Paragon Finance Plc v D B Thakerar & Co (A Firm); Thimbleby & Co v Paragon Finance Plc

An amendment which first alleges intentional wrongdoing introduces a new cause of action where the existing pleading alleges only negligence or other unintentional wrongdoing. After expiry of the limitation period, such a claim does not arise from the same or substantially the same facts merely because the underlying transactions are unchanged.

A claimant invoking postponed limitation for fraud must prove that the fraud could not, with reasonable diligence, have been discovered earlier. The standard assumes a comparable business with adequate but finite resources and a reasonable sense of urgency.

A person described as a constructive trustee solely because of participation in the impugned fraud is not necessarily a true trustee. A limitation defence to such a concurrent equitable claim is at least reasonably arguable and must not be defeated through amendment.

Mortgage lenders alleged that solicitors acting for both lenders and borrowers had failed to disclose features of sub-purchases suggesting mortgage fraud. The original actions alleged breach of contract, negligence and breach of fiduciary duty, but did not allege dishonesty or intentional wrongdoing.

After more than six years, the lenders sought to add claims for fraud, conspiracy to defraud, fraudulent breach of trust and intentional breach of fiduciary duty. Lloyd J allowed the amendments and consequential discovery in the Thimbleby action. Chadwick J refused comparable applications in the Thakerar action.

The conjoined appeals concerned whether the amendments introduced new causes of action, whether an applicable limitation period had expired or was postponed, and whether the new claims arose from the same or substantially the same facts as the existing claims.

1. The appeal by Thimbleby & Co was allowed, and the appeal by Paragon Finance Plc in the Thakerar action was dismissed. Millett LJ delivered the leading judgment. Pill and May LJJ agreed.

2. A cause of action is defined by the material facts which must be proved, selected at the highest appropriate level of abstraction. Additional particulars or unnecessary allegations do not create a new cause of action. Intentional and unintentional wrongdoing are different, however. An amendment first alleging fraud, conspiracy to defraud, fraudulent breach of trust or intentional breach of fiduciary duty therefore introduced a new cause of action.

3. Fraud must be distinctly alleged and proved. Knowledge that another person is committing fraud, coupled with a failure to disclose it, remains consistent with inadvertence unless deliberate dishonesty is expressly pleaded. Further particulars of known unusual circumstances could nevertheless remain as particulars of negligence and breach of contract.

4. Millett LJ distinguished two uses of “constructive trust”. In the first, a genuine trust obligation precedes the transaction complained of. In the second, liability to account arises solely as equity’s response to the impugned fraud. The latter is a remedial formula arising within equity’s concurrent jurisdiction rather than a true trust. The court did not finally decide whether Limitation Act 1980, section 21, applies to the second category. The defendants had at least a reasonably arguable limitation defence, which could not properly be removed by amendment.

5. Nelson v Rye [1996] 1 WLR 1378 was disapproved insofar as it decided that a fiduciary who was not a trustee of the money was liable to account without limitation of time. An agent’s fiduciary status alone does not make money received trust property. The solicitors had laid out the advances in accordance with their instructions; the proposed claim was for equitable compensation, not an outstanding account.

6. For postponed limitation under section 32, the question is whether the claimant could have discovered the fraud with reasonable diligence, not whether it should have done so. The claimant bears the burden of showing that discovery would have required exceptional measures which could not reasonably have been expected. The lenders had not shown this sufficiently on the summary applications.

7. Under section 35 and RSC Order 20 rule 5, the same-or-substantially-the-same-facts condition is mandatory. Allegations of intentional wrongdoing gave the existing allegations of negligence and incompetence a substantially different character. Leave to add them was refused. Consequential discovery was also refused, without prejudice to renewed applications based on the pleadings as permitted by the judgment.

1. Court of Appeal (Civil Division): In Paragon Finance Plc v D B Thakerar & Co (A Firm); Thimbleby & Co v Paragon Finance Plc [1998] EWCA Civ 1249, the court allowed Thimbleby & Co’s appeal, dismissed Paragon Finance Plc’s appeal in the Thakerar action, and refused permission to appeal to the House of Lords.
2. High Court, Chancery Division: Lloyd J granted the lenders leave to amend and made consequential discovery orders in the Thimbleby action on 25 March 1997.
3. High Court, Chancery Division: Chadwick J refused comparable amendments and further discovery in the Thakerar action on 4 June 1997.