03 September 2008

International fraud and asset tracing litigation news - summer: Proving carousel fraud (Part 2)


Facts of the Case

The decision of the Court of Appeal reported in the Summer 2007 edition, was appealed by Revenue and Customs Commissioners (‘Customs') and cross-appealed by Total Network SL (‘Total'), the Respondents.

Customs brought an action against Total for damages at common law for unlawful means conspiracy in sums equivalent to the amounts of VAT which they claimed to have lost as a result of carousel frauds.  These carousel frauds amounted to 13 alleged conspiracies involving different companies, with Total being the first and last link in the chain of traders (the circularity of the transaction giving rise to the label ‘carousel').

At first instance, Mr Justice Hodge held that Customs had a cause of action against Total, “in conspiracy where the unlawful means alleged is a common law offence of cheating the public revenue.”  He found that it was sufficient for Customs to show that Total was party to a conspiracy, the intention of which was to cheat Customs by a series of transactions that had no other purpose than to defraud.  In effect, Hodge J held that the fraud automatically amounted to unlawful means for the purpose of the tort.

The Court of Appeal held that it was open for Customs to bring an action in damages at common law as a way of recovering VAT from a person who had not been made accountable for that tax, but that unlawful means should amount to a civil wrong committed by at least one conspirator.  

The Decision

The judges in the Court of Appeal had felt bound by the decision in Powell v Boldaz [1998] Lloyds Re P Med 116 which found that an unlawful act actionable at the suit of the claimant was a necessary ingredient of unlawful means conspiracy.   They concluded that is was not sufficient that the unlawful act amounted to a crime or breach of contract by a third party.

Customs' claim was struck out.

Appeal to the House of Lords

In the House of Lords, the Appeal by Customs was allowed and the cross-appeal by Total was dismissed.

There were two issues before the House of Lords (per Lord Walker of Gestingthorpe):

“The first is whether the appellants…are entitled to resort to a private law remedy – an action for damages in the tort of conspiracy – in order to recoup value added tax, which would otherwise be irrecoverable.

The second issue is whether [on these facts] the requirement of the common law tort of conspiracy can be established….”

Points of Interest

Both these issues surround the question of whether Customs would be able to bring a private law claim for fraudulent misrepresentation against one of the companies which was a fraudulent conspirator with Total.

On the first issue, the House of Lords was split 3 to 2, with the majority deciding that there was nothing in the VAT statutory scheme which disqualified Customs bringing a common law claim, to recover the tax due, for conspiracy against Total.

On the second issue, the House of Lords agreed unanimously that conspirators who engaged in criminal conduct, with the purpose of inflicting harm on a claimant, could be sued in the tort of conspiracy. They concluded that criminal conduct amounted to unlawful means whether or not such an action could be the basis of a claim under another tort.

The decision of the Court of Appeal in Powell v Boldaz was therefore found ‘erroneous' (Lord Hope of Craighead) and overruled.

The judge at first instance had been correct and the claim should not be struck out.

Category: Article