What Is Commercial Fraud?

Fraud is a serious and widespread issue that can have financial consequences for businesses. But what is commercial fraud? 

In short, commercial fraud is an umbrella term for various dishonest or criminal acts committed against, or involving a business. 

While the term is often used in discussions about corporate wrongdoing, it isn’t a single, clearly defined cause of action in legal terms. 

Instead, commercial fraud can take on many forms, from deceptive business transactions and financial misrepresentation to intentionally misleading partners or clients for financial gain.

Understanding what commercial fraud is can help businesses protect themselves from potential risks, ensuring that they maintain legal compliance. 

Understanding Commercial Fraud

While the terms “commercial fraud”, known as “civil fraud”, are frequently used, they do not represent a distinct civil cause of action.  Instead, fraud-related claims are typically pursued under legal categories, such as breaches of trust, deceit, or fraudulent misrepresentation.

Commercial fraud is distinct from criminal fraud, which is defined under the Fraud Act 2006 and can result in severe penalties, including fines or imprisonment, depending on whether the case is tried in a magistrates’ court or a higher court.

Commercial fraud does not carry a punishment like imprisonment, but allows the victim to seek compensation, including the recovery of stolen assets or other damages. 

Examples of Commercial Fraud Offences

Commercial fraud offences include, but are not limited to: 

1. Breach of contract
2. Breach of trust
3. Fraudulent misrepresentation
4. Breach of Fiduciary Duty

1. Breach of Contract

A breach of contract takes place when one party fails to meet their contractual obligations, without a legitimate excuse. This breach serves as the cause of action, which grants the affected party the right to seek legal recourse in court. 

The failure to uphold contractual terms can take various forms, including:

• Failure to Meet Deadlines: Agreed upon work not being completed within the specified timeframe.
• Non-Payment: A party does not compensate the other as required under the contract.
• Non-Delivery of Goods/Services: A party does not provide promised goods or services.
• Substandard or Defective Deliverables: Goods or services provided do not meet the quality or specifications agreed upon.

2. Breach of Trust

A breach of trust occurs when a trustee fails to uphold their legal duties, violating the terms of the trust or acting against the best interests of the beneficiaries. 

This can include mismanaging assets, making unauthorised investments, or prioritising personal gain over fiduciary responsibilities. 

Trustees are held to a high standard of care under the law, and if found liable, may be required to restore any financial losses suffered by the trust. However, defences such as exemption clauses, beneficiary consent, or statutory relief may protect trustees from liability. 

3. Fraudulent Misrepresentation

Fraudulent misrepresentation occurs when a false statement is intentionally made to deceive someone, leading them to rely on it, enter into an agreement, and suffer a loss as a result. 

Fraudulent misrepresentation can occur during business transactions, such as the sale of a company. For example, a seller may falsely claim that their business is more profitable than it is, hiding debts or exaggerating revenue to entice a buyer. 

4. Breach of Fiduciary Duty

A breach of fiduciary duty occurs when someone entrusted to act in the best interests of another fails to fulfil that responsibility.

For example, employees, as agents of their employers, owe fiduciary duties to act in their company’s best interests. 

Breach of this duty can include poaching clients and bringing them to a competitor, sharing trade secrets, or diverting business opportunities to a competing firm.

How To Safeguard Your Business Against Commercial Fraud

It may be impossible to completely eliminate the risk of fraud, but there are several key strategies you can implement to reduce the likelihood and impact of fraudulent activities.

• Establish Clear Accountability: Define management roles clearly, splitting responsibilities to maintain balances and checks, especially in areas that require financial control and key decision-making.
• Review All Contracts Carefully: Always review legal agreements thoroughly to check that no misleading terms or fraudulent clauses have been included. A solicitor can help with contractual disputes; reviewing contracts to prevent potential fraud.
• Foster a Transparent Culture: Promote openness within your organisation, so employees feel comfortable discussing mistakes and challenges. This approach encourages learning instead of hiding problems, reducing the chance of fraudulent activity going unnoticed.
• Take All Concerns Seriously: No matter how small, never dismiss warning signs of fraud. Whether it’s a gut feeling or a formal report of suspicious behaviour, make it a priority to investigate. Addressing concerns early on can prevent larger, more damaging issues from emerging later.

What To Do If You Suspect Commercial Fraud

If you believe that your business may be a victim of commercial fraud, it’s essential to act quickly. 

Under Section 32 of the Limitation Act, you have up to six years from the date you discovered the fraud, or from when you could have reasonably discovered it, to bring a legal claim. 

Seeking legal advice from a solicitor specialising in commercial fraud can help guide you through the necessary steps. 

This includes assistance with:

• Investigating the fraud and gathering evidence
• Filing legal claims
• Advising on the best course of action to recover losses
• Representing your business in legal proceedings or negotiations

Working with experienced solicitors can provide invaluable support in preventing, detecting, and resolving any instances of fraud that you may face.

How Can We Help

If you’re concerned about commercial fraud or need advice on protecting your business, contact our team of expert solicitors today. 

At Harding Evans, our commercial solicitors can guide you through fraud prevention strategies and offer tailored solutions to keep your business secure. 

Contact us for more information.