Introduction
Fraud by failing to disclose information, as outlined in Section 3 of the Fraud Act 2006, is a significant offense in criminal law. This offense occurs when an individual dishonestly fails to disclose information that they are under a legal duty to disclose, intending thereby to make a gain for themselves or another, or to cause a loss to another. The key elements of this offense include the existence of a legal duty to disclose, the defendant's dishonesty, and the intent to gain or cause loss. Understanding these components is essential for a comprehensive understanding of fraud by omission within the context of the SQE1 FLK2 exam.
The Legal Duty to Disclose Information
Central to the offense of fraud by failing to disclose is the existence of a legal duty to reveal certain information. This duty arises from various sources and imposes an obligation on individuals to act transparently in specific contexts.
Sources of Legal Duty
Statutory Duties
Legislation often imposes explicit obligations to disclose information. For instance:
-
Financial Services: Under the Financial Services and Markets Act 2000, financial advisors are required to provide clear and full disclosures to clients regarding investment products.
-
Consumer Protection: The Consumer Rights Act 2015 mandates that sellers provide consumers with essential pre-contractual information, ensuring that buyers make informed decisions.
-
Company Directors: Section 177 of the Companies Act 2006 obliges directors to declare any personal interest in proposed transactions, upholding corporate integrity.
Contractual Duties
Contracts may entail duties to disclose, either explicitly stated or implied by the nature of the agreement. Consider insurance contracts, which operate under the principle of utmost good faith (uberrimae fidei). Policyholders must disclose all material facts that could affect the insurer's risk assessment. Failure to do so can amount to fraud by omission.
Fiduciary Duties
Fiduciary relationships are characterized by trust and confidence, imposing a higher standard of disclosure. Examples include:
-
Trustees and Beneficiaries: Trustees must act in the best interests of beneficiaries, fully disclosing any information that may affect the trust's assets.
-
Solicitors and Clients: Solicitors are obliged to disclose any conflicts of interest that might affect their professional judgment.
-
Agents and Principals: Agents must inform principals of all material facts relevant to the agency relationship.
Real-World Examples
Take, for example, a financial advisor who neglects to inform a client about the high-risk nature of an investment product due to receiving higher commissions. Or consider a property seller who fails to disclose significant structural issues, knowing that such information would deter potential buyers. These scenarios illustrate how non-disclosure, where there is a duty to disclose, can lead to fraudulent outcomes.
The Element of Dishonesty
Dishonesty is a core component of fraud offenses. In the context of failing to disclose information, the standard for dishonesty is objective, focusing on societal norms rather than the defendant's personal beliefs.
Understanding the Objective Standard
The Supreme Court's decision in Ivey v Genting Casinos [2017] UKSC 67 established a two-stage test:
-
Ascertain the Actual State of the Individual's Knowledge or Belief: What did the defendant know or believe about the facts?
-
Apply the Standards of Ordinary Decent People: Would ordinary, reasonable people consider the defendant's conduct dishonest given the circumstances?
This test moves away from considering whether the defendant realized that their actions were dishonest, instead emphasizing societal standards.
Illustrative Scenarios
Consider an employee who fails to disclose a significant error that occurred during their shift, which could harm the company if left unaddressed. Even if the employee believes they might avoid trouble by keeping silent, ordinary people might view this omission as dishonest.
Similarly, if a doctor neglects to inform a patient about a critical side effect of a treatment due to concerns about the patient's reaction, this omission may be deemed dishonest under the objective standard, as patients have a right to be fully informed.
Intent to Make Gain or Cause Loss
For the offense to be complete, there must be an intention to make a gain or cause loss by the failure to disclose.
Defining Gain and Loss
Under Section 5 of the Fraud Act 2006:
-
Gain includes keeping what one has, as well as obtaining something new.
-
Loss encompasses not getting what one might get, or parting with something one has.
The definitions are broad, covering both temporary and permanent situations, and extending to monetary and property interests.
Practical Implications
For example, a contractor who omits to disclose a cheaper construction method to a client, intending to charge more and increase profit margins, demonstrates intent to make a gain. Conversely, nondisclosure that leads a party to incur unnecessary expenses or miss out on benefits illustrates intent to cause loss.
Interaction of Elements in Fraud by Omission
Understanding how the legal duty, dishonesty, and intent elements interact is essential in applying the law effectively.
How Legal Duty, Dishonesty, and Intent Combine
An individual may have a legal duty to disclose information due to a fiduciary relationship, statutory requirement, or contractual term. Failing to fulfill this duty, when coupled with dishonesty and intent to gain or cause loss, completes the offense.
Complex Cases
Consider R v Razoq [2017] EWCA Crim 14, where a doctor failed to disclose previous disciplinary actions when applying for a new position. The court held that his omission, under a duty to disclose, was dishonest and intended to secure employment (a gain), thus constituting fraud by failing to disclose information.
Differentiation from Other Fraud Offenses
It's important to distinguish fraud by failing to disclose information from other offenses under the Fraud Act 2006.
Fraud by False Representation (Section 2)
This offense involves making a false representation, which can be express or implied, with the intent to gain or cause loss. The key difference lies in the active misrepresentation versus the passive omission present in failure to disclose.
Fraud by Abuse of Position (Section 4)
Fraud by abuse of position occurs when a person in a position of trust acts against the interests of those they are expected to protect. While there may be overlaps, particularly in fiduciary relationships, the abuse of position involves an act of commission, whereas fraud by omission focuses on the failure to act.
Conclusion
Fraud by failing to disclose information under Section 3 of the Fraud Act 2006 is a challenging offense that requires careful consideration of its core elements. The complexity arises from the combination of the legal duty to disclose, the objective standard of dishonesty, and the intent to gain or cause loss.
In situations where a fiduciary, such as a trustee, omits to inform beneficiaries of significant developments affecting trust assets, the legal duty is evident. If this omission is deemed dishonest by societal standards and is intended to benefit the trustee or harm the beneficiaries, all elements of the offense are satisfied.
Detailed understanding of statutes like the Companies Act 2006 and case law such as Ivey v Genting Casinos enhances comprehension of these interactions. For instance, company directors must comply with statutory duties of disclosure to avoid fraudulent omissions that could lead to legal repercussions.
Precise requirements, like the need for directors to declare personal interests in proposed transactions, highlight the importance of transparency. Failure to meet these obligations can result in fraud charges, emphasizing the necessity for professionals to be vigilant in their disclosure duties.
