A guide to civil fraud for companies
22/04/2024
All business owners and managers will want to protect their business and its assets from fraudsters, whether inside or outside the business. Sometimes, however, things do go wrong and a business will find itself the victim of fraud, resulting in loss which can be significant.
Occasionally, a business might also be accused of fraudulent conduct, and it will want to defend itself. For example, a company might be accused of inducing a third party to enter into a contract by fraudulent misrepresentation.
This article is intended to serve as a guide for businesses affected by fraud. It explains some of the rules surrounding civil fraud under the law of England and Wales. The aim of the article is not, however, to constitute advice on your company’s position in bringing or defending a civil fraud claim, or to serve as a substitute for such advice. Civil fraud is a complex area of law and professional advice should be sought before you decide to take (or not take) any legal action. A failure to take appropriate specialist advice could well result in further loss.
What is civil fraud?
Most people are familiar with the term “fraud” and know that fraudsters are dishonest criminals who break the law to gain an advantage (usually financial) over another.
Fewer are familiar with the term “civil fraud,” which is a term covering a number of causes of action that can be pursued by a victim of fraud in the civil courts, with a view to obtaining a civil remedy (usually, restitution of the loss the victim has sustained). The purpose of a civil fraud claim is therefore to compensate the victim of fraud. This is different to reporting a fraudster to the police, who might conduct a criminal investigation with a view to punishing the fraudster.
Does my company have a potential civil fraud claim?
If your company has been the victim of fraud then yes, it is very likely that your company will have grounds to bring a civil fraud claim.
A civil fraud claim might be brought against the fraudster personally (if their identity is known), or it might be brought against a third party (such as a bank) that has negligently or dishonestly, or sometimes even innocently, become involved in the fraudster’s wrongdoing. A company is therefore not necessarily without recourse in circumstances where the fraudster’s identity, or whereabouts, is unknown.
If your company has been the victim of fraud, it should seek advice from a civil fraud lawyer at the earliest opportunity so as to maximise its chances of successfully recovering its loss by making a civil fraud claim.
My company is being accused of fraud. What should I do?
Any accusation of fraud is very serious and, if your company has been accused of fraud, specialist legal advice should be sought at the earliest opportunity so as to ensure that your company’s position and its reputation are protected as far as is possible.
Civil fraud: main heads of claim
There are several causes of action that fall under the category of civil fraud. The most common civil fraud heads of claim, and the corresponding legal test that must be satisfied in order to establish such a claim, can be summarised as follows.
Cause of action: conversion / misappropriation of funds
Legal test: The claimant must establish that: 1) the defendant has deliberately taken or interfered with property (which includes money) belonging to the claimant; 2) the claimant had possession or an immediate right to possession of the property in question immediately before the conversion or misappropriation occurred; and 3) the claimant is denied the use and possession of the property as a result of the conversion/misappropriation.
Remedy: Return of the goods or money, or compensation in the sum of the market value of the goods lost at the time they were lost.
Cause of action: deceit / fraudulent misrepresentation
Legal test: The claimant must establish that: 1) a statement or representation made by the defendant was false; 2) the defendant knew that the statement or representation was false or was reckless as to whether it was false; 3) the defendant intended for the claimant to rely upon the false statement or representation; 4) the claimant did in fact rely upon the false statement or representation; and 5) the claimant suffered loss as a result.
Remedy: Compensation for the loss sustained so that the claimant is placed in the position it would have been in had the false statement or misrepresentation not been made. The claimant is also entitled to rescind the contract. This means that the contract is effectively cancelled from the beginning so that it is treated as never having existed.
Cause of action: unlawful means conspiracy
Legal test: The claimant must establish that: 1) a combination or concerted action or agreement existed between two or more legal persons (i.e. one of those legal persons could be a company) with the intention of causing damage to the claimant; 2) the combination or concerted action or agreement made use of unlawful means (i.e. an action not according to or permitted by the law); 3) the alleged conspirators had knowledge of the unlawfulness; and 4) the combination or concerted action or agreement did in fact cause damage (i.e. loss) to the claimant.
Remedy: The claimant is entitled to damages (compensation) for any loss caused by the unlawful means itself.
Cause of action: dishonest assistance
Legal test: The claimant must establish that: 1) that the defendant helped a third party commit a breach of trust or fiduciary duty; 2) the defendant had a dishonest state of mind when doing so (for the avoidance of doubt, there is no requirement that the third party was dishonest); and 3) the breach committed by the third party caused loss to the claimant.
Remedy: The claimant may be entitled to equitable compensation (a discretionary monetary remedy) for losses resulting from dishonest assistance. The defendant may, alternatively, be required to account to the claimant for the gain or profit that accrued to the defendant because of the dishonest assistance, regardless of whether the wrongdoing caused the claimant any corresponding loss (although this is also a discretionary remedy).
Cause of action: knowing receipt
Legal test: The claimant must establish that: 1) the defendant has received the claimant’s assets that have been disposed of by another in breach of trust or fiduciary duty; and 2) the defendant received those assets in circumstances where they knew the assets were received in breach of trust or duty.
Remedy: The claimant will have a claim to the property transferred in breach of trust to a third party who is not a bona fide purchaser for value without notice (i.e. an innocent party who purchases property without notice of any other party’s claim to the title of that property). The claimant may also have a remedy in the form of equitable compensation or an order for account of profits.
Cause of action: unjust enrichment
Legal test: The claimant must establish that: 1) the defendant has been enriched or has received a benefit; 2) the retention of the enrichment by the defendant would be unjust; and 3) the enrichment of the defendant was at the expense of the claimant.
If the claimant can establish these three elements, the claim will be successful unless the defendant can prove that they have a defence.
Remedy: The usual remedy here is that the claimant is entitled to restitution whereby the defendant must pay to the claimant the value of the enrichment.
Civil fraud: other claims
There are other causes of action which often feature allegations of fraud, including breaches of fiduciary duty and breaches of trust. These causes of action are often used in the context of directors or senior personnel acting inappropriately, causing the company to suffer loss.
Usually, a number of civil fraud heads of claim and other heads of claim will apply to any given scenario. In cases where fraud is suspected, it is often an available (and an advisable) option to plead alternative causes of action that do not involve allegations of fraud, such as breach of contract, negligent or innocent misrepresentation, or breach of statutory duty. This is because these causes of action are generally easier to prove. It is important to remember, however, that the remedies the various civil fraud causes of action allow (if the claim succeeds) are different. We will be able to advise on which heads of claim are most appropriate to the situation.
Preparing a civil fraud case
It is well established 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, claimants must present strong and compelling evidence to prove fraud. The court expects more than mere suspicion – it requires a convincing case to establish fraudulent conduct.
There are various tools that can be used to assist a company with obtaining further evidence to support its case, or to protect its stolen money/assets, before it decides whether or not to “take the plunge” and issue court proceedings. These tools include applying to the court for a disclosure order and/or injunctive relief and/or a freezing order over a defendant’s or a third party’s assets. They also include applying to the court for a search order which would allow the claimant’s representative to search the defendant’s home or place of business to secure evidence relating to the fraud, or which may lead to the location of assets.
As part of the evidence gathering and investigation process by any potential claimant, it is also often sensible to take steps to assess whether the defendant is “good for the money”. This will also help the claimant to decide whether it is financially worthwhile pursuing the claim and, if it is, against whom it should be pursued if there is more than one possible defendant. Assistance can be sought from a tracing agent to investigate any potential defendant’s situation and means.
Pursuing a civil fraud case
Once the case has been assembled with cogent evidence in support, the next stage is to send the defendant(s) a formal Letter of Claim which is compliant with the Practice Direction for Pre-Action Conduct. This step should be taken before any claim is pursued against the defendant(s) via the court.
The Letter of Claim should set out the claimant’s case against the defendant(s) and what the claimant wants from the defendant(s) for legal action to be avoided. Within the letter, the claimant should invite the defendant(s) to engage in an alternative form of dispute resolution, such as mediation.
The defendant should respond fully to the Letter of Claim with its own position and (if applicable) proposals for alternative dispute resolution. The parties should then engage in communication with a view to trying to resolve their differences. If the claimant’s proposed claim is not resolved after a reasonable amount of time (which will depend on the complexity of the case and the conduct of both of the parties), then civil court action can be commenced.
Civil court action involves delivering a Claim Form to the appropriate court, usually with a document called the Particulars of Claim which sets out the allegations, the legal grounds for the claim(s) and what remedy the claimant is seeking from the defendant(s) and why.
Once a civil court claim has been issued by the court, the parties will need to comply with directions given by the court leading up to Trial, which will include dealing with disclosure of documents and the preparation and exchange of witness statements. There are strict rules surrounding how the court procedural matters should be dealt with and the timings that must be followed. We can help to ensure mistakes (which can be catastrophic) are not made, and to maximise the prospects of success of your case.
Can my case be resolved outside of court?
Absolutely, yes. Even if the claim has been issued at court, the parties should at all times consider whether their dispute is one which is capable of resolution outside of court. It is common, and very much encouraged, for parties in all legal actions to engage in alternative dispute resolution such as mediation. There are many benefits to doing this, including the ability to agree on a creative remedy, the ability of the parties to retain complete privacy and control, and the ability of the parties to agree on terms of confidentiality of any commercial settlement, which is likely to be important given the serious nature of any allegations concerning civil fraud.
We are here to help
Fraud has grown hugely in recent years and is now the most commonly experienced crime in the UK. If your company is affected by fraud, it is essential to seek legal advice.
For specialist legal advice about bringing or defending a civil fraud claim, please contact Claire Boucher.
This article is not legal advice, which it may be sensible to obtain before you take any decisions or actions in the areas covered. Please do contact me if you would like an initial discussion of your situation.
