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Implications Of Fraud Act 2006 For Advertisers Law Essay

The Fraud Act 2006, since it’s royal assent on the 15th January 2007, has had major implications in the prosecution of suspects who, under outdated legal statute, would not have been prosecuted based on the ‘Conduct not Consequence’ focus of the new offences. The nature of the new legislation was to remove deception as a requirement for liability; aswell as abolishing the absolute need for any material gain or loss to be made, and thus creating a set of conduct based offences. The bulk of the old deception offences are to be found under both the Theft Act 1968, aswell as 2 other deception offences under the Theft Act 1978. The introduction of the Theft (Amendment Act) in 1995 illustrated the problem with the law at the time; offences were far too overlapping, and the Crown Prosecution Service on occasion struggled to choose the correct offence to prosecute. Preddy [1] was the precursor to that particular amendment, and surrounded a case where the defendant was charged with obtaining property by deception by using a false representation to receive credit for a mortgage. However, the money in the lender’s account was not seen to be property belonging to another, and so the case was dropped.

Under the old deception offences prior to 2007, not only did the deception have to be communicated directly to the victim, but the person communicating that deception had to then obtain something in return; whether that be property [2] , money transfer [3] or pecuniary advantage [4] . In comparison with today’s legislation, this seems a narrow set of guidelines. Goods traders could, under this old statute, make dishonest attempts to deceive people into parting with their property [5] , without being incriminated. The Law Commissions’ Report [6] (presented in 2002) identified this, and it was this document which preceded the Fraud Act’s inception. The Fraud Act 2006 has changed that full circle, and instead of material exchange, ‘lying’ seems to be enough for the basis of a conviction.

Fraudulent advertising has been part of the fabric of media for many years. A case dating back to 1892, Carlill v Carbolic Smoke Ball Company [7] , related to an early contractual disagreement. The smoke ball company created what was claimed to be a cure for influenza, and as such if it failed to work on anyone testing it, then they would receive £100. The advertising was deemed to have created the unilateral contract between the company and anyone wishing to try the cure; in this case Carlill. The company tried to claim there was no enforceable contract but were found to be guilty and ordered to pay the victim the full amount. Today, we might not expect to believe such claims about a miracle cure for the flu. However, over 100 years ago, the belief in the cure was clearly there, and the contract was one of upmost good faith, in the efficacy of the product.

The Fraud Act, aswell as creating other supplementary offences, created 3 broad subsections detailing how a potential fraudster may fall foul of the title offence under section1, Fraud. As an indication of the severity of how the authorities wish to deal with fraud offences, 10 years on indictment is the maximum which a defendant may expect to receive. The 3 underlying sections of the Fraud offence are Fraud by False Representation(s.2), Fraud through failure to disclose information(s.3), and a Fraud by abuse of position(s.4). Whether advertising and goods trading are implicated by each of these sections is the matter up for discussion.

A Section 2 offence constitutes an act of Fraud by False Representation. As well as being the most commonly indicted of the 3 offences, with the widest range of liability, it is also the most pertinent with regards to trading and advertising. Whilst being cited under s.1 of the Act, Section 2 defines the requirements for completion of the offence:

(1) A person is in breach of this section if he —

(a) dishonestly makes a false representation, and

(b) intends, by making the representation—

(i) to make a gain for himself or another, or

(ii) to cause loss to another or to expose another to a risk of loss. [8] 

The frame of mind which the advertiser or trader puts the potential customer under, is critical in conviction. The mens rea deals with the dishonesty in the representation made; the knowledge that the representation is made is based on a falsity, and that the intent is to either cause a gain for himself or another, or loss. This also encompasses the intent to expose the other to a risk of loss.

A common theme within many of the offences is the necessity in the mens rea for a degree of dishonest action or intent. The Ghosh [9] ruling of 1982 is the test used, by which a jury can make a judgement on a case-by-case basis. This judgement is often clouded by people’s individual judgements. The two-fold ruling on dishonesty, which takes into account both the objective and subjective nature of dishonest behaviour, is as follows;

Objective: Were the person’s actions honest according to the ordinary standards of reasonable and honest people?

