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A New Fraud State of Mind

The UK Supreme Court in the recent case of Ivey v Genting Casino (UK) Ltd t/a Crockfords ([2017] UKSC 67) overruled the longstanding Ghosh test of dishonesty at common law, applicable where dishonesty forms an essential element of a criminal offence or cause of action.

The case concerned a professional punter who, whilst playing a card game called ‘punto banco’ employed a sophisticated gambling technique called edge-sorting, won over £7 million but which the Respondent casino refused to pay, arguing that the Appellant had cheated, thus breaching an implied term of their gaming contract.  In the Supreme Court it was argued for the Appellant inter alia that cheating necessarily involves dishonesty and that edge-sorting was not cheating but a legitimate gaming strategy used to his advantage. The Court therefore had to decide the meaning of the concept of cheating and the relevance of dishonesty to cheating.

The Supreme Court analyzed prior authorities and identified a number of shortcomings with the Ghosh test (para [57]). R v Ghosh [1982] QB 1053 established a two stage test which requires the tribunal of fact to consider whether the conduct complained of was dishonest by the objective standards of ordinary reasonable and honest people. If the answer is in the affirmative, then they must go on to consider whether the defendant must have realized that ordinary honest people would so regard his behavior as dishonest. A defendant is only guilty or liable if the answer to this second question is yes.

With significant repercussions for fraud practitioners, the Court held that the second leg of the Ghosh test does not correctly represent the law. It instead adopted the test propounded by Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Tan ([1995] 2 AC 378) and Lord Hoffmann in Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37: when dishonesty is in question the tribunal of fact must first subjectively ascertain the actual state of an individual’s knowledge or belief as to the facts (subjective test). The reasonableness or otherwise of his belief is a matter of fact identifying whether he held that belief. The key question is whether his belief that he acted honestly is genuinely held. Once the individual’s actual state of mind as to his conduct is established then the question whether his conduct was honest or dishonest must be determined by application of the standards of ordinary decent people (objective test).

This case is important for commercial fraud practitioners. The concept of dishonesty is at the heart of civil actions in fraud, accessory liability, breaches of trust and tracing claims used to recover misappropriated assets.

 

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