Such terms as “fraud” are used loosely by most people and are generally meant to include wrongful acts ranging from outright thievery to simply not telling the whole story to someone in order to make a deal happen. Legally, the concepts of Fraud and Deceit are much more complex and specific torts that require proof of specific wrongful acts in order to achieve appropriate remedy.
The reader should first review our basic article on Torts, Intentional and Negligent for a discussion of the characteristics of such causes of action in general. This article shall only discuss the elements necessary to constitute the specific torts of Fraud and Deceit. It shall be assumed for the purposes of this article that the larger article has already been read.
Definitions and General Law of Fraud and Deceit
THE LAW AND DEFINITIONS
Actual Fraud is normally contractual in nature and is defined in the California Civil Code (CC) Section 1572. Deceit, which is not necessarily based on a contract, is described at CC 1709 and 1710.
Actual fraud…consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:
1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
3. The suppression of that which is true by one having knowledge or belief of the fact;
4. A promise made without any intention of performing it; or,
5. Any other act fitted to deceive.
One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers
CC 1710 specified four kinds of deceit within the meaning of CC 1709:
(a) Intentional misrepresentation which is “the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;”
(b) Negligent misrepresentation which is “the assertion, as a fact, of that which is not true by one who has no reasonable ground for believing it to be true”
(c) Concealment, which is “the suppression of a fact by one who is bound to disclose it or who gives information of other facts which are likely to mislead for want of communication of that fact” and
(d) False Promise which is “a promise made without any intention of performing it.”
Aside from the above statutes, the California courts have long held the following elements as essential to prove in fraud: a) misrepresentation; b) knowledge that the misrepresentation is false; c) intent to deceive; d) justifiable reliance by the victim; and e) resulting damages.
The above criteria must all be met. If I make a false statement to you but do not know it is false or even if I make a misstatement knowing it to be false but it did not harm you, no action lies.
NO BENEFIT TO WRONG DOER NECESSARY
Note that it is NOT necessary that the wrongdoer benefited from the fraud. It is enough that the above criteria are met and you were damaged.
MISSTATEMENT OF FACT REQUIRED
Usually, the misrepresentation must be an affirmation of a fact. Statements regarding opinion are usually NOT actionable. Stating a belief or suspicion can seldom result in liability for fraud even if you misstate your actual opinion. Thus if I state, “The house has no defects and is worth two hundred thousand dollars” when I know it has bad foundations and is worth next to nothing could make me liable but if I state, “I believe there are no problems with the house and I think it may be worth two hundred thousand dollars,” is probably not. (WARNING: WHEN PEOPLE PHRASE THEIR STATEMENTS IN BELIEF MODE, CHECK THE TRUTH OF THE OPINION BY YOURSELF!)
Further the representation, to be actionable, must ordinarily be as to past or existing facts: predictions as to future events or future action by some third parties are often deemed opinions and seldom actionable fraud.
However, despite this general rule, misrepresentations as to opinions can result in liability if the defendant held him or herself out as be “specially qualified” and the hearer is situated as to be regarded as reasonably relying on that expertise, fraud may lie. (Typically, if I indicate I have lived in the house for ten years and think the paint is lead free that may result in a complaint in fraud if I intentionally misstated that opinion to a new buyer.)
Further, if one states an opinion not as an opinion but as a fact that may create liability for fraud.
If one is in a fiduciary capacity, one’s opinion may be treated as grounds for fraud if improperly given. The reader should review the definitions and types of fiduciaries that exist on the article on this web site but suffice to state that most professional relationship, family relationships, employee-employer relationships, etc, can create that type of duty.
An old issue has been whether a misstatement of intention to perform constitutes fraud since it relates to future action, not present fact, and may even be considered an opinion. The courts now normally allow that to be actionable fraud if the misstatement relates to a false presentation of current intentions. If you falsely state you intend to perform, that may constitute fraud. (Consider how hard that is to prove since you are trying to prove what is going on inside of someone’s head. Most such cases use proof by using evidence of conflicting statements of intent made to different people at the same time.)
