Time-bar: getting away with fraud

The ‘limitation period’ is the period of time during which civil proceedings must be started. For most civil claims this is six years from the date the claim arises. If a claim is commenced after the limitation period has passed, a wrongdoer can make a preliminary application to court to have it thrown out before the claim itself is even heard, on the grounds it is time barred.

There is a sensible public policy reason for applying limitation periods to legal claims. It could be unfair for individuals and other entities to continue to be exposed to litigation in perpetuity, potentially giving rise to an imbalance in bargaining power. It also becomes more difficult to fairly decide the merits of a claim as time passes. People’s memories fade and documentation becomes less available. So far all very fair and sensible. But is the law on limitation failing victims of fraud?

Before you even get to the merits of a fraud claim, the first port of call for defence lawyers is, 'can it be defeated on jurisdiction or limitation grounds?' All large frauds these days are international in nature and money flows will have gone all round the world at least once, so often any nexus to the UK can render the English courts as good a jurisdiction as any other, particularly given their world-class judiciary and jurisprudence. However, fraudsters will raise jurisdiction arguments to eke out the process in any way, to determine whether the victim has the stamina and the cash to go the whole way to trial.

Then the defence will move onto limitation. In contrast to other civil claims, where a case involves fraud the six-year limitation period commences from the earlier of (i) when the victim became aware of the fraud or (ii) when the victim could have discovered the fraud with reasonable diligence. This secondary limb is where unfairness can arise and where defendants, and their lawyers, make hay.

Here, the defendant will seek to prove that the victim could have been aware of the fraud at least six years ago had they acted reasonably. It doesn’t matter that the victim didn’t in fact know about or wasn’t aware of the fraud. It is an objective test which considers how a reasonable person carrying on the relevant business and with reasonable resources would have acted to discover the fraud.

In this framework, the fraudster will be employing the top lawyers (inevitably using the victim’s money) to construct scenarios demonstrating that a reasonable person with reasonable resources would have discovered the fraud sooner. The fact that a fraud has been committed and victims may have lost significant sums does not matter. The victim must then incur significant time and costs defeating those counterfactual scenarios. The reasonableness test disregards the fact that the victim may be impecunious as a result of the fraud.

In an age where information is often easily accessible, this question of where the line of reasonableness lies is not straightforward. For example, envisage a scenario where there are articles in the media that the victim is unaware of, accusing the fraudster of another fraud in different circumstances. The defence would argue any reasonable person in the same circumstances with reasonable resources would have read those articles. Should that have put the victim on alert that perhaps they had been defrauded as well? Would a reasonable person have conducted further investigations, perhaps including bringing any proceedings for discovery to obtain documents from the fraudster to confirm whether they had in fact been defrauded? These questions must be answered in the context of complex factual circumstances, where the fraudster is likely to have gone to great lengths to ensure they can enjoy the fruits of their fraud, perhaps preying on particularly vulnerable victims.

Sadly, even if the victim is likely to ultimately succeed in showing they could not have discovered the fraud earlier with reasonable diligence, challenges to a claim on jurisdictional or limitation grounds are a common tactic employed by fraudsters to delay proceedings and rack up costs. This can leave the victim, who has been defrauded of their money and is therefore likely to have considerably fewer resources than the fraudster, unable to afford to pursue their claim further.

This can’t have been what was envisaged by the lawmakers when they were formulating the Limitation Act and, specifically, the provisions that deal with fraud.

Surely it would be more equitable for victims of fraud if the limitation period started from when they actually became aware or were made aware of the fraud? This higher bar would mean that fraudsters cannot seek to escape liability so easily and reflects the special nature of fraud, which has dishonesty at its core.

Nick Wood is a partner at Grant Thornton UK LLP in London