Fraud fundamentals: what is civil fraud?

We are a society in a state of high alert when it comes to fraud. The possibilities posed by our increasingly digital world coupled with the current macro-economic climate mean that the opportunity and motivation to commit fraud are at a new peak. Fraud losses in the UK reportedly equate to £137 billion each year and rising. With that in mind, our new series of short reads, 'Fraud Fundamentals', will cover the basics of civil fraud, the tools available in the context of civil litigation and insolvency, the advantages and disadvantages of pleading fraud and our thoughts on current trends and predictions.

What is civil fraud?

Fraud can take many forms and have many faces. Individuals and corporate entities alike can be victims. It can be described as using misrepresentation, deception or dishonesty to obtain an advantage or to disadvantage another. It could involve an obvious wrongdoer, for example where there is a payment fraud, a fraudulent investment scheme, a Ponzi scheme or a phishing scam. One of the most popular types of fraud over the past few years is the authorised push payment or APP fraud, which involves a fraudster duping a victim into transferring money from their bank account to the fraudster's account in the mistaken belief that they are effecting a legitimate transaction. Impacting both private individuals and companies, the scam can range from small sums of money to millions of pounds.

But circumstances giving rise to fraud-based claims are often more nuanced than that. They often involve people well known to each other, with complex motivations and even more complex schemes in place to disguise the true story and the true flow of funds involved. They might involve a dishonest business counterparty, an employee who abuses company information or assets for personal gain, or someone who dishonestly assists a company director to breach their duties. The largest frauds in recent years have involved elaborate Ponzi schemes orchestrated over many years, targeting sophisticated parties.

Victims of financial fraud often seek to recover their money through the civil courts, particularly when the criminal justice system and law enforcement agencies are too stretched to meaningfully investigate.

If you or your business are the victim of a fraud, one of the first steps from a legal perspective is to identify what your claim is and against whom. 'Fraud' is not a cause of action in itself, however, outlined below are the most commonly encountered heads of claim in fraud cases, and a summary of their key features. As explained below, the purest claim for civil fraud is a claim in the tort of deceit (commonly referred to as fraudulent misrepresentation), but there are many other types of claim which either have fraud or dishonesty as an essential element (such as dishonest assistance) or which are commonly pleaded in fraud claims but do not only arise in that context.

Heads of claim

Head of claim	Requirements	Remedies
Tort of deceit/fraudulent misrepresentation	This is what most people mean when they refer to civil or commercial fraud and fraud is an essential element of the claim. It is: a false statement or representation made by the defendant which they knew was false or were reckless as to whether it was false that they intended for the claimant to rely upon that the claimant did in fact rely upon and suffers loss as a result. It must be shown that the defendant's statement of mind was dishonest, but it is not necessary to prove that the defendant intended to cheat or injure the person to whom the statement was made.	The claimant can recover tortious damages (ie the claimant will be placed in the position it would have been in had the misrepresentation not been made). There is no remoteness limit, ie the claimant is entitled to recover damages equal to the loss suffered by the claimant as a direct result of their reliance on the false statement, even if it was not reasonably foreseeable. The claimant must, however, give credit for benefits received as a result of the transaction. The claimant is also entitled to recission of the contract.
Dishonest assistance	The defendant, having a dishonest state of mind, helped a third party commit a breach of trust or fiduciary duty. There is no requirement that the third party trustee/fiduciary was dishonest; it is the person assisting that must be shown to have had a dishonest state of mind.	The claimant may be entitled to equitable compensation (a personal monetary remedy) for losses resulting from dishonest assistance. The defendant may, alternatively, be required to account for profit that accrued because of the dishonest assistance regardless of whether the wrongdoing caused the claimant any corresponding loss, though this is also a discretionary remedy.
Knowing receipt	This can arise where the defendant receives assets that have been disposed of by another in breach of trust or fiduciary duty, in circumstances where they knew the assets were received in breach of trust or duty. Dishonesty on part of the defendant is not required, although it is often pleaded in cases involving fraud and dishonesty.	The claimant will have a proprietary claim to trust property transferred in breach of trust to a third party who is not a bona fide purchaser for value without notice. The claimant may also have a remedy in the form of equitable compensation or an order for account of profits.
Unlawful means conspiracy	This can arise in cases where there is no allegation of fraud or dishonesty. A combination or agreement between two or more persons with the intention of causing damage to the claimant, who make use of unlawful means as part of a concerted action further to the agreement/combination that causes damage to the claimant.	Conspirators using unlawful means are liable for any damage caused by the unlawful means itself.
Unjust enrichment	Another example of a claim which does not arise only in cases of fraud but is often claimed in that context. The defendant must have been enriched at the claimant's expense and the retention of the enrichment would be unjust. The claim is not dependent on establishing dishonesty on the part of the defendant, although that could be relevant to establishing that the enrichment has been "unjust". (There is much academic debate about whether unjust enrichment is a cause of action or a form of relief but we won't get into that).	The claimant is entitled to restitution in the form of a personal remedy, whereby the defendant must pay to the claimant the value of the enrichment, or a proprietary remedy, such as tracing into the defendant's assets, asserting a lien over an asset, or subrogation to the rights of a third party against a defendant.
Tort of conversion	This can arise when the defendant deliberately interferes with the personal property of the claimant, so that the claimant is denied the use and possession of it. The claimant must demonstrate possession, or an immediate right to possession, of the property in question. Provided it can be shown that the defendant had the intention to seize or interfere with the property, it is not necessary to show that the defendant intended to commit a wrong. A claim for conversion can occur in many different circumstances, but commonly arises in the context of misappropriation, which often involves fraud.	The claimant is entitled to the return of the goods or damages.

There are numerous other causes of action which often feature allegations of fraud including breaches of fiduciary duty and breach of trust. It is generally more straight-forward to plead an alternative cause of action that doesn't involve fraud, such as breach of contract, misrepresentation or negligent misstatement. There is no one size fits all approach.

The key point to take away is that if you suspect you or your business has been a victim of fraud, it is essential to immediately seek legal advice.