“Trusting” fraudulent family

In the case of Arthur James Watts v John Harris Watts (2014) the High Court has recently awarded damages for deceit and breach of trust to a claimant beneficiary who was the victim of a fraudulent misrepresentation made by a trustee. 

The claimant was the sole beneficiary of a trust.  The defendant was (effectively) the sole trustee of the trust; he was also an accountant, a professional investor and the brother of the claimant.  The trust was invested in UK stocks and shares. 

The defendant persuaded the claimant to agree to dissolve the trust (worth approximately £2.2 million) on the basis that:

• The claimant would retain a small percentage of the value of the trust on dissolution;
• The defendant would re-invest the significant balance of the dissolved trust and manage those investments on behalf of the claimant;
• The defendant would pay the claimant an annual income from the invested funds of £70,000 for the first 4 years and £100,000 per annum thereafter; and
• The annual payments would be free of UK tax as the defendant was resident abroad. 

The claimant did receive an income from the defendant for the first 4 years after the dissolution of the trust (on which no UK tax was paid), but, in breach of trust and in breach of contract, the defendant then used the funds for his personal use.

The claimant alleged that he was induced to enter into the agreement by the defendant’s fraudulent misrepresentations that (1) the defendant would manage the investments on behalf of the claimant from which he would pay the agreed annual amounts to the claimant by way of income and (2) the agreement legitimately avoided UK tax when, in fact, the defendant had no intention of paying those monies to the claimant and he knew what he proposed was unlawful tax evasion.

Decision

The court held that:

• The claimant was induced to enter into the agreement by a fraudulent misrepresentation made by the defendant that he would manage the claimant’s investments and pay the claimant an annual income; 
• The claimant’s case that he had been induced to enter into the agreement by the second misrepresentation that UK tax could lawfully be avoided was rejected as the claimant had suspected that this was incorrect and had not relied on it;
• The defendant was liable to the claimant for damages for deceit and breach of trust, being payment to the claimant of the capital sum invested plus repayment of the monies which the defendant had taken for his personal use;
• The claimant could not enforce his contractual claim against the defendant because it concerned an agreement to perform an unlawful act and where it had been partially performed it was performed unlawfully and the claimant had participated in that (because the claimant succeeded in his claims for deceit and breach of trust, in practice this made no difference to him).

Fraudulent misrepresentation

An action for fraudulent misrepresentation is founded in the tort of deceit.  The tort of deceit contains 4 ingredients:

• The defendant makes a false representation to the claimant;
• The defendant knows that the representation is false or is reckless as to whether it is true or false;
• The defendant intends that the claimant should act in reliance on the representation; and
• The claimant does act in reliance on the representation and consequently suffers loss.

No fraud will be found if the person making the representation honestly believes his statement to be true; therefore, a claimant must prove the absence of an honest belief to succeed in action for fraudulent misrepresentation. 

The remedy for fraudulent misrepresentation is that the claimant has the right to rescind the agreement and/or claim damages to put the claimant back into the position he was in before the misrepresentation was made. 

Bringing a claim for fraudulent misrepresentation can be difficult, particularly where the alleged misrepresentation(s) is oral, in which case, the success of the claim will hinge on the credibility of the oral testimonies of the claimant and the defendant.  If you have entered, or are going to enter, into an oral, not written, agreement always make sure that the important terms of that agreement are put in writing; a contemporaneous exchange of emails which supports your oral testimony will hold a lot of weight in a court of law.