DISCOVERY LAND COMPANY LLC & ANOR v KAREN HUBBARD JONES

Permission to amend a defence requires a proposed defence to have a real, rather than fanciful, prospect of success. The court must not conduct a mini-trial, but it may reject factual assertions that lack credible support or are contradicted by contemporaneous documents. Serious allegations such as fraud, illegality, notice or knowledge require some evidential basis, including identifiable primary facts from which the allegation may properly be inferred.

An illegality defence is assessed by considering the purpose of the prohibition, other relevant public policies and whether denying the claim would be proportionate. A separate alleged illegality in an underlying transaction will not bar a proprietary claim to recover misappropriated funds where the necessary connection is absent and denial of the claim would not advance the relevant policies.

The claimants sought to recover US$700,000 transferred to the defendant, alleging proprietary claims, knowing receipt or constructive trusteeship, and equitable compensation. The defendant applied under CPR Rule 17.3 for permission to amend her defence to plead illegality, ownership of the funds and change of position.

The claimants consented to the change of position amendment but opposed the other proposed defences. The central issues were whether the proposed allegations had a real prospect of success and whether the alleged corrupt inducement in the sale of the property could constitute a defence to the claim.

1. The application was allowed only to the extent that the change of position defence was unopposed. Permission to plead illegality and ownership of the funds was refused.
2. The applicable threshold under CPR Rule 17.3 was whether the proposed defence had a real, as opposed to fanciful, prospect of success. The court applied the summary judgment guidance in SPI North Limited v Swiss Post International UK Limited [2019] EWHC 2004 (Ch), Swain v Hillman [2001] 1 All E.R. 91 and EasyAir Limited v Opal Telecom Limited [2009] EWHC 339 (Ch). A mini-trial was impermissible, but the court was not required to accept unsupported assertions or disregard contemporaneous documents.
3. The proposed illegality defence involved a serious allegation that a seller had received an inducement to reduce the sale price. The defendant identified no credible primary facts capable of supporting that inference. The available email did not establish the alleged bribe, the proposed witness statement did not materialise, and the surrounding circumstances did not provide sufficient support.
4. Even assuming the alleged facts, the defence would fail in law. Applying Patel v Mirza [2017] A.C. 467 and Stoffel & Co v Grondona [2021] A.C. 540, the court considered the purpose of the prohibition, other relevant public policies and proportionality. The alleged inducement in the property transaction was separate from the claimants’ claim to recover their own funds, and barring recovery would not advance the relevant policies.
5. The ownership defence was unsupported by the contemporaneous engagement terms, which treated the funds as held in a client account, and by the absence of attendance notes or other evidence supporting the alleged loan arrangement. A later loan facility agreement did not credibly show that the earlier breach of trust had been authorised or ratified. The findings in related proceedings were not binding on the defendant and did not create issue estoppel, but they were relevant evidence because they resulted from a fully contested hearing and were inconsistent with the proposed defence.