Judgment shows need for businesses to be proactive in preventing employee fraud, says expert

A Mr Dickson commenced a personal injury claim in July 2012 in relation to injuries suffered in a car collision. Dickson was represented by a solicitor's firm called Mellor Hargreaves. Prior to July 2012, NFU Mutual Insurance Services Ltd (NFU) had already agreed with a different firm, Barber and Co (B&C) of Preston, to settle Dickson's claim. However, it transpired that B&C did not act for Dickson and therefore B&C had no right to settle the claim.

The case against B&C was brought by NFU, which added B&C into Dickson's original claim on the issue of cost as a third party. B&C subsequently sought in this application to join two former employees to the action for costs against B&C, alleging that these individuals had been responsible for making a fraudulent personal injury claim.

According to the judgment, B&C accepted that Dickson was never its client, that it had no authority to act on his behalf and that a medical report submitted as part of the claim NFU had already agreed to settle was a forgery. Arif Barber, the firm's sole partner and a solicitor, and Yasin Bagas are both facing disciplinary action with the Solicitors Regulation Authority (SRA) in relation to the case.

Judge Peter Hughes QC ordered B&C to pay costs on an indemnity basis and has also supplied copies of his judgment (17-page / 485KB PDF) to the police for further investigation.

The judge refused the B&C's application to join its two former employees to the claim. He did so because the application was made too late in the proceedings, and would considerably widen the scope of the case. However, he also suggested that there was a sufficient "close connection" between B&C and its former employees for the firm to be vicariously liable for their actions.

The ruling "serves as an important cautionary tale to all solicitors' firms", said Alan Sheeley, a fraud expert at Pinsent Masons, the law firm behind Out-Law.com.

"Firms must ensure that proper systems and safeguards are in place to prevent fraudulent activities being undertaken in the firm's name," he said.

"The judgment should serve as a disincentive to any firm that is not proactive enough in preventing employees committing fraud or responding to enquiries once a fraud has been discovered. It is clear that in the absence of proper steps being taken in response to the discovery of a fraud, a court will be minded to pin the employee's actions on the employer," he said.

In his judgment, Hughes said that the firm had "constantly stalled and obfuscated", and had "failed to assist those acting for [Dickson] and [NFU] to resolve the position". This had "materially delayed the resolution of the claim and added significantly to the costs", he said.

The judge added that "a number of criminal offences may have been committed through the firm", potentially meriting further investigation by Lancashire Police and the Crown Prosecution Service.

"Law firms should note that, if a fraud is discovered, the firm must not view the loss suffered in isolation," said fraud expert Alan Sheeley. "Law firms have to consider whether regulatory bodies need to be informed, including, in particular, the SRA."

"Firms, and the solicitors themselves, must consider self-reporting to the SRA to avoid adverse consequences at a later date. Firms and solicitors must consider closely whether a report is needed and the consequences of making such a report. If they do not have experience in this area, then they should immediately seek external advice," he said.