England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
WREXHAM DISTRICT REGISTRY
HIS HONOUR JUDGE KEYSER QC
(Sitting as a Deputy High court Judge)
B02YJ629

		Royal Courts of Justice Strand, London, WC2A 2LL
		15/06/2018

Lord Justice Flaux:

Introduction

1. This case involves serious fraud committed against the appellant insurance company (to which I will refer as "Axa") by the respondents in relation to two fictitious motor accidents alleged to involve insureds of Axa. The respondents pursued Court proceedings against in the first instance the insureds and then, when default judgments had been obtained against the insureds, further enforcement proceedings against Axa under section 151 of the Road Traffic Act 1988, which led to further default judgments against Axa. It was only through the diligence of Axa, its legal advisers and experts that the fraud was exposed. An injunction was obtained restraining the respondents from continuing with the proceedings and, accordingly, the respondents were thwarted in the attempt to enforce default judgments for a sum in the region of £85,000. As appears in more detail below, the fraud was sophisticated, well-planned and brazen and involved serious abuse of the process of the Court.
2. In the present Part 20 proceedings, Axa sought both compensatory and exemplary damages against the respondents for the torts of deceit and unlawful means conspiracy. On 10 March 2016, on the application of Axa, His Honour Judge Seys-Llewellyn QC struck out the claims in the two sets of proceedings against Axa and entered judgment against the first and second respondents in the Part 20 proceedings, with damages to be assessed. On 20 May 2016, District Judge Humphreys entered judgment against the third respondent with damages to be assessed.
3. The assessment of damages was carried out by His Honour Judge Keyser QC at a hearing on 17 February 2017. The judge awarded Axa compensatory damages in the total sum of £24,954.31, comprising the value of time expended by Axa staff in unravelling the effects of the fraud and disbursements to counsel, investigators and solicitors in unravelling the fraud and setting aside the judgments obtained by the respondents. However, the judge dismissed the claim for exemplary damages on the basis that the case did not fall within the principles laid down in the various authorities on the award of exemplary damages. Axa now appeals, pursuant to permission to appeal granted by me on 5 July 2017, against that dismissal of the claim for exemplary damages.