Subjective: Did the person concerned believe that what he did was dishonest at the time?

Whether advertisers and traders are being dishonest in their actions is pivotal in assessing their guilt under the various Fraud Act offences. Did the traders sell their goods in the belief that what they were telling the consumer was in fact false, either as a matter of fact or as a matter of law? Moreover, should it have been expected that the ‘ordinary man’ should believe what is being communicated or portrayed on an advert, as being totally accurate. Alcohol brands claiming their beer is ‘Probably the Best beer in the World’. It is reasonable to suggest that whether the statement is correct, is down to individual preference; the claim is not substantiated on any survey or statistic, and so although perhaps false, it is clearly mere advertising puff, and a form of ‘boasting’ about one’s product. This example is rather more clear cut than other adverts which tread the borderline between boasting and lying.

‘Misleading’, is a term which is regularly mentioned in the same breath as media advertising campaigns, whether they are communicated via television or elsewhere. Alongside the supplementary definition under rules 5.1.1-5.1.4 of the ASA Advertising Code [10] , The Office of Fair Trading defines misleading as;

‘If it deceives or is likely to deceive its audience and affect their economic decision-making’ [11] 

In order to complete the offence under section 2, a false representation must actually be made. How a false representation is defined comes under subsection 2 of s.2, and is two-fold in that it requires the representation to be untrue or misleading, in addition to the knowledge of the person (or persons) making the representation that it is or might be misleading or untrue.

How does the definition of misleading compare with the legal dishonesty required to prove the mens rea in the s.2 Fraud offence? How might advertisers avoid making a false representation, whilst still being somewhat misleading? The British Committee of Advertising Practises has come for much criticism with regards to this matter. In many cases, what to the ordinary viewer seems on the outset to be a good deal, may actually be a false representation of what the true cost may be. An example is a recent phone and broadband package advertisement. [12] The line rental charge was advertised as £6.49 per month. However, the regulators allow small print in fine detail at the bottom of the screen to pass as a disclaimer, and as such the £11.25 additional line rental fee per month which was discretely added, means that there is no false representation. So despite the ordinary person probably viewing this as being unreasonable and dishonest; there could be no claim that a false representation was made.

‘Misleading’ behaviour also relates to comparative advertising or competitive trading. Comparative advertising is a situation where one advert claims that their product is of a better quality or price than that of a competitor, and the same applies for a company’s goods in competitive trading. Such advertising is acceptable, in the form of advertising ‘puff’. In fact, one of the allegations against the Fraud Act is that it turns such adverts, which fall short of lying but merely exaggerate a point of fact, into possibly fraudulent actions. However if the claims are over-exaggerated then the claim can be construed as being misleading to the consumer. A case illustrating the borderline on which claims turn from a play on words, into the realms over-exaggeration, can be found in Mandry v Wooster [13] ; a case in which two street traders advertised a perfume for sale. The defendants’ claim was that the price of the perfume was the lowest in the area. They also displayed false advertising from a fake magazine highlighting the cost of the perfume in other stores. Upon arrest, police officers visited 4 separate stores in the local area, all of which offered the product at a cheaper price. The defendants claim was that at Selfridges, a department store not in the local area, the perfume could be found at a higher price. On appeal, the judge held that the police officers were not required to look at every shop, and so the conviction was upheld. Despite this relating to the old obtaining property by deception offence, repealed under the Fraud Act but originally found in s.15 of the Theft Act (Obtaining property by Deception), the standpoint today changes little from this case. For sellers to avoid claims such as in Mandry, they must avoid making unsatisfactory enquiries into costs of products in the area. Such enquiries were classified in Roper v Taylor’s Central Garage [14] as ‘deliberately refraining from making enquiries, the result of which a person does not have to care’.

