CHAPTER ONE – THE SCOTTISH DEFINITION OF FRAUD
The classic definition of fraud is relevant to all aspects of fraud in personal injury actions. It is therefore important to understand the definition and what is required to establish fraud in Scotland.
John Erskine [Inst, III,I,16] and George Joseph Bell [Principles, para 13], two of Scotland’s institutional writers defined fraud as “a machination or contrivance to deceive“.
The definition confirms the intentional element necessary for fraud, a machination is “a complicated and secret plan to get power or control or to gain an advantage“[Collins, 2020] similarly, a contrivance is “the act of intentionally arranging for something to happen by clever planning, or something that is arranged in this way” [Collins, 2020].
This definition is however viewed as expansive in that it allows for any number of methods or schemes by which to achieve the deception.
The definition of criminal fraud in Scotland
Before moving on to consider fraud in the context of civil actions, it is worthwhile setting out the definition and requirements of the crime of fraud in Scotland. This is important because it provides some insight into the way in which fraud is viewed in civil disputes, and the underlying principles are relevant in both criminal and civil contexts.
The law in Scotland on this point differs to that in England and Wales. In Scotland, criminal fraud is a common law offence, it is not defined in legislation. This contrasts with the position in England and Wales, where fraud is defined by the Fraud Act 2006.
In order for an offence of fraud to have been committed in Scotland, three elements must be proven, that the accused has made a false pretence, that there has been a practical result, and that the practical result was brought about by the false pretence.
False pretence
This can be express, [Stueurt v Macpherson 1918 SC JC 96 97] friends cheating together at cards asserting that they didn’t know each other, or implied, [James Paton (1858) 3 Irvine 208] a farmer modifying his cattle to improve their prospects in acattle show by pumping them with air to make them seem larger. It can also be staying silent where there is an obligation to speak up, this arises in certain financial transactions, for example failing to disclose material facts when obtaining loans or insurance. [Buchmann v Normand 1994 SCCR 929]
The crucial element is intent. Changing your mind, or not paying debts is unlikely to satisfy the requirement. However, stating an intent which you know to be untrue at the time, with the intention of achieving some beneficial result will be. [Richards v HM Advocate 1971 JC 29 – pretending that houses would be used as private residential homes in order to induce sale]
Practical effect
This was most recently considered in the case of Whyte v HM Advocate [2017 J.C. 262]. It arose in the prosecution of an individual accused of fraudulently acquiring a Scottish Football club. It was argued on behalf of the accused that as there had not been any actual loss, the charges against him were irrelevant. That argument was rejected at first instance, because the court considered itself bound by Adcock v Archibald [1925 JC 58], long considered to provide the authoritative approach to the issue. In that decision, the Lord Justice General (Clyde) said that it was not necessary to prove a loss and that it was instead sufficient to show that fraud had achieved “any definite practical result”. Adcock was a miner who switched tags on bags of coal, to make it appear that he had mined the coal in the bag when it had in fact been another miner. However, both miners failed to mine sufficient coal to earn the minimum wage, and the employer was bound to make up both miners’ pay to minimum wage. The miner’s dishonesty had not therefore brought him any gain. However, the court held it sufficient that the employer had attributed the bag of coal to Adcock, as it had been “induced by false pretences to do what they would otherwise not have done”
The accused appealed on the basis that Adcock was wrongly decided, and that it was necessary for the “dupe” to have suffered some prejudice as a result of the fraud, Hearing the appeal in The High Court of Justiciary, Lady Dorrian, Lord Justice Clerk, rejected with reference to the line of authority preceding Adcock [HMA v Smith (1893) 1 Adam 6; Turnbull v Stewart (1898) 25R (J) 78 and Hood v Young June 10 1853, 1 Irv 236.] the appellant’s argument and affirmed the Adcock decision. She found that, changes in commercial practice notwithstanding, it remained sufficient to demonstrate that there had been a practical impact as a result of the fraud, it was not necessary to show any loss. Lady Dorrian commented that “the principle in Adcock has the virtue of being clear, objective, sufficiently flexible to address changing commercial situations, and which apparently has worked successfully for over 90 years“[per Lady Dorrian para 150]
Significantly Lady Dorrian rejected the argument that fraud was essentially a crime against property. She held, following, Adcock, that fraud is a crime of dishonesty, there need be no impact on property for the crime to be complete.
Causal connection
As already noted, the crime is committed when someone is induced by false pretences to do what they would not otherwise have done. If there is no practical result, the crime is not committed. Similarly, if it is shown that the practical result would have occurred even in the absence of the false representation, the crime is not committed.