The factual background

4. In order to set the issue raised by the appeal as to whether exemplary damages should be awarded in context, it is necessary to examine the circumstances of the fraud in more detail. There were two fraudulent motor accidents. One was alleged to have taken place on 8 February 2014 in Lymm in Cheshire involving a "rear end shunt" by a vehicle driven by Axa's insured James Allcott into a BMW driven by Nasima Khatun in which Shazia Begum and Jamal Ahmed were passengers. The second accident was alleged to have occurred in Llandudno on 13 February 2014 and again was said to have involved a vehicle driven by Axa's insured, Zafar Ali, coming into collision with a Vauxhall Insignia driven by Halima Khatun in which Hamza Mahmood was a passenger. Axa avoided both policies shortly after notification of the relevant accident.
5. Claims on behalf of the drivers and passengers in the two vehicles were pursued by the first respondent, which traded as "Coelum Legal". That entity was operated by the second and third respondents, the second respondent being a director. Its letterhead showed the name Coelum Legal underneath a logo of scales of justice and an address in Windermere Road, Middleton, Manchester. The letterhead also stated that the first respondent was regulated by the Ministry of Justice and gave a registration number with the Claims Management Regulator and a registered address in Flixton Road, Urmston, Manchester. Subsequent investigations at the Windermere Road and Flixton Road premises revealed both to be shuttered and unoccupied.
6. Axa nominated BLM LLP as its solicitors to accept service of proceedings on its behalf and on behalf of its insureds. Two sets of proceedings were commenced and prosecuted by the first respondent ostensibly on behalf of the five individuals said to have been in the other vehicles. Throughout those proceedings, the first respondent acted as if it were a firm of solicitors authorised to conduct litigation, which it was not, thereby committing a criminal offence under section 14 of the Legal Services Act 2007.
7. The proceedings were not served on Axa and the first occasion on which Axa became aware of any proceedings was when it was served with an Order of DJ Jones-Evans in the County Court at Conwy and Colwyn dated 31 October 2014, following a disposal hearing, which granted judgment in default against the insured in the second alleged accident for damages, interest and costs in the total sum of £47,335.28. BLM immediately sought copies of the proceedings and the agreement of the first respondent to the setting aside of the judgment. The first respondent's response in email and letter signed by Adam Khan who described himself as "Litigation Executive, Coelum Legal" was obstructive and unacceptably offensive. The first respondent refused to provide copies of the proceedings which were ultimately obtained from the Court. On 13 November 2014, Axa issued an application to set aside the judgment in default and to join Axa as a defendant.
8. The first respondent then issued enforcement proceedings under section 151 of the Road Traffic Act 1988 against Axa, which were purportedly served by registered post. The subsequent investigations carried out by BLM revealed that the letters purportedly serving these proceedings and the proceedings in relation to the first accident did not contain any court documents or correspondence about such proceedings but junk mail, which meant that post-room staff simply disposed of what was in the envelopes. Axa was not served with any enforcement proceedings. However, the first respondent fraudulently misrepresented to the Court that the enforcement proceedings had been served on Axa and, on 10 December 2014, judgment in default was entered against Axa.
9. In relation to the first accident, following a disposal hearing before DJ Crisp in the County Court at Altrincham on 27 November 2014, judgment in default was granted against Axa's insured for damages, interest and costs in the total sum of £36,123.64. The special damages totalled £16,834.28. This comprised two principal elements. First the cost of a replacement vehicle ostensibly hired on a credit hire basis from a hire company called EuropeCar in respect of which two hire agreements were produced by the first respondent for a total period of hire of 96 days, one for 89 days and the second for 7 days. As Mr McCluggage pointed out, this demonstrates that whoever drew up these agreements appreciated that hire agreements in excess of 90 days would fall foul of the Consumer Credit Act 1974. Subsequent investigations by enquiry agents at the premises for EuropeCar stated on the agreements showed no presence of such an entity at those premises, although an entity called "Coleum" did have a signboard there. It seems highly likely that there was no such entity as EuropeCar and these agreements were fictitious, using a name for the car hire company which closely resembled that of a well-known worldwide hire company.
10. The second element of the special damages was the personal injury claim for whiplash caused by the accident. The first respondent produced ostensible medical reports from a Dr Aman Mbarushimana of examinations of the various claimants, which purported to diagnose whiplash injury and which gave every appearance of being genuine expert medical reports, supported in each case by a statement of truth compliant with CPR Part 35. Subsequent investigation by enquiry agents revealed only one doctor on the register of the General Medical Council with that surname but his first name was Simon, and his qualifications and length of practice did not correspond with those given in the reports. It is tolerably clear that the medical reports are fakes. Furthermore, investigations with the landlord of the premises given as the home address of Ms Khatun and the other claimants revealed that no-one with those names had ever lived there. It may well be that the claimants themselves did not exist.
11. On 6 January 2015, the first respondent issued enforcement proceedings under section 151 against Axa in respect of the first accident, which again it claimed to have served by registered post, producing a Certificate of Service signed by Adam Khan, describing himself as a solicitor and partner. Subsequently, on 9 February 2015, default judgment was entered against Axa in those enforcement proceedings. Within days, the first respondent had obtained a writ of enforcement or control and bailiffs attended Axa's offices with a view to seizing computers in aid of enforcement. To avoid such enforcement, Axa had to pay the judgment sum into Court. However, on 6 March 2015 DDJ Buchan granted a stay of execution and of the release of any monies. DJ Jones-Evans had already made an order on 19 January 2015 staying enforcement of the judgment obtained by the first respondent in relation to the second accident.
12. Axa issued applications to strike out the claims and set aside the default judgments. Correspondence signed by Adam Khan continued to be offensive and hectoring. Axa then sought and obtained orders transferring the proceedings to the High Court. On 18 August 2015, His Honour Judge Seys-Llewellyn QC (sitting as a Deputy High Court Judge) granted an injunction restraining the first respondent (whether through Adam Khan or otherwise) from conducting any litigation. Thereafter the present Part 20 proceedings were commenced with the consequences set out at [2] and [3] above, which led to the judgment under appeal.
13. The third respondent has recently pleaded guilty in the Crown Court at Bradford to two sample counts of fraud contrary to section 1 of the Fraud Act 2006 for each year of fraudulent activity from 2011 to 2017, having originally been charged by the police with some forty such offences. We were provided with a copy of the indictment. One of the counts covered his involvement in the first fraudulent claim in the present case. He was sentenced to 3 years and 8 months imprisonment. The other charges were taken into account in sentencing him. An application is also to be made against him in the criminal proceedings for a confiscation order under the Proceeds of Crime Act 2002. A charging order has also been made against the second respondent's real property.