Does a hotel manager commit fraud by false representation by paying a magazine to advertise an excellent review in the hotels name? The false representation is made as, regardless of whether the hotel is of that excellent standard or not, the review made is not an accurate representation of the hotel. The direct intention of the article is to attract custom, and as such to cause a loss to that customer; the money spent on the stay at the hotel. Dishonesty according to Ghosh is clear for all to see; Not only would any ordinary person find the behaviour dishonest, but the manager would also know it to be dishonest. The Fraud Act implicates heavily on this sort of case, as under old Theft Act legislation, the offence would only have been committed once someone actually visited the hotel, on the basis that they had read the review and been persuaded to stay there due to its favourable write-up. However, since there is no requirement for a consequence by today’s statute, the manager would be liable.

What about if a salesman fails to keep a potential buyer informed before the customer then buys the item? The precedent found in DPP v Ray [15] would apply. A false representation is complete, whenever the defendant fails to inform the other party of other intentions. This should not be confused with a section 3 offence of Fraud by Failing to Disclose Information [16] , where the requirement to disclose information is one of a legal position, not for a defendant who has entered a contract with good faith. In Ray, a customer in a restaurant, who had entered with the representation that he was going to pay fully for the meal. However, he then changed his mind, and failed to inform the waiters of this, before leaving without paying for any of the meal. Relating to the sale of a car, the salesman may, for example, arrange to sell a vehicle in the belief that the vehicle is in functioning order. However, during the examination prior to the sale, he is notified that the car is not roadworthy. Failure to tell the customer would constitute a false representation, when following the direction in Ray.

Another example of a salesman’s actions turning into fraudulent behaviour under the new legislation can be found in Wheeler [17] . A salesman selling a medal agreed a price with the customer, thereby creating the contract of good faith, with the intention for the customer to return and pay for it at a later date. Between the agreement and the return of the customer, police officers told the seller the medal was stolen, after which he then maintained to the customer that the medal was not stolen. The seller was convicted for obtaining property by deception. An appeal was held as the false representation was made after the agreement to obtain the property; which under old legislation did not matter as it was a consequence based offence. Under the Fraud Act 2006 statute, false representations can be made at any time during the transaction, regardless of whether the property has been transferred or not; the action of the victim need not be as a result of the false representation. It is down to the salesman to keep the buyer informed. This is an example of the shift of liability from the old statute, which required the false representation to cause the property to change hands.

The ‘ loss’ or ‘gain’, which in many cases will be monetary, but not necessarily limited to money, and is part of the mens rea of section 2, may not be limited strictly to the consumer; competitors for the market who have not been false in their advertising may be exposed to the risk of loss of custom, through another’s falsities. Determining how wide such a loss may reach, is the job of the jury directed by the judge, and depends on what level the advertising campaign is on; nationwide, regional or local? Intent to cause such loss is an indirectly fundamental aim of advertising campaigns; to attract custom, which also involves the passing of money. This satisfies the necessity for the intent to cause gain or loss to be made by the false representation; there must be a causal link between the two to prove intent. Lord Kingsland in the Hansard debate suggested that because a gain or loss was evident when an advertiser made a claim, knowing that it was misleading, that the only way to avoid guilt would be to fall back on the debate of dishonesty. Kingsland also claimed that placing such pressures on a jury under this situation would be too uncertain. [18] 

A false representation can be something as simple as a communication, whether that is spoken or written. A written piece in a prospectus for a company advertising to attract potential investors, which turns out to falsely represent that company, falls under this category. [19] Equally, a false representation may also be an omission to keep the consumer or target investor informed of the most up-to-date information which may affect a judgement with regards to making a purchase. The case of Incledon & Watson [20] involved the production and distribution of a school prospectus. Within the booklet, claims were made that there were soon to be 22 scholars at the school. However, such a claim did not materialise. Yet despite this the head teacher of the school failed to inform the parents of the prospective students.