However, attempted fraud is a crime in Scotland. To prove that crime, it is necessary to show that had the deception been successful, there would have been a practical result.
Intention
In Whyte Lady Dorrian observed that the requirement for a practical result, and a causal connection between that and the dishonesty, served as “important safeguards against the criminalisation of innocent behaviour, or mere lies.”
There is a further component which serves the same purpose, intention; there is no crime of fraud in Scotland unless the accused, knew the representation was false, and intended to bring about the practical result, careless or inadvertent dishonesty will not be fraud.
This requirement and safeguard is reflected in Erskine’s definition of fraud, “a machination or contrivance to deceive [Inst, III,I,16] because, in order to be a machination or a contrivance, the behaviour must involve a deliberate plan or plot, and not something which is inadvertent or opportunistic.
Definition of fraudulent representation in Scottish civil law
Although it is recognised that fraudulent behaviour may take any number of forms, in civil law, as in criminal, it must be deliberate “the mere fact of the inaccuracy of the statement ought not to be pressed into constituting a liability which appears to me not to exist.” [Derry v Peek (1889) 14 App. Cas 337) per Lord Halsbury at 344].
The judgement of Lord Hershell in Derry in which he said, “Fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.”[374] was accepted as reflecting the Scottish law by the House of Lords in Robinson v National Bank of Scotland [1916 SC (H.L.) 154] where it was found that a representation which was inaccurate and careless, but not dishonest, was not fraudulent. Indeed, Earl Loreburn expressed his hope that the term fraud would only be applied in circumstances where there was “moral delinquency” [155]. Viscount Haldane [at 157] emphasised that there was no “duty to be careful” and with reference to Derry, commented that the duty was one of “common honesty“.
It is to be noted that these observations apply in relation to a finding of fraud generally. Other duties may be imposed by way of the particular relationship between the parties. In such circumstances, for example, where there is a fiduciary relationship, silence could amount to a fraudulent misrepresentation, essentially, dishonesty by “concealment” [Adams v R [1995] 1 WLR 52 (HL), Lord Jauncey of Tullichettle at 65.].
An inaccurate but honestly made representation will not be fraud, there must be “actual dishonesty“. [McBryde on Contract 3rd Edition para 4-12].
Although there is arguably a personal element to whether a representation was honestly made, because someone may have believed the statement to be true on the basis of their knowledge at the time, honesty itself is an objective standard [Starglade Properties Ltd v Nash [2010] EWCA Civ 1314 , Chancellor (Morritt) at paragraph 32.]. This reflects the risk that a different approach would allow honesty to be considered as on “an optional scale, with higher or lower values according to the moral standards of each individual” [Royal Brunei Airlines v Tan [1995] 2 AC 278 per Lord Nicholls of Birkenhead p 389 C-F]. It will not be relevant that the person making the misrepresentation thought it was “honest enough” or not “materially untrue“. The test is whether “by ordinary standards a defendant’s mental state would be characterised as dishonest” [Barlow Clowes Ltd v Eurotrust ltd [2006] 1WLR 1476 at para 10].
However, even although the standard is objective, when considering whether a representation was made honestly, the court should take into account everything known by the person at the time and the assessment should also take account of their own experience and intelligence [Royal Brunei Airlines v Tan [1995] 2 AC 278 at p391B].
Requirement of a practical outcome
Proof that the misrepresentation has brought about a practical outcome is also necessary to establish fraud in the civil context. It is not sufficient simply to show that someone has been deliberately dishonest, the dishonesty must have been intended to, and has, precipitated some action, for example that the target would enter into a transaction or make an investment which when they would not have done so in the absence of the misrepresentation. [Kidd v Paull & Williamson LLP [2017] CSOH 16].
In order to prove loss arising from the fraud, it is necessary to show that the misrepresentation materially influenced the victim’s decision to take the action. While there is a presumption in favour of materiality, and it is sufficient for the misrepresentation to be “an inducing” and not the “sole” cause [Zurich Insurance Co Plc v Hayward [2016] UKSC 48 per Lord Clarke of Stone-Cum-Ebony JSC at156]. The pleadings must contain an averment to the effect that there was a connection between the misrepresentation and the decision to proceed [Kidd v Paull & Williamson LLP [2017] CSOH 16].
The victim need not actually believe that the misrepresentation is true, but the absence of such a belief will make it more difficult to prove that they were induced to do something. It might be possible, for example, in the context of a personal injury claim, to show that although the victim did not entirely believe the misrepresentation, they honestly believed that the court would [Zurich Insurance Co Plc v Hayward [2016] UKSC 48]. This is consistent with the requirement that the misrepresentation induced the victim to do something they would not otherwise have done; there is no requirement that the victim was actually fooled.