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FRAUD - MEDIATION - THE 15th JANUARY 2007 Was the 15th of January 2007 the day when a mere ripple touched the seemingly sun-drenched beach where some stars of mediation dance for the attention of parties in dispute? Was it the first signs of stronger waves that will follow? Or, have I got it completely wrong? The 15th January 2007 was the day The Fraud Act 2006 came into force and I believe it is likely to be an event which will be noted by the growing troop of mediators who seek to resolve disputes in general. The object of this article is to encourage mediators to think about The Fraud Act now, rather than reflect upon it should the need arise. It would not be news to the readers of my articles if I repeated my opinion that all disputes arise out of lack of knowledge and/or ulterior motive. Nor would it be news for readers to be told that disputes which fall into the category of being caused by ulterior motives are likely to be classed as fraud. For the sake of simplicity, let us move into an omniscient mode and look over a small mediation. A builder had undertaken some work for which he gave a price; and his final account, including substantial extras, had been submitted to the customer. The customer did not pay. The customer had complained about the quality of work and said that the work originally included in the price had not been wholly completed and also that the cost of the extras was outrageous. The builder had written to the customer and stated that proceedings would be commenced in the county court if payment was not made in full by a certain date. The customer spoke to a colleague, heard about mediation and put the proposition of mediation to the builder. The builder agreed. A local solicitor, who began life as an architect, was appointed to act as the mediator and he got the parties to sign a standard type of agreement. The mediator had looked at the paperwork submitted by the parties and he met the parties and he did all the usual things. The parties were not represented. At the end of the day a settlement was reached which dealt with the differences between the parties. The settlement was set down in a binding agreement, which was based on a fairly standard format, and both the builder and the customer signed the document. Still in our omniscient mode, at the meeting with the parties, we know that the mediator had ended his opening observations by drawing a chart. This chart basically stated that both parties should think carefully about the time and costs spent by them up to the present point in time and, moreover, that they should compare that with the likely time and costs should the matter go to court. We also know that mediator had looked at the paperwork which had been given to him and thought to himself that the builder's final account had the look of a much inflated document, but he was not there to give advice. We know that the builder was aware that all the work was not properly carried out in accordance with the original price. Also we know that the builder intentionally inflated the extras considerably and even claimed for things for which there was no just entitlement. We know that the customer was honestly taken aback with the extras which had been claimed. We also know that the customer was short of funds and that the mediator's chart showing likely costs should the matter go to court was a real frightener. At the end of the day, following the agreement, the customer managed to find some temporary finance and settled in accordance with the agreement. A few months later, the customer applied to a mortgage lender for some more permanent finance. In short, a surveyor from the mortgage lender visited the property and noted that some of the work done by the builder did not conform to building regulations and that other things were amiss. The surveyor orally suggested that the customer should get the work looked at by a building surveyor. This the customer did. The subsequent report, which took note of the builder's original price and final account, advised the customer that the work had not been fully, nor properly, carried out and that the charge for the extras was clearly out of all proportion to what had been done. The customer realised that he was the dupe. The customer, looking for a cheap route to redress the matter, spoke to Trading Standards, but there was not much help; save the offer of some booklets. The customer visited the local Police Station and spoke to the officer at the desk and was told that it was a civil matter. Upon receiving advice from another source, the customer wrote to the area Police Head Quarters and accused the builder of fraud and asked for the matter to be investigated. The builder, who claimed that the whole matter was properly resolved by mediation, was questioned by the police under caution and records were removed from the builder's office. The police also interviewed the mediator as a witness and requested sight of the paperwork. The mediator said that he could not comment and that his papers were privileged documents. Upon that the police continued the interview under caution and removed the mediator's file. To continue the story to a final outcome is of no direct concern to this article. The important matter for consideration is the status of mediation and the mediator in the context