“Money in the hands of the thief” – civil claims for fraud
In the modern age of electronic commerce, civil fraud is increasingly prevalent. The advent of online banking, digital signatures, automated transactions (sometimes ineloquently described as ‘smart contracts’) and even cryptocurrency has made the risk of fraudulent behaviour even more acute.
A victim of fraud is often left in the unenviable position of knowing that a wrong has been committed against them, but without any real certainty as to the appropriate legal remedy to recover their misappropriated property.
Legal claims for civil fraud
Depending on the particular circumstances, the victim of fraud may have claims which are both personal and proprietary in nature. That is, fraudulent conduct may result in personal remedies being directed at the person who committed the fraud (i.e. the fraudster). By contrast, proprietary relief may be directed at property to which the fraudster holds, rather than towards the fraudster themselves. Whether proprietary or personal relief is available can be very important for victims of fraud, particularly in circumstances where the defendant fraudster is insolvent or bankrupt (or at risk of becoming so). The legal claims which can be brought by a victim of fraud are numerous and can include:
- breach of contract;
- the tort of deceit;
- breach of fiduciary duty or trust;
- restitutionary claims for money had and received;
- claims for “knowing assistance” and “knowing receipt”; and
- certain statutory remedies, including those available under the Property Law Act 1974 (Qld).
“Money in the hands of a thief”
The fundamental legal principle which underpins civil claims for fraud is that where money has been stolen, the law deems that the stolen funds are held on trust by the fraudster for the benefit of the victim.[1] Although this general principle has been subject to some judicial and academic criticism (primarily on the basis that a thief cannot acquire legal title to stolen property), it has been accepted as settled law in Australia.
As an extension to this general legal principle, where a thief transfers stolen funds to a third party, the third party is similarly deemed to hold the stolen funds on trust for the victim, once the third party becomes aware of the original fraud. In Heperu Pty Ltd v Belle [2009] NSWCA 252; 76 NSWLR 230, Allsop P summarised the position of the ‘innocent third party’ as follows:
“[A] person entirely innocent of a fraud who comes to know that he or
she has received and still retains the proceeds of, or taken advantage of, a fraud to
which he or she was not a party, cannot knowingly seek to retain those proceeds or
that advantage, without, in effect, becoming a party to that fraud and liable
accordingly …”
The innocent party’s liability to account for the stolen funds is therefore generally limited to the amount of the stolen funds remaining ‘in their hands’ at the time they acquire sufficient knowledge of the theft. It is, therefore, often a significant point of contention as to when an ‘innocent’ third party is taken to become aware of the theft and therefore can no longer be said to be ‘innocent’.
It is this fundamental principle which underpins the various civil remedies which might be available to a victim of fraud. These remedies are, of course, separate and distinct from any criminal prosecution which may be brought by the State in relation to the same fraudulent conduct. However, for various reasons, it is often the case that the remedy most likely to result in a recovery of funds is a civil remedy, rather than a criminal prosecution.
Practical guidance – what steps can be taken immediately once fraud is discovered?
Once fraud is discovered, victims must act very quickly.
The inherent risk is that stolen or misappropriated property is transferred or dissipated into an overseas jurisdiction which may be difficult (or impossible) to reach. To that end, a common first step for victims of fraud is to consider obtaining a form of Court order commonly known as a ‘freezing order’.
These types of orders are also known as an “asset preservation order” and are essential tools in protecting against civil fraud. The purpose of such an order is to prevent the frustration or inhibition of the Court’s processes. Specifically, freezing orders prevent assets being removed out of the jurisdiction of the Court, or otherwise dealt with in such a way to prejudice a plaintiff from enforcing a judgment.[2]
A freezing order is a very serious matter and Courts do not grant such orders lightly. An applicant for a freezing order will need to demonstrate that they have a good arguable case against a defendant and that there is a risk that certain assets might be dissipated, if an order is not made. Generally, a defendant is not given notice of the application for a freezing order. This is to ensure that the defendant does not seek to dispose of or move assets before the application is dealt with by the Court.
As well as taking steps to obtain a freezing order, other practical steps that can be taken once fraud is discovered (particularly if the identity of the fraudster is unknown) can include:
- the quarantine of IT system access and bank account access to essential personnel only;
- contacting banks/financial institutions to prevent any further transfers of funds; and
- instructing an IT professional to take a ‘snapshot’ of IT systems and otherwise reset security system features.
We regularly advise clients in relation to civil fraud and what steps can be taken to prevent financial loss. If you have any questions or require any assistance in relation to potentially fraudulent conduct, please don’t hesitate to contact our team.
[1] Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105.
[2] See for example, Uniform Civil Procedure Rules 1999 (Qld), s 260A; Rahman (Prince Abdul) v Abu-Taha [1980] 1 WLR 1268 at 1273.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.