THE CRITERIA OF INTENT
For fraud and deceit it is usually necessary to prove that the defendant meant to induce action by some particular person or persons in reliance upon a false statement. While there is a particular cause of action called “negligent misrepresentation,” that is not an intentional tort (thus unlikely to ever allow punitive damages) and has its own stringent requirements as to what elements must exist to make it a valid cause of action. Negligent misrepresentation is treated in other articles on this website.
Note that the misrepresentation may be indirect. If I know you will tell another my misrepresentation and intend that he or she shall act upon it, I may be liable for fraud even if I did not directly tell the third party the misrepresentation. And one who makes a statement intending to defraud an entire class of people or the public is deemed to have made an intentional misrepresentation to each person in the class. However, if the persons relying on the misrepresentation are not reasonably foreseeable, some courts have held that the requisite intent has not been established.
It must be shown that the injured party actually relied upon the misrepresentation, e.g. that the representation was “an immediate cause of the injured party’s conduct and that without such representation, the injured party would not, in all reasonable probability, have entered into the contract or other transaction.” Obviously, then, if the statements were not known to the injured party until after he or she acted, no fraud would lie.
Further, if the injured party discovered the truth or had easy access to the necessary information to show the truth, many courts have held that no fraud could lie since there was no reasonable reliance on the misstatements. (a fiduciary relationship to the injured party by the wrong doer can obviate this.)
However, in a remarkable exception, the existence of recorded title documents that would mitigate against the fraud do NOT bar an action against the person who misrepresented the state of title. “Such public recordation is to protect bona fide purchasers, not people who commit fraud.” (Seeger v Odell (1941) 18 C2d, 409).
AND THE DAMAGES?
In an action based on contract, the injured party normally has the choice to rescind (eliminate) the contract or affirm the contract. If rescinded, the injured party gets back any consideration paid for the contract and the contract is voided. If affirmed, the injured party is entitled to the damages that are suffered and that usually means the contract is treated as if the misstatements of fact were actually true and the injured party gets the “benefit of the bargain.” Thus, if you advise me the machine you are selling is worth 500,000 but the hidden defect will cost 150,000 to repair, I may get 150,000 in damages.
And, in certain circumstances, “punitive damages” to punish the person who defrauded may be levied and those are usually related to the actual losses suffered, the degree of malice and deceit shown and the anger of the judge or jury. Despite articles in the newspapers, punitive damages do NOT constitute a constant portion of jury verdicts though they do get levied from time to time. Our firm has obtained ten million dollars in punitive damages based on actual contractual damages of only four million dollars (thus a fourteen million dollar verdict in all.) If you are a defendant, you must consider them as possible. If you are a plaintiff, you should try for them, but do not assume they are automatic by any means.
And damages based on fraud (and other intentional torts) are quite often not dischargeable in bankruptcy which gives the judgment holder a tremendous advantage over other creditors of the defendant.
All too often, in an effort to intimidate opponents or due to emotion, people throw fraud causes of action into purely contractual disputes, asking for massive punitive damages and alleging copious misrepresentations. The courts and arbitrators, now used to “over pleading” routinely discount such allegations and we normally do not recommend such over pleading to our clients.
However, if misrepresentation leading to damages has occurred, fraud is a powerful and effective cause of action, albeit far more complex to plead and prove than most people believe. It allows for additional compensation than one obtains in a typical breach of contract action, allows for punitive damages being possible, and expands the scope of discovery available to plaintiffs so that they may determine far more of the events that transpired that led to the damages.
If fraud has been pled against you, do not overreact. A careful analysis of the elements of fraud as described above should indicate that what many people consider fraud is often not. Quite often a plaintiff will start litigation because he heard the defendant comment casually as to his or her opinion as to what might happen and the plaintiff claims such opinion was intentionally wrong. As seen above, that is usually not fraud. Close analysis and good legal advice must be sought by the parties before they embark on what can be costly…and often useless…litigation.
But in those instances in which fraud truly occurs, it can form the single largest element of damages awarded to the injured plaintiff. When our clients do sue for fraud and obtain damages, it is common to receive an award of punitive damages many times higher than the contractual damages-and recall, bankruptcy may not be available to void those damages. See our web article on Bankruptcy: the Constitutional Right to Start Over.