The judgment below

14. In his judgment on exemplary damages at [2] the judge noted that Axa, through its diligence and investigations, had exposed the fraud and avoided paying out on the fraudulent claims, limiting its damages to the costs of rectifying the matter. He referred to the prevalence of this type of insurance fraud and its cost to the insurance industry and thus to the public at large. He noted that the amount claimed in the two fictitious and fraudulent claims was a little over £85,000, significantly more than the damages suffered by Axa in rectifying the matter.
15. The judge then cited the well-known passages from the speech of Lord Devlin in Rookes v Barnard [1964] AC 1129 at 1226-7 and 1228 in relation to the second category of case where exemplary damages might be awarded identified by his Lordship:

"Cases in the second category are those in which the defendant's conduct has been calculated by him to make a profit for himself which may well exceed the compensation payable to the plaintiff…It is a factor also that is taken into account in damages for libel; one man should not be allowed to sell another man's reputation for profit. Where a defendant with a cynical disregard for a plaintiff's rights has calculated that the money to be made out of his wrongdoing will probably exceed the damages at risk, it is necessary for the law to show that it cannot be broken with impunity. This category is not confined to moneymaking in the strict sense. It extends to cases in which the defendant is seeking to gain at the expense of the plaintiff some object—perhaps some property which he covets—which either he could not obtain at all or not obtain except at a price greater than he wants to put down. Exemplary damages can properly be awarded whenever it is necessary to teach a wrongdoer that tort does not pay.

…

Thus a case for exemplary damages must be presented quite differently from one for compensatory damages; and the judge should not allow it to be left to the jury unless he is satisfied that it can be brought within the categories I have specified. But the fact that the two sorts of damage differ essentially does not necessarily mean that there should be two awards. In a case in which exemplary damages are appropriate, a jury should be directed that if, but only if, the sum which they have in mind to award as compensation (which may, of course, be a sum aggravated by the way in which the defendant has behaved to the plaintiff) is inadequate to punish him for his outrageous conduct, to mark their disapproval of such conduct and to deter him from repeating it, then it can award some larger sum. If a verdict given on such direction has to be reviewed upon appeal, the appellate court will first consider whether the award can be justified as compensation and if it can, there is nothing further to be said. If it cannot, the court must consider whether or not the punishment is, in all the circumstances, excessive."

16. The judge then noted at [5] Mr McCluggage's submission that this was wilful and fraudulent conduct which was a great evil, difficult to detect and potentially very profitable, with a potential profit of £85,000, albeit that through the diligence of Axa the profit was not made and it did not incur that loss. The judge then referred to the decision of the House of Lords in Kuddus v Chief Constable of Leicestershire Constabulary [2002] 2 AC 122, where it was established that for an award of exemplary damages, it was not necessary that the claim be based on a cause of action where exemplary damages had been available at the time Rookes v Barnard was decided.
17. The judge also referred to one of the High Court cases to which he had been referred where exemplary damages had been awarded in a similar case of fraudulent road traffic claims: Direct Line v Suleman (2010) unreported. He said that he had not found the case of particular assistance.
18. At [8] he concluded that Lord Devlin's speech remained the fount of the modern jurisdiction to award exemplary damages. He made two observations about the speech, with neither of which Mr McCluggage disagreed before this Court. First that Lord Devlin's remarks are not to be read as though they were an Act of Parliament. This reflects what Lord Mackay said in Kuddus at [38] about Lord Devlin's speech not being concerned to set out a code. Second, that, as Lord Devlin pointed out, the jurisdiction to award exemplary damages is not limited to cases of money making in the strict sense, nor does the word "calculated" mean that there has to have been a careful, mathematical computation. The judge cited what Lord Hailsham said in Broome v Cassell [1972] AC 1027 at 1079:

"What is necessary is that the tortious act must be done with guilty knowledge for the motive that the chances of economic advantage outweigh the chances of economic, or perhaps physical, penalty."

