Brighton Industries (M) Sdn Bhd v Supreme-QBE Insurance Bhd [1992] 3 CLJ 1424 where His Lordship LC Vohrah J (as he then was) held:
[1] Where serious allegations are made that is with regards to the wilful misconduct on the part of the plaintiff, a very high degree of probability within the general standard has to be applied.
[2] The defendant had to conform to this strict test in order to establish that the fire was caused by the plaintiffs wilful act or with its connivance.
[3] Based on the facts, the defendant had established a high degree of probability that the fire at the factory was set wilfully or with the connivance of the plaintiff. (Emphasis added.)
[20] When an insurer pleads that an insured has committed an act of arson, by deliberately setting fire to the said property the standard of proof on the defendant whilst higher than a civil standard of proof, it did not however require proof beyond reasonable doubt. In Watkins and Davis Ltd v Legal and General Assurance [1981] 1 Llyods Rep 674 Neill J held the evidential burden in the case of arson was to show on a high degree of probability that the fire was caused by the insured and not beyond reasonable doubt.
From the above, it is clear that His Lordship preferred the sliding scale; the more serious the allegation of civil fraud, the higher the standard of proof. Proof beyond reasonable doubt was a step too far, but if one were to allege civil fraud, then a high degree of probability would need to be shown.
In Sinnaiyah, the Federal Court revisited the issue of the standard of proof in cases involving civil fraud. Indeed, leave to appeal was granted based on this sole question of law.
The Federal Court considered Saminathan , Ang Hiok Seng, Yong Tim and Asean Securities.
The Federal Court also considered the position in the UK, Canada, Australia and Singapore and concluded as follows:
[49] With respect, we are inclined to agree with learned counsel for the plaintiff that the correct principle to apply is as explained in In re B (Children). It is this: that at law there are only two standards of proof, namely, beyond reasonable doubt for criminal cases while it is on the balance of probabilities for civil cases. As such even if fraud is the subject in a civil claim the standard of proof is on the balance of probabilities. There is no third standard. And ‘(N)either the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts’.
...
[52] We therefore reiterate that we agree and accept the rationale in In re B (Children) that in a civil claim even when fraud is alleged the civil standard of proof, that is, on the balance of probabilities, should apply.
...
[53] Accordingly, despite the reaffirmation of the law on the issue in Yong Tim v Hoo Kok Cheong we hold that it is no longer the law in this country. Similarly, the principles as pronounced in Ang Hiok Seng and Lee You Sin v Chong Ngo Khoon despite applying the civil standard to a certain extent are also no longer the law. Hence, the disapproval of Lau Kee Ko in Ang Hiok Seng is no longer relevant.
The Federal Court emphatically overturned Yong Tim (beyond reasonable doubt) and Ang Hiok Seng (hybrid). By extension, one would certainly argue that Asean Securities has also been overturned.
The standard of proof for all civil matters today in Malaysia, whether they involve elements of fraud or otherwise, must now be interpreted as being on a balance of probabilities.
Is this the correct decision?
By virtue of Sinnaiyah, the Federal Court has conclusively determined that the standard of proof for all civil claims will be determined on a balance of probabilities.
This will cause numerous problems. In hotly-disputed insurance suits, there will always be an allegation that the insured has fraudulently magnified his claim. The pronouncement in Sinnaiyah will cause considerable difficulties to an honest insured. If the allegation of fraudulent enlargement is proved on a balance of probabilities, then it will be incredibly difficult for the insured to receive any separate policy from a different insurer.
One finding by a trial judge (on a simple balance of probabilities) that there has been fraudulent misrepresentation may spell the death knell for small and medium-sized companies. One must remember that even innocently misrepresenting the number of items damaged for an insurance claim may be grounds for dismissing the same (see Stone v Reliance Mutual Insurance Society [1972] 1 Lloyds Rep 469 for a general discussion).
Further, a restating of the law as in Sinnaiyah will grant almost carte blanche to insurers; pick at every little discrepancy that one is able to dig up and hope that it will suffice. In all probability, it will, given the lowered threshold that the insurer will need to meet.
In addition, it must be kept in mind that many issues pertaining to civil fraud will have criminal implications. A simple example would be arson. If an insurer alleges that the insured has set fire to its own building and/or stock-in-trade, it is an inherently dangerous exercise for a trial judge to only consider this allegation on a balance of probabilities. If proven, an insured (its agents) will be at serious risk of a criminal prosecution.
Having reviewed the merits of decision if Sinnaiyah, it is difficult to see how this restatement of the law will bring about any cheer. On the one hand, it conclusively sets out the law. Turning to the other, it has usurped the functions of a trial judge to decide a matter and the standard of proof required based on the evidence that has been put before him.
I would argue that the position outlined by Prasad Abraham J in Modern Universal is a measured, moderate approach. A trial judge, being the arbiter of fact, will be able to determine what the appropriate standard of proof is. This will be based on the evidence advanced, the seriousness of the civil fraud alleged and the veracity of the witnesses called. It is truly regrettable that His Lordship's decision was not canvassed before the Federal Court. As persuasive precedent, I believe that it would have been instructive.
Sinnaiyah seeks to standardise the law but its rigidity and blind application will lead to a substantial miscarriage of justice. The position of law in Ang Hiok Seng and as encapsulated in Modern Universal is, for all intents and purposes, a flexible, protean method that would allow for justice to not only be talked about, but to actually be seen.