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How to decide which civil fraud action to pursue

Author: Nicola Sharp  1 February 2023
4 min read

When alerted to suspected fraudulent activity against a business, which action do you advise the board to pursue against the perpetrator?

Since there is no single definition of fraud in English law, actions come in various guises, including fraudulent misrepresentation, the tort of deceit, conspiracy, bribery, certain breaches of fiduciary duty, dishonest assistance, knowing receipt, defrauding creditors, and wrongful or fraudulent trading, to name just some.

Of course, the direction of your claim will be dictated by the facts and what you need to prove. But as a starting point, these are a few factors to consider when choosing the appropriate course of action.

Is there a contract?

For contractual claims (commonly called a breach of contract), you can pursue a claim for fraudulent misrepresentation. For example, this might arise when the business recently acquired another company, only to discover that one (or more) of the share purchase agreement (SPA) warranties is false.

Where there is no contract in place, but the business suffered loss due to relying on a false statement of fact, you may be looking at a claim in the tort of deceit instead. A prime illustration is a director who doctors financial information to receive investment from people who thought they were backing a successful fund. (See Weavering Capital (UK) Ltd v Pearson [2012] EWHC 1480 (Ch))

Where there is no contract, and it cannot be said that anybody in the business relied on a representation, it is still possible to pursue a fraud action. An employee who embezzles money from their employer or a director who misappropriates company assets can be liable for fraud even if no representation is made (such as, for example, preparing false accounts). The action here is likely to be a breach of fiduciary duties.

What do you want to achieve?

Next, consider the remedy that would be most beneficial to the business. It is worth noting that damages in a deceit claim are more expansive than damages in a contractual claim because the recoverable losses are not limited to reasonably foreseeable ones.

That has been longstanding law since Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, in which the Court of Appeal held that the claimant is entitled to damages for any such loss which flows from the defendant’s deceit, even if it was not reasonably foreseeable. It is a far-reaching remedy, and any losses from the deceit are potentially recoverable.

There are more narrowly defined parameters around damages flowing from fraudulent misrepresentations. In the recent case of Glossop Cartons and Print Ltd and others v Contact (Print & Packaging) Ltd and others1, the Court of Appeal held that, as a general principle, the proper approach for calculating damages for fraudulent misrepresentation should be to (i) ascertain the actual value of the assets bought at the relevant date and (ii) deduct that figure from the price paid.

When considering which action to pursue, check that the available remedy will sufficiently rectify your situation.

When did you discover the fraud?

This would be important if the alleged fraud occurred several years ago. The limitation period for fraudulent misrepresentation, brought under the Misrepresentation Act 1967, is six years from (i) when the misrepresentation was made or (ii) when the claimant first suffered loss (confirmed in Green v Eadie [2012] Ch 363)

However, you will likely have a little longer to claim deceit. Pursuant to s.32 Limitation Act 1980, the clock starts ticking when (i) you discover the fraud or (ii) you could have discovered the fraud with reasonable due diligence. You must bring your claim within six years of knowledge of the fraud, not necessarily from the time of the fraudulent act.

What do you suspect about the defendant’s state of mind?

Different actions presume slightly different intentions on behalf of the defendant. For example, to be liable for knowing receipt, the defendant must know that the trust property they have received was given to them in breach of trust.

However, to be liable for dishonest assistance, the defendant has to have a “dishonest state of mind.” It may look like semantics, but it could substantially affect the merits of your claim, given that it is more problematic to prove dishonesty.

There is a subtle difference between claims in the tort of deceit and claims in fraudulent misrepresentation regarding the burden of proof for establishing the defendant’s state of mind. As the claimant, it’s an easier hurdle to overcome in a fraudulent misrepresentation claim.

In a deceit claim, the claimant must prove that the defendant had knowledge of the falsity of the statement and that they intended to deceive the representee. It is tough to prove somebody else’s state of mind, even on the balance of probabilities.

However, in a claim under the Misrepresentation Act 1967, the defendant must prove that he had reasonable grounds for believing that his statement was true and that he did believe it was true.

Practical takeaways

How you pursue a civil fraud claim will depend on your facts. But when you put together your particulars of claim, you should plead all the causes of action you want to rely on. Claims in the tort of deceit and fraudulent misrepresentation are sufficiently different that you are unlikely to plead them together. However, you might decide to plead one in the alternative.

But several other actions in fraud can be brought together. For example, in Weavering Capital (UK) Ltd v Pearson, the managing director was found liable (i) in the tort of deceit, and (ii) for breach of his fiduciary duties to the company, and (iii) for a series of transactions defrauding creditors under s.423 of the Insolvency Act 1986.

Given the seriousness of the allegation of fraud, your claims must be carefully and cogently particularised in your statement of claim. Whichever action you take, make sure you can create a coherent fraud case.

The considerations outlined here can help you navigate the early stages of a potential claim in fraud. Anyone intending to bring such a claim should contact civil fraud experts for detailed advice.

1 [2021] EWCA Civ 639

 

 

Nicola Sharp C 09983

Nicola Sharp

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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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