Contract Terms For Fraud Prevention

In supply chain disputes (especially where fraud is suspected) often a lot of direct and circumstantial evidence is needed to demonstrate dishonesty to the level required at Court or to persuade a counter party that they are at risk of being held liable for fraud.  What if your organisation could ease the challenge in a dispute where you suspect fraud? That would save time, money and resources.

Making claims against suppliers easier, even with allegations of fraud, can be achieved by bolstering your contractual terms to anticipate dishonest conduct. Breach of these terms can bring easier claims to terminate a supplier relationship and claim damages.

Due diligence

It is important to ensure that your organisation knows the suppliers and other businesses with which it has contractual relationships. Due diligence should be carried out whenever a new supplier or other contractor is introduced. Senior personnel or those who will be carrying out contractual duties or obligations should be included in such due diligence as well as the owners of a business, not just its directors.

As part of this process, it is prudent to request the completion of a due diligence questionnaire covering key details of the company, including its operations and personnel. At the same time, it would be appropriate to include copies of your organisation’s policies relating to fraud prevention, financial crime, bribery and corruption, cybercrime prevention and other ethical topics relevant to your industry. By doing this, your organisation makes clear its stance on such issues and sets expectations for behaviours from the outset of the relationship.

Contract terms 

To go one step further, and afford your organisation contractual protection against unwanted behaviour, you will need to ensure that certain terms are included in your standard supply contracts.

1. PROHIBITED ACTS

It is prudent to have a main clause setting out “prohibited acts” such as offences i) under the Bribery Act 2010; ii) under the Criminal Finances Act 2017; iii) under legislation or common law concerning fraudulent acts; iv) of defrauding, attempting to defraud or conspiring to defraud your organisation; v) specific to the Housing sector such as failure to declare a conflict of interest such as a relationship with an employee of your organisation. The clause should include a positive obligation not to commit a “prohibited act” (as defined), or to place your organisation in a position of committing any “prohibited acts” or in breach of any relevant legislation. Further, if a supplier is aware of a prohibited act, they are under a positive obligation to declare that to you.

2. REPRESENTATIONS AND WARRANTIES

To go one step further, include a clause whereby the supplier represents and warrants (i.e. promises) that it has not committed a “prohibited act” and that it is not or has not been the subject of any relevant investigation or inquiry. The warranties can also be extended to include all directors, officers, employees, other workers, agents, consultants, contractors or sub-contractors. This may be resisted by suppliers, but the aim is to encourage your suppliers to carry out due diligence on those with whom they have a contractual relationship and ensure that they themselves consider fraud risk.

3. MAINTENANCE OF POLICIES AND PROCEDURES

There ought to be a positive obligation on any supplier to maintain its own policies and procedures to prevent the occurrence of a “prohibited act” and to ensure compliance with any relevant legislation such as the Bribery Act 2010, the Criminal Finances Act 2017, fraud related activity and any sector specific legislation.

4. TERMINATION ON DEFAULT

It is important to retain the right to terminate the contract in circumstances where the supplier is in breach of the clauses relating to “prohibited acts”.

5. PROVISION OF INFORMATION

There should be obligations upon the supplier to notify your organisation if it becomes aware of any commission of a “prohibited act” or breach of relevant legislation by it or any of those with whom it has a contractual relationship.  It would also be useful to include a standard clause placing a positive obligation on a supplier to report any change to a shareholding and / or company officer of a supplier, with such information to be provided within 14 days of the event taking place (such that your organisation can then undertake updated due diligence and conflict checks on names and addresses as against its own employees). It is also sometimes expected that larger suppliers will accept a right to ‘audit’ their files if your organisation suspects fraud, in other words, your organisation can pre-empt gaining access to documents held by a supplier in order to investigate fraud.

6. LIMITATION OF LIABILITY

Most contracts will include a limitation of liability clause. Such clauses are ineffective in limiting liability for fraud; however, it is worth making this clear by stating that such clause does not extend to any liability which cannot legally be limited such as death or personal injury caused by negligence, and fraud or fraudulent misrepresentation.

7. CONFLICTS OF INTEREST

It would be sensible to include a standalone section dealing with conflicts of interest setting out what that means and the expectation of suppliers to confirm they are not aware of any conflict of interest as between themselves and your organisation.

How can we help?

The team here at Tenet can assist with reviewing and revising your organisation’s policies and procedures for fraud prevention. We are also able to help review standard terms and conditions or supply contracts from the perspective of bolstering your organisation’s contractual protections in respect of fraud and financial crime.

If your documents need a refresh or need any support on how to ensure you are compliant or would like a chat about what risks look like in your organisation please reach out to Arun Chauhan.

We hope this article has provided valuable insights and information around contract terms for fraud prevention in the Housing sector [tenetlaw.co.uk/sectors/housing-associations]. Our team of specialist fraud and financial crime lawyers are dedicated to providing insightful and engaging content on disputes and compliance law relating to fraud and financial crime from a legal perspective.

If you have any specific topics or interests that you would like to see covered in future articles or would like to contribute your own perspectives, please get in touch at hello@tenetlaw.com