Grabowski v Scott & Anor

A trial judge must decide the case defined by the pleadings and must give adequate reasons for rejecting material evidence, particularly where the rejection supports findings of fraud or dishonesty. Serious allegations should be pleaded clearly and raised fairly, so that the opposing party has a proper opportunity to meet them. An appellate court will set aside findings founded on unpleaded allegations, unsupported inferences, or unexplained rejection of unchallenged evidence. A tracing claim also requires a reasoned finding identifying the relevant property or fund and establishing that the claimant’s money was applied in its acquisition. Where a retrial would cause injustice after prolonged proceedings and the claimant has had ample opportunity to present the case properly, the appropriate order may be dismissal rather than remission.

The claimant alleged that he had been defrauded of $2.7 million from the $2.9 million paid to Grangemore Investments Ltd. He sought to trace the money into Hyde Farm, which was held through the Drummond Settlement. The trial judge found that Mr Scott had participated in the fraud, that an agreement relied on by Mr Scott and Mr Conway was forged, and that the property had been purchased with the claimant’s money. The judge declared that the claimant could trace into Hyde Farm.

Mr Scott and Mr Conway appealed. They challenged the findings of fraud, forgery and beneficial ownership, the adequacy of the reasoning, the treatment of the pleadings and the conclusion on tracing. The central issues were whether the trial judge had fairly and properly determined the pleaded case and whether the evidence supported the tracing order.

1. Appeals allowed. The deputy judge’s judgment was set aside and the action was dismissed. Lord Justice Jonathan Parker delivered the principal judgment. Lord Justice Schiemann agreed. Lord Justice Pill agreed with the result and substantially with the reasoning.
2. The pleadings permitted consideration of whether some of the claimant’s money had been used to purchase Hyde Farm. They did not, however, provide a proper foundation for the wider allegations and findings made at trial. The only pleaded overt act against Mr Scott was the alleged misrepresentation at the Frankfurt meeting. The evidence that Mr Rachow, who was accepted to be acting fraudulently, translated an alleged statement by Mr Scott was insufficient to establish fraud or a conspiracy by Mr Scott.
3. The findings that Mr Scott and Mr Conway had acted dishonestly, and that the agreement dated 4 June 1993 was forged, were procedurally and evidentially unsustainable. Allegations of forgery should have been pleaded and raised in sufficient time to allow the defendants to meet them and call relevant evidence. The deputy judge also rejected important evidence without giving reasons. Although a judge decides what evidence to accept, unexplained rejection of unchallenged evidence may amount to a denial of justice, especially where it forms the basis of findings of fraud.
4. The deputy judge failed adequately to review Mr Scott’s defence, relied unfairly on matters such as the payment of rent, failed to address the inherent probabilities, and made no finding identifying whose money the pre-existing $1.035 million was. The possibility that Hyde Farm had been purchased with money other than the claimant’s was not properly considered.
5. The tracing conclusion was inadequately reasoned. The deputy judge did not explain why the whole of the $800,000 used to purchase Hyde Farm derived from the claimant’s money, nor address the alternative claim for a proportionate beneficial interest. A retrial was refused because the action had been pending since 1995, the claimant had ample opportunity to plead and prove his case, and continuation would cause injustice to the defendants.

• Court of Appeal (Civil Division) — Grabowski v Scott & Anor [2002] EWCA Civ 1885: appeals allowed; the deputy judge’s judgment set aside; action dismissed. Permission to appeal to the House of Lords refused.
• High Court, Chancery Division — Deputy Judge Simon Berry QC: declared that the claimant had a right to trace $2.7 million into Hyde Farm and that the property was held on trust for him.