Zahoor & Ors v Masood & Ors

A claim advanced through serious fraud in litigation may be struck out where the misconduct jeopardises a fair trial or makes continued proceedings an affront to the court. After a full trial, however, strike-out will be exceptional. The court will usually determine the merits and address proven fraud through dismissal, costs sanctions or other appropriate action.

A judge must decide the case pleaded, proved and argued by the parties. The judge cannot grant relief on an unpleaded theory. An employee who procures forged documents while employed may be summarily dismissed. A person who causes costs by procuring forged evidence to be used in proceedings may also be liable for a third-party costs order.

The claimants, led by Mr Masood, brought claims against Mr Zahoor and associated companies concerning beneficial ownership of shares in International Steel and Tube Industries Ltd, unpaid salary following summary dismissal, and related litigation costs.

Peter Smith J held that both sides had used forged documents and given false evidence. He declined to strike out the claims, but found that Mr Masood was beneficially entitled to certain shares, awarded damages for wrongful dismissal, and made no third-party costs order. His decision is reported at [2008] EWHC 1034 (Ch).

The defendants appealed. The central questions were whether the claims should have been summarily disposed of for abuse of process, whether the share award rested on an unpleaded basis, whether the dismissal was justified, and whether a third-party costs order should have been made.

1. Appeal allowed. The judge was right not to strike out the claims at the conclusion of the trial, although his reason for doing so was wrong. Serious litigation misconduct may justify striking out a claimant’s case where it jeopardises a fair trial or is such an affront to the court that the claimant has forfeited the right to continue. The misconduct of a defendant is irrelevant to that forfeiture question.

   Once a full trial has taken place, however, striking out will be very rare. Its case-management purpose of stopping further waste of resources has largely passed. Where the claim has been tried, the usual course is to make findings and determine the merits, dismissing any claim founded on fraud and imposing suitable consequential sanctions.

2. The Shares Claim should nevertheless have failed. The judge rejected the contractual case pleaded by Mr Masood because the supporting documents were forged, but then upheld the claim on a contribution-based resulting, constructive or implied trust theory. That theory had not been pleaded, proved or argued. It was therefore not open to the judge to substitute it for the parties’ case. The award concerning the shares was set aside.

3. The Employment Claim also failed. Mr Masood had procured forged documents while employed by ISTIL, including documents used to support claims for shares and compensation. That conduct was contrary to ISTIL’s interests and justified summary dismissal. He was therefore not entitled to damages for salary from dismissal to the contractual termination date.

4. The court held that a third-party costs order should have been made under Supreme Court Act 1981, section 51. Mr Masood had procured forged documents to be placed in evidence in the Reventox proceedings, causing Mr Zahoor costs in relation to the application for return of privileged documents. The order was limited to those caused costs.

• Court of Appeal (Civil Division): Allowed the defendants’ appeal, set aside the share and salary relief, and held that a limited third-party costs order should have been made.
• High Court, Chancery Division: Peter Smith J declined to strike out the claims, granted relief concerning shares and salary, and made no third-party costs order: [2008] EWHC 1034 (Ch).