19. At [9] the judge noted that exemplary damages are an exception from the normal tortious principle that damages are compensatory not penal. He went on to say at [10] that the important point was that Lord Devlin was not talking about conduct so malign or anti-social as to call for punishment, or all fraud cases would attract exemplary damages. Nor did the dictum justify the award of such damages just because the tortfeasor hoped to get away with it, which was probably the case with most fraudsters. He said that exemplary damages were not a substitute for the criminal law. The second category was "available for the case where compensatory damages are inadequate to remove the wrongful gain achieved by the tort - where paying compensation in accordance with the normal principle would leave the tortfeasor 'up on the deal'".
20. The judge considered at [11] that that was not this case. The profit sought to be gained (the £85,000) was entirely by means of abstracting money from the insurer and the profit and the compensation would be identical. It made no difference that Axa discovered the fraud before paying out the claims. The judge said: "It is nothing to the point to say that if the fraud had succeeded the profit would have been far larger than the compensatory damages are when it failed". He considered that the present case did not remotely fall within Lord Devlin's second category. He continued at [12] that it was not for the court to extend the scope of exemplary damages, which was in effect what he was being asked to do. Nor should they be used as a vehicle for "social policy", in relation to which he referred to the available avenues through the criminal courts and through the contempt of court jurisdiction. He refused the claim for exemplary damages.

The appellant's case

21. Mr McCluggage submitted that the judge's analysis was fundamentally incorrect. He had failed to recognise that this was a case where the respondents would have considered that the profit to be made by extracting monies from insurers through fraudulent insurance claims would probably exceed the damages at risk if the fraud was uncovered before the claims were paid out. Far from it being nothing to the point that the profit of £85,000, if the fraud had succeeded, was far in excess of the £25,000 compensatory damages the respondents had to pay, that was precisely the point which brought the present case within Lord Devlin's second category.
22. The judge had also erred in concluding at [10] that the second category was limited to cases where the tortfeasor's gain could not be matched by the compensatory damages, in other words to cases of "unreachable" damages. This was not what Lord Devlin had said and although there was some support for this approach in the judgment of Sedley LJ in Borders (UK) Ltd v Commissioner of Police of the Metropolis [2005] EWCA Civ 197, the wider approach of Rix LJ in that case was to be preferred. The judge's approach was also inconsistent with the subsequent decision of this Court in Ramzan v Brookwide Ltd [2011] EWCA Civ 985.
23. Mr McCluggage also submitted that the judge had given insufficient weight to the important point, emphasised in a number of cases, that exemplary damages are awarded to deter and punish outrageous conduct. Finally, Mr McCluggage submitted that the judge was wrong to rely upon the availability of other means of punishing the respondents through the criminal courts or contempt of court proceedings. The availability of these alternatives was irrelevant and in any event would be difficult to pursue.
24. We should add that although the second respondent attended part of the hearing in person, he was unable to provide any assistance to the Court on the issue on this appeal.

Analysis and conclusion

25. It is important to keep in mind that exemplary damages remain anomalous and the exception to the general rule. It would therefore be inappropriate to extend the circumstances in which they can be awarded beyond the three categories of case identified by Lord Devlin. As the passage from his speech which I have cited above makes clear, the second category only encompasses cases where the defendant's conduct has been calculated to make a profit for himself which may well exceed the compensation payable to the claimant. If that criterion is satisfied, exemplary damages may be awarded to deter and punish such cynical and outrageous conduct.
26. In my judgment that criterion is clearly satisfied here, as in other similar fraudulent insurance claims which have come before the Courts where exemplary damages have been awarded. The respondents' object was to extract large sums from the insurers through fraudulent insurance claims in circumstances where if the fraud was discovered before it succeeded, any compensatory damages would be limited to the costs of investigating the fraud, which would in all probability be a much lesser sum, as proved to be the case.
27. The judge's analysis that the profit and the compensation would be identical looks at the matter through the wrong end of the telescope and overlooks that the second category requires the Court to analyse the position prospectively when the tort is committed, at which time the tortfeasor may or may not ultimately achieve the profit it seeks to achieve. Hence Lord Hailsham's references to "the chances of economic advantage" outweighing "the chances of economic penalty", reflecting what Lord Devlin had said about the wrongdoer calculating that the profit "will probably exceed the damages at risk". In any event, as Sharp LJ pointed out during the course of argument, if the fraud had been successful, Axa would have paid the claims and the monies would have disappeared, so that even if the fraud had been subsequently uncovered, the compensation Axa would be likely to have recovered would be nothing like the profit the wrongdoers had achieved.
28. I also agree with Mr McCluggage that, to the extent that the judge appears to have thought that exemplary damages in the second category would only be awarded when the profit made by the wrongdoer cannot be fully recovered by the victim through an award of compensatory damages, that is to impose an unjustified limitation on the second category of case. The judge's approach is inconsistent with the decision of this Court in Ramzan v Brookwide, that it was inappropriate to award exemplary damages by reference to the profits made by the wrongdoer for which compensatory damages could have been but had not been claimed by the victim of the tortious conduct (see [80]-[81] of the judgment of Arden LJ).
29. Furthermore, I do not read Sedley LJ at [26] of his judgment in the Borders case as saying that the second category is limited to such cases of "unreachable" damages, but even if he were, the wider analysis of Rix LJ is to be preferred. It is clear from [47] of the judgment of May LJ in that case that he too did not consider that the availability of an award of exemplary damages was affected by whether the claimant could have claimed the disgorgement of the tortfeasor's profit as compensatory damages.
30. At [43] of his judgment, Rix LJ said:

"Exemplary damages no doubt remain a controversial topic (see McGregor at paras 11-001/8). In my judgment, however, Kuddus indicates, if anything, that, controversial as they are, they are not to be contained in a form of straight-jacket, but can be awarded, ultimately in the interests of justice, to punish and deter outrageous conduct on the part of a defendant. As long therefore as the power to award exemplary damages remains, it is not inappropriate in a case such as this, where the claimants have been persistently and cynically targeted, that they, rather than the state, should be the beneficiaries of the court's judgment that a defendant's outrageous conduct should be marked as it has been here. They are truly victims, and, for the reasons given by Master Leslie himself, there is no question at all of the award becoming a mere windfall in their hands."

31. Provided that it is recognised that the criterion which Lord Devlin identified, that the wrongdoer has calculated that the profit to be made from the wrongdoing may well exceed any compensation he has to pay the claimant, must have been satisfied for exemplary damages in the second category to be available, this seems to me to be an appropriate statement of the approach to be adopted to the award of exemplary damages in this category.
32. Applying that approach, in my judgment the present case (in which, as I have stated, the criterion which Lord Devlin identified is satisfied) is a paradigm case for the award of exemplary damages. This was a sophisticated and sustained fraud involving deceit and fraudulent misrepresentation from the outset. The accidents were faked. False documentation, such as the hire agreements and medical reports, was created. The claimants themselves may not have existed. The first respondent conducted proceedings on the basis that it was authorised to do so as a firm of solicitors when it was not, thereby committing a criminal offence. Its conduct of those proceedings was cynical and abusive and through its dishonest manipulation and misuse of the court process, falsely representing that court documents had been served when they had not, the fraud very nearly succeeded. There is little doubt that if the respondents had managed to enforce the judgments they obtained against Axa, Axa would never have seen its money again.
33. Contrary to the view of the judge, it is nothing to the point that criminal proceedings could have been brought (and indeed were brought against the third respondent). That was precisely what had occurred in the Borders case, where the appellant had been tried and convicted of fraud and sentenced to 30 months imprisonment. There had also been an application in the criminal proceedings for a compensation order under section 130 of the Powers of the Criminal Courts Act 2000, although that was withdrawn after Master Leslie awarded damages. As in the present case, confiscation proceedings were pending at the time of the hearing in this Court. The existence of the criminal proceedings and, in particular, the confiscation proceedings was not considered by this Court to affect the award of exemplary damages if appropriate and the argument of double jeopardy was rejected (see [16]-[17] per Sedley LJ, [41] per Rix LJ and [46] per May LJ).
34. Furthermore, I do not consider that the availability of contempt of court proceedings should adversely affect the award of exemplary damages if it is otherwise appropriate. Any contempt was in a narrower compass than the overall fraud and thus did not include the totality of the outrageous conduct, quite apart from the fact that contempt would have to be proved to the criminal standard of proof.
35. As I have said, this case is a paradigm one for the award of exemplary damages. As to the amount of such damages, as was stated by Arden LJ in Ramzan v Brookwide at [82], the sum must be principled and proportionate. As in that case, given the need to deter and punish the outrageous conduct and abusive behaviour in the present context, the principled basis is to make a punitive award. The respondents have chosen not to place before the court any evidence as to their means so that it is not appropriate to limit the amount of any award by reference to ability or inability to pay (see [16] of my judgment in Direct Line v Akramzadeh (2016) unreported). Given the seriousness of the conduct of the respondents and the need to deter them and others from engaging in this form of "cash for crash" fraud, which has become far too prevalent and which adversely affects all those in society who are policyholders who face increased insurance premiums, I consider that the appropriate award of exemplary damages is that each of the first, second and third respondents should be liable to pay £20,000.
36. Accordingly, I would allow the appeal and award exemplary damages of £20,000 against each of the respondents.

Sir Stephen Richards

37. I agree.

Lady Justice Sharp

38. I also agree.