As a side from the Fraud Act itself, the introduction of the statute has paved the way for other acts of law to come into fruition. The Consumer Protection from Unfair Trading Regulations 2008(CPUTR) statute has come into force alongside the Fraud Act 2006, and brings with it its own set of regulations, specifically regarding ‘misleading’ actions and omissions. When deciding a charge, the Crown Prosecution Service must try to allocate the best charge to the situation. A recent case illustrates this point. [21] A butcher in Wales was brought before the court with a charge of 26 separate offences, relating to the product labelling on various joints of meat, which it was said were misleading to the general public in terms of the actual content of the product. Alongside this, advertising banners were also used to illustrate the point further. However, upon charge, only 5 counts out of the 26 revolved around a section 2 of the Fraud Act 2006 offence, with the remainder falling to different statutes, including the CPUTR. Although the Fraud Act has widened the net for catching potential offenders, there are other Acts which have been introduced as a side to the Fraud Act, and can be used during charging decision-making.

What conclusions can be drawn with relation to the legislation and the salesman or advertiser? The Fraud Act has certainly given advertisers something to think about when deciding on how to portray products to the public. What one select group of professionals consider being honest and reasonable advertising ‘puff’ may to the ordinary person seem totally unacceptable, and misleading. Whether the advert is a false representation or merely a boast of a product’s worth is up to the jury, directed by the judge in a court of law. The question is not whether someone actually acted upon information given to them in a television advert; that would imply a consequence based set of offences. What the Fraud Act has now introduced is whether the ordinary person would be expected to believe in what the advert is displaying. Should a man who sees a deodorant being sprayed, resulting in attracting many women, automatically assume that the product would have the same effect upon himself? You would have to say not; but under the Fraud Act 2006, in the strictest interpretation of the law, it may seem a false representation. Fortunately the Ghosh ruling on the dishonesty element to the offence provides a well tried and tested way to decide. Even with this ruling however, it may come as quite a challenge for juries to make a decision on dishonesty; often the pivotal factor in the liability of a defendant.

As for the salesman’s liability, any failure to keep the consumer updated as to the condition of the product they are selling could see them face conviction. As could the fabrication of the value of a product in comparison with competitive goods, or an exaggeration of the standing in the marketplace of a product.

In summary, The Fraud Act includes a wider reaching set of offences, providing less direction for the jury. The jury are required to make a tricky decision, usually based on interpreting whether or not the advertiser’s or salesman’s aims were to mislead and instil a belief of truth into the minds of the target customer; a truth which may be unsubstantiated and exaggerated. However, merely hyperbolizing in selling a product to the public, should not be a basis to brand someone a fraudster and a criminal.

Bibliography

Literature:

A, Arlidge and J, Parry, Arlidge and Parry on Fraud, (Sweet &Maxwell London 2007)

R.Card, Card Cross and Jones Criminal Law, (18th Edition, Oxford University Press 2008)

D. Omerod, Smith and Hogan: Criminal Law, (12th Edition, Oxford University Press 2008)

Reports:

D,Ormerod, , ‘The Fraud Act 2006Criminalysing Lying?’ Criminal Law Review (2007)

The Law Commission,’Fraud’ (LAWCOM 276) Report on a reference under section 3(1)(e) of the Law Commissions Act 1965 (2002)

Internet Pages:

<http://sas-space.sas.ac.uk/1783/1/amicus75_summers.pdf>. Accessed 17/10/10 , B. Summers, ‘The Fraud Act 2006, Has it Had any Impact?

<http://www.thisissouthwales.co.uk/news/Butcher-accused-fraud-misleading-advertising/article-2712759-detail/article.html> Date Accessed 18/10/10

<http://www.letsfixbritain.com/advertisingcodeofpractice.htm >Date Accessed 19/10/10

<http://www.asa.org.uk/Complaints-and-ASA-Action/Adjudications/Display-Code.aspx?CodeId={BE12BA7E-A189-44C3-BE60-5D22C8D23411}&ItemId={A4D2E019-B7B4-468B-8945-85829C97FA41}> Date Accessed 18-10-10

<www.westlaw.co.uk> – Case law

<http://www.lexisnexis.com/uk/legal/search/editSearch.do?formBeanKey=68_T10528707167&BCT=G0-> Case law

<www.opsi.co.uk >– Fraud Act Statute

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