Fraud

Frequently, people who enter contracts were induced to do so by a misstatement of fact or by a failure to state an important fact. For example, the seller of a business may lie about the profits he's been making to induce the buyer to buy the business. That kind of fraud provides an affirmative claim-- i.e., a claim by the victim to recover money. The fraud can also provide a defense, such as when the seller of the business sues to recover payment for the business.

Elements of the Cause of Action. So what is fraud? The elements of