Allegations of fraud were at the centre of a recent commercial court case in the Court of Session: Well-Fed Scotland CIC v Serco Limited and Serco Group Plc. The pursuer (claimant) appeared at the legal hearing without the benefit of legal representation, which added another layer of consideration to the analysis of the competing arguments heard by Lord Sandison.
Background
Well-Fed raised an action against Serco seeking payment of £5.25 million in damages, plus other orders.
Well-Fed alleged that fraudulent misrepresentations were made by Serco over a 26-month period about a potential catering opportunity at the former RAF Scampton location relating to a Home Office asylum contract. Well-Fed contended that Serco represented to it that catering contracts were likely to be entered into and, based on the circumstances, a commercial relationship between the parties existed. Well-Fed claimed that it became insolvent as a result of Serco's fraudulent misrepresentations which had induced it to outlay significant costs.
Serco argued that Well-Fed's legal case was irrelevant in law and insufficiently detailed such that the legal action should be dismissed without hearing evidence.
A debate on the legal issues was heard by the Court, with each side's statements of fact taken as true for present purposes.
Serco's position was that the actions and discussions between itself and Well-Fed did not amount to fraudulent misrepresentation or an intention to deceive. Serco argued that a reasonable person would consider the representations to be "mere expressions of opinion or puff". Serco also asserted that any contract arising between the parties was ultimately a decision for the UK Government as the employer on the projects.
Serco Limited had entered into a confidentiality agreement with Well-Fed which Serco argued barred Well-Fed's claim of fraudulent misrepresentation. The confidentiality agreement provided that discussions or negotiations between the parties would not constitute a representation or commitment to enter into a contract. Serco sought to rely on this to dismiss Well-Fed's case of fraudulent misrepresentation.
Decision
Lord Sandison noted that whether statements had a fraudulent character required evidence to be led: the case could not simply be dismissed at a legal hearing. The importance, complexity and extent of the background circumstances meant the case would proceed to a proof before answer (evidential hearing). Fraudulent misrepresentation is a matter of fact, degree and context.
In arriving at his decision, Lord Sandison said that some of Serco's representations were clearly opinions. However, Lord Sandison noted that that did "not necessarily disqualify them as potentially fraudulent misrepresentations" because Well-Fed argued that it was deceived to its disadvantage in some measure by opinions which were not genuinely held by Serco.
Lord Sandison also held that the relevant clauses of the confidentiality agreement did not bar Well-Fed's case. Whether Well-Fed could prove all or any of its arguments was a matter for another day.
Where fraud is at issue in a case and proved, everything arising from the fraud is void. Honesty and good faith are relied upon in all commercial negotiations and transactions.
Key Takeaways
The decision emphasises the difficulty in considering allegations of fraud purely on the basis of legal arguments and in the absence of evidence of the factual context and matrix.
Commercial arrangements arising from fraud (including fraudulent misrepresentations), if proven, will have no legal force or effect.
The importance of honesty (and good faith) in commercial negotiations. A party to a contract does not contemplate fraud when a contract is entered into.
Exclusion clauses in a contract, however drafted, generally cannot bar a claim of fraudulent misrepresentation or deception for public policy reasons.
In a high-stakes scenario involving allegations of fraud, businesses will rightly want to reflect on their terms and the effectiveness of their written and oral contractual negotiation processes, associated records and employee practices in commercial negotiations. In the event of a formal dispute, these will be examined in detail in court. Clear and robust internal checks and procedures may help to avoid lengthy and expensive litigation, as well as unwanted publicity and potential reputational damage.
This article was co-authored by Trainee Solicitor at MFMac Taya Hardie.
