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Preliminary discovery and the need to have an adequate factual foundation before pleading fraud

May 1st, 2014 · No Comments

As you will probably be sick by now of hearing, I suspect that the law relating to the need to have an adequate factual foundation before pleading fraud will be resorted to more frequently given the new prominence given to it by s. 18(d) of the Civil Procedure Act 2010, the Court of Appeal’s admonition to inferior courts as to the need to consider these matters of their own motion, and the new (or at least newly prominent) remedies for breaches of overarching obligations such as that referred to in s. 18(d).  The new prominence of these laws may make applications for preliminary discovery more frequent, though I must confess it remains a mystery to me why so few preliminary discovery applications are made in general.  It may also make courts more inclined to grant such orders. In Pioneer Energy Holdings v Seth [2014] NSWSC 492, McDougall J granted preliminary discovery under a rule not dissimilar to Victoria’s SCR 32.05 to a prospective plaintiff from prospective defendants to a suit claiming damages for fraud, making reference (at [66]) to s. s 347 of the Legal Profession Act 2004 (NSW).  Section 347 has some of the characteristics of s. 18(d), albeit only in relation to damages claims.  His Honour said, in the course of an ex tempore judgment:

’32. I turn to the essence of the defendants’ opposition, which as I have said is that the plaintiffs (on the defendants’ view of the world) have sufficient information to decide whether to commence proceedings.

  1. In assessing this submission, it is necessary to bear in mind that the question is not just, ‘do the plaintiffs know enough to suggest that they may have a cause of action?’ Demonstration that they may have a cause of action is one of the elements that enlivens the discretion under the rule. But the question that is relevant is whether the plaintiffs have sufficient information to enable them to commence proceedings in respect of the suggested cause of action. (It seems to me that there is no material distinction between the Rules’ expression “claims for relief” and the more common expression “cause of action”.)
  1. Clearly enough, the decision whether or not to commence proceedings requires consideration of whether there is in fact an available cause of action, or claim for relief. But it goes further than that. Even leaving aside the case of fraud, what is required is some analysis of the facts overall, to see if there may be available defences, and to attempt to make some assessment of the strength of those defences.
  1. A construction of the rule which said that a prospective plaintiff was not entitled to get anything over and above documents necessary to show the existence of a cause of action would, in my view, be unduly restrictive.
  1. Further, there is clear authority in support of the proposition that the statutory test directs attention not only to the cause of action but also, as I have said, to the assessment of the availability and strength of defences. McColl JA made this clear in Hatfield at [51].
  1. In this case, it is necessary to bear in mind that what the plaintiffs are contemplating is an allegation of fraud, or of intentional (and effectively fraudulent) statutory misleading or deceptive conduct. That is a very serious matter. The courts have stressed consistently the necessity of parties and their lawyers, who wish to make such serious allegations, satisfying themselves that there is a proper basis for making them. Again, the satisfaction of that duty goes beyond looking at material that might justify making the allegation. In an appropriate case, it would require assessment of material that might suggest that in fact, despite a somewhat malodorous pile of facts or documents, there is in reality no fraud at all.
  1. Thus, in the present case, it may well be that there is some obvious (or even difficult to perceive) innocent and non-fraudulent reason to suggest that the apparent disparity between the sub-contract amounts and the amounts in the head contract, have a harmless explanation. That is to say, it may be that there is some explanation of the possible disparities that is entirely inconsistent with the existence of fraud. Particularly when the relevant facts are to a large extent within the knowledge of the defendants, I do not think that it can be said to be outside the purview of r 5.3(1) for plaintiffs who are contemplating making the serious allegation of fraud to wish to satisfy themselves, so far as an application for preliminary discovery might help them to do, that there is no innocent explanation.
  1. Essentially similar observations apply in respect of the funding representation. Again, if the plaintiff’s suspicions prove to be well founded, the funding representations could be thought to have been made when they were not intended to be carried out, and when in fact Mr Seth and others intended to fund the project (to the extent that Blue Oil was required to do) through the excessive and unauthorised profits that, the plaintiffs suspect, it may have garnered under the construction agreement. In that sense, the two are tied together.
  1. That is enough reason to reject the first (and principal) reason given by the defendants in opposition to the application.’

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Tags: Alleging fraud & misconduct · duty to court · litigation ethics