The Court of Appeal’s decision in Bank St Petersburg PJSC v Vitaly Arkhangelsky & Ors [2002] EWCA Civ 408 (Bank St Petersburg PJSC v Vitaly Arkhangelsky) explores arguably the most important principle to consider when attempting to prove fraud - the standard of proof applicable to civil fraud claims.

The case related to a £16.5M fraud claim that saw the defendants then bring a counterclaim against the bank, alleging dishonesty. It saw the Court of Appeal disagree with the standard of proof applied by the High Court for dishonesty.

Criminal v Civil Standard of Proof

The burden of proof is the legal obligation on a litigant to prove his or her assertion.

The English courts recognise two standards of proof:

  • The criminal standard - where allegations must be established "beyond reasonable doubt".
  • The civil standard - where allegations must be established "on the balance of probabilities".

In criminal proceedings, the defendant is presumed innocent unless the prosecution has proved guilt beyond a reasonable doubt. Beyond reasonable doubt is a very high standard of proof, with the court having to be convinced that there is no doubt that something is true. In civil proceedings, however, the claimant must prove on the balance of probabilities that his or her case is true. This means that the court must be satisfied that, on the evidence, the occurrence of any event was more likely than not. If the evidence is such that the court can say it is more probable than not that the event happened then the case in principle succeeds. But if the probabilities are equal, the case fails.

Civil Fraud Claims

The standard of proof in civil fraud claims is the same as in all other civil claims: the claimant has to show that it is more likely than not that the defendant committed a fraud (Re B (Children) [2008] UKHL 35).

It is well established in Fiona Trust v Privalov [2010] EWHC 3199 that “cogent evidence is required to justify a finding of fraud or other discreditable conduct.” This is because fraud and dishonesty are both very serious allegations. As such, clearer evidence is required to prove fraud or dishonesty than other torts i.e. negligence or innocence.

However, the Court of Appeal in Bank St Petersburg PJSC v Vitaly Arkhangelsky made it clear that cogent evidence and / or discreditable conduct is only the starting point when establishing civil fraud.

Case Background

The first claimant, Bank St. Petersburg PJSC (the bank), brought a claim for approximately £16.5M against the first defendant, Dr Vitaly Arkhangelsky, a Russian shipping entrepreneur, under six personal guarantees and a loan. Dr Arkhangelsky, his wife Julia Arkhangelskaya and their company, Oslo Marine Group Ports LLC (together, the applicants) brought a counterclaim against the bank and its chairman, Alexander Savelyev (together, the respondents), for damages arising from an alleged conspiracy to seize the assets of the first and second applicants’ main Russian business in an unlawful corporate raid. The applicants sought damages of US$467 million. The bank denied any wrongdoing.

In the first instance, Hildyard J sitting in the High Court granted the bank’s monetary claim in full and gave judgement against the defendants for £16.5M. The High Court rejected the applicants’ counterclaim for conspiracy (in which they made allegations of dishonesty against the bank) and stated that it had “not been established having regard to the strength of the evidence that was necessary to discharge the burden of proof”. Hildyard J went on to state that the counterclaim “always faced the difficulty that it relied on proof of the inherently improbable, and a burden of proof that could only be discharged by showing the facts to be incapable of innocent explanation such as to give rise to the inference of the conspiracy.”

Appeal

An appeal was brought against part of the judgement refusing the counterclaim on two central grounds:

The judge had applied the wrong standard of proof, setting too high a bar for dishonesty. The judge adopted a narrow piecemeal approach to the evidence which prevented him from assessing the alleged fraud as a whole.

The Court of Appeal decided that the approach taken by the High Court was wrong. It confirmed that even in cases of fraud or dishonesty the correct test is whether the allegation has been proven to be more likely than not. There is no requirement to prove that the fraud has occurred beyond all possible doubt, or to prefer an innocent explanation in place of a dishonest one.

On the second ground of appeal, it was held that Hildyard J’s piecemeal approach to the counterclaim led to a “a failure to consider how the extraordinary facts that he had found at one stage affects the likelihood of the applicants’ allegations at a later stage”. As such, the judge’s failure to consider the factual findings made his conclusions unreliable.

The Bank St Petersburg PJSC v Vitaly Arkhangelsky case is now set to be re-tried in the High Court.

Conclusion

This decision is particularly important for those fighting against sophisticated frauds, where defendants can often create complex, seemingly innocent, explanations for events. It emphasises that while dishonesty is inherently more improbable than an innocent explanation, compelling evidence (both documents and witness evidence) of dishonesty will shift this balance.

Claimants bringing fraud litigation in English courts could well find it easier to succeed as a result of this case. This may, in time, come to be regarded as a much- welcomed development; especially given the anticipated rise in fraud litigation due to the pandemic and current economic downturn.