of fraud, namely: (i) can the mediator's files be privileged? (ii) can the mediator be a party to the process of dealing with fraud in private? (iii) can fraud ever be settled finally by private mediation? Can the mediator's files be privileged? At a recent meeting which I attended, the matter of privilege was discussed and it was thought that a solicitor who was a mediator could claim that in the capacity of a mediator his documents would be privileged and, further, that the documents could not be subject to any order for disclosure even in connection with a fraud. Asking a question about that, I wondered, on the basis that fraud unsettles all things, whether or not such documents would be privileged, but I did not get an answer. Upon subsequent reflection, I cannot see that a solicitor and client relationship is created in the solicitor's standard agreement to act as a mediator. The relationship is purely contractual because the solicitor is simply entering into an agreement with the parties to undertake work which is based upon mutually agreed rights and obligations. The agreement is clearly binding upon the parties to it, but no more. In short, I came to the conclusion that if I was right about that, namely: my doubt about there being any special status for a solicitor who acts as a mediator, then certainly doubts would exists in this context for anyone else. In any event, as I understand it, The Law Society's standard agreement for the Appointment of the mediator, at clause 19 [Information, whether oral or written, disclosed to the mediator in private will be treated as confidential by the Mediator unless] (b) the law imposes an obligation of disclosure. Does the sniff of fraud by the mediator impose any obligations of disclosure? Can the mediator be a party to the process of dealing with fraud in private? Section 6(1) of the Fraud Act states that a person is guilty of an offence if he has in his possession or under his control any article for use in the course of or in connection with any fraud. If the documents handed to the mediator were found to be 'an article' for use in the course of or in connection with any fraud, namely: in our little story, the builder's final account, then that may raise some interesting issues for a mediator. However, I am sure that there would be a valid defence if the mediator had no reason to believe that the documents were intended for fraudulent use [but, of course, in our little story the mediator had such thoughts]. Can fraud ever be settled finally by private mediation? It appears, from the observations above, that this question is not even worth putting, but there seems to be a growing body of thought that it is possible to deal with fraud within private mediation. Perhaps the Inland Revenue's new civil investigation of fraud procedures, and presumably the like procedures with other government departments and regulatory bodies, has given some encouragement to such thinking. The subject matter for the Inland Revenue procedures seems to be casually referred to as "civil fraud", but that gives quite a false impression. As far as I understand it, the Inland Revenue is not identifying a new class of fraud, rather it is simply identifying a procedure for dealing with the matter of fraud at two levels, both levels potentially attach penalties, but the lower level will not result in criminal proceedings; at least, not at first.
Would these references suggest that two parties in dispute who had been fraudulent in some way could search out a suitable mediator and legitimately settle their differences in a private mediation without any fear that the fraudulent aspects would be exposed to the criminal law? In Conclusion Well, as I asked in my opening remarks, "have I got it completely wrong?" Whilst I see no point in quoting too much from the Fraud Act in this article, it may be helpful if I quote a little part so you can see that the concept of simple intention as opposed to success seems to be an important factor. Section 2, which deals with fraud by false representation states:- (1) A person is in breach of this section if he-
(2) A representation is false if-
The word 'intention' as used in the Act does, I believe, open up a wider range of areas where pursuit of claims and rejection of claims, in general, may be touched upon in a way that did not exist before. If indeed the Act does have an impact upon what may be regarded by some as everyday, so called, optimistic expectations and/or the bargaining margins in loss and expense claims, or upon the unjustified rejection of claims, this will be most significant when dealing with disputes. Further, if my observations about privilege are not unfounded, then mediators will not have their comfort zone of slipping into the settlement of a dispute for a brief period of time and then retreating after a settlement; without a care about what was really in play between the parties. In general, my thoughts are that I am not wrong in my concerns, but I am not an expert in fraud nor criminal law so I shall be looking attentively at other contributions on the subject. In any event, I would certainly encourage reading of the Fraud Act 2006, which I should imagine is one of the shortest Acts to come out of Parliament for a long time. Short, but not insignificant! END Francis Miller |
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