Alleging Fraud in Civil Proceedings

The word ‘fraud’ – like ‘negligence’ – tends to be easily thrown into a conversation when discussing the actions of a potential defendant, but it has a different and more onerous definition in law than it does in everyday language.  

Indeed, it can strike fear into the very heart of a lawyer as not only can it be difficult to prove but get it wrong and there can be significant cost consequences for the claimant as well as potential disciplinary proceedings for the hapless legal team.

In reality, there is no such single thing as ‘civil fraud’.  Instead, it covers a vast array of different types of actions including such things as bribery, breach of fiduciary duty, and conspiracy.  To keep matters simple, I am only going to deal with the most common type of civil fraud in this article, that of fraudulent misrepresentation or deceit.

According to the textbooks, a fraudulent misrepresentation is

“where a defendant makes a false representation, knowing it to be untrue or being reckless as to whether it is true, and intends that the claimant should act in reliance on it, then in so far as the latter does so and suffers loss, the defendant is liable for that loss”

There are therefore five aspects to establishing fraudulent misrepresentation:

(1) There must be a false representation as to fact to the claimant (C)

(2) When making the statement, the Defendant (D) must have a dishonest state of mind

(3) There must be an intention that C will rely on that representation

(4) C does actually rely on that statement

(5) C suffers a financial loss

A false representation as to fact

This is not as easy to prove as it suggests because how do you show that D actually believes what he says is a fact as opposed to his opinion?  Importantly, what if D does not actually make the statement but allows C to draw his own conclusion from innuendo or conduct by D?  The courts are happy to draw conclusions from half truths and statements but the more ambiguous the statement, the more careful the courts will be in imputing fraud.

D must have a dishonest state of mind

It is probably worth citing the leading case on this – Derry –v- Peek 1889 – and the judgement of Lord Herchell:

“Fraud is proved when it is shown that a false representation has been made (i) knowingly (ii) without belief in its truth or (iii) recklessly, careless whether it is true or false… to prevent a false statement from being fraudulent, there must, I think, always be an honest belief in the truth”.

Again, this is not easy to demonstrate as D is hardly likely to put his hand up and admit that he had ‘knowingly’ made a false statement to C.  C can again ask the Court to draw inferences but to establish the state of mind of D, the Court has to be careful.  Lord Nicholls in Re H (Child Abuse) 1996 said that:

“fraud is less likely than negligence” so “the more serious the allegation the less likely it is the event occurred and hence the stronger should be the evidence.”

Ultimately though, if D can show that he had an honest belief in the ‘fact’, he will have a defence although this belief may be set up against the yardstick of the “ordinary standards of reasonable and honest people”2

An intention that C relies on the misrepresentation

Interestingly, D does not have to make the statement directly to C.  He can make it to a third party if he knows that the third party will tell C.  All that is needed to be shown is that D had an actual intention to deceive C.

There was reliance by C on the misrepresentation

If C can show that the ‘fact’ induced him to enter into the transaction or even that it was one of a number of factors, then this aspect of the ‘fraudulent misrepresentation’ will be established.  He does not need to show that it was reasonable to rely on the fact although of course, the more unreasonable it was to rely on an obscure and outlandish fact, the more difficult it would be for the Court to accept reliance.  Of course, if D can show that C would have acted in the same way if he knew of the true facts behind the statement, he would have a total defence.

C suffers a financial loss

If C can demonstrate that he has suffered a loss which directly flows from reliance on D’s statement, then he will be entitled to damages.  Unlike a claim for negligence though where damages are limited to those which could have been reasonably foreseen as being incurred as a result of the negligence, when it comes to claims for fraudulent misrepresentation, C is entitled to be put back into the position he was as if the fraudulent misrepresentation had not occurred – which can include some unforeseen losses.  C still has an obligation to mitigate the losses.

A properly pleaded and supported claim for fraudulent misrepresentation does have a number of benefits for a claimant.

(1) The limitation period in negligence is six years from the date of the act of negligence or three years from date of knowledge subject to a fifteen year longstop date.  However, under s32 Limitation Act 1980, claims for fraud do not have a longstop date.  The limitation period for fraudulent misrepresentation claims is six years from the date C first became aware that a fraud had been perpetrated so extending the time to bring a claim

(2) The measure of damages is much greater than in negligence or in contract claims as it is not limited by foreseeability

(3) A defendant cannot argue that the claimant has contributed to the loss by his own negligence (contributory negligence)

(4) Limitation and exclusion clauses in a contract cannot be relied upon in claims of fraud

It would seem therefore to be advantageous to bring a claim for fraud but it largely because of those advantages (which could potentially open the floodgates on unlimited litigation and damages) and the fact that the term ‘fraud’ carries with it such connotations as well as leading to hostile and antagonistic litigation, that the Courts are reluctant to impute fraud.  Fraud requires a positive act by a Defendant – an intention to commit fraud – that smacks of deceitfulness whereas a claim for negligence tends to arise from mere carelessness and so is less confrontational.  Although the standard of proof in fraud cases is the same as in all civil cases – on the balance of probabilities – the reality is that the Courts prefer a greater standard of evidence to support such a claim.

Added to this is that which I hinted to at the beginning of this article – the professional regulation.  In both the Solicitors Code of Conduct and the Bar Code of Conduct will be found similar strictures which, paraphrasing, require that a solicitor or barrister cannot pursue an allegation of fraud unless they have “clear instructions to make such an allegation” by the client and they have good quality material before them to support the allegation.  If they do not, as I have said, professional disciplinary proceedings may be commenced.  The Court may also make a substantial costs order against the Claimant themselves.

It is for the combination of these reasons – difficulty in establishing fraud as well as the Courts reluctance to impute fraud as well as the professional strictures – that when a layperson claims a defendant has been “fraudulent”, a lawyer is reluctant to jump on the bandwagon.  Great care needs to be taken before these allegations are made and, although there are advantages in pleading fraud, sometimes it is tactically and financially better to take a step back and simply plead negligence.

Emma Slade is a solicitor specialising in professional negligence claims. For a FREE initial assessment of your case call us now on 0808 1391595

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