Fraud fundamentals: the pros and cons of pleading civil fraud

Sometimes it's obvious that a party has been defrauded, but it often isn't clear cut. There might be a significant factual dispute between the parties who might have different recollections or understandings of what occurred. A prospective claimant will usually be advised to consider whether there is a non-fraudulent cause of action available to them, such as for breach of contract, misrepresentation and/or negligence, because fraud is a very serious allegation and carries a stigma that doesn’t attach to other civil claims. It can therefore be more challenging to succeed with a fraud claim because it is generally more likely that someone has acted negligently (or otherwise failed to comply with a legal obligation) than it is that they have acted fraudulently.

The approach will depend on the circumstances and practical considerations in any given case, but in this edition of our 'Fraud fundamentals' series, we've highlighted some of the key pros and cons to pleading civil fraud.

The pros

Loss

A claimant may be able to claim more extensive damages in a fraud claim:

• In a contract or negligence claim, a victim can only claim for losses that were a reasonably foreseeable consequence of the wrong, but in a fraud claim there is no such restriction and the courts take a wider approach.
• A contract may contain clauses excluding liability or limiting the amount and/or types of loss that a claimant can recover, but such clauses do not apply to fraud.
• When there has been dishonest conduct, the court may be more willing to award substantial damages compared to cases where there has been no intentional wrongdoing.
• Contributory negligence does not apply in defence to a fraud claim.

Corporate veil

It may be that a body corporate has carried out the wrongdoing and the entity was used by the wrongdoers (eg a dishonest director) as a façade to conceal the true facts in an attempt to avoid personal liability. As a body corporate has a distinct legal personality, a claimant may not be able to pursue the individuals who control the entity in a contract or negligence claim and the entity itself may be a shell with no assets from which to recover loss. In fraud claims, the court may be willing to 'lift the corporate veil' and hold the individuals controlling the company personally liable.

Limitation

Limitation is the time period within which a claim must be brought in relation to the cause of action. Claims in eg contract or negligence may be statute barred if the statutory limitation period has expired. However, where a legal claim arises which involves fraud or the concealment of facts, the limitation period does not begin to run until the facts allowing the claimant to bring the claim have (or could have with reasonable diligence) been discovered. No limitation applies in cases concerning fraudulent breach of trust.

The cons

Particularising fraud

Fraud claims cannot be made flippantly, and solicitors and barristers have professional obligations requiring them to ensure that any fraud-based claim is set out in sufficient detail, including the facts, matters and circumstances relied upon to show that the wrongdoer was dishonest. This includes ensuring that there is credible material which establishes an arguable case of fraud. If these requirements are not met, non-fraudulent causes of action should be considered instead. In practice, these are often included as alternative claims to a fraud-based claim as a safety net in the event that the fraud-based claim fails.

Standard of proof

For a legal claim to be successful, the court must be satisfied that the relevant 'standard of proof' has been met. In all civil claims, including civil fraud, the standard of proof is the 'balance of probabilities' - ie in order for a claimant to be successful they have to demonstrate that the facts on which they rely in support of their claim are more probable than not to have occurred. In criminal proceedings the relevant standard is significantly higher and the prosecution has to prove its case 'beyond reasonable doubt'. An allegation of civil fraud is a serious one and while the standard of proof is not higher than for other civil claims, it is inherently more difficult to prove fraud than to prove eg negligence or breach of contract. This is because the more serious the allegation, the stronger the evidence that will be needed to satisfy a court that the fact in issue occurred and will be unlikely to find a party liable for fraud if there is another explanation for their conduct such as negligence.

Settlement/early determination

Fraud claims are typically more difficult to settle because they can involve significant reputational damage to the defendant which raises the temperature of the litigation from the off, and they typically involve disputes about material facts involved in the case meaning they are unsuitable for strike out and/or summary judgment. This means that fraud claims are more likely to go to a full trial and the claimant will need to be prepared to be involved in proceedings for the long haul.

Insurance

Before commencing proceedings, a claimant will want to know that the defendant has assets against which to enforce a judgment and costs order to avoid a pyrrhic victory. In some instances, a defendant might have access to insurance cover (eg directors and officers liability insurance), which will provide a claimant with some comfort, but insurance policies typically exclude liability for fraud and this should be borne in mind when deciding whether to plead fraud or to run with a non-fraudulent cause of action only if available.

Seeking advice

Careful thought should always be given to whether it is necessary to plead fraud, because it can be a difficult path to tread. However, if the evidence supports a pleading in fraud there are a number of potential advantages available to claimants and it is therefore important to seek advice early to understand how those might apply to a particular case.

To discuss the issues raised in this article in more detail, please contact a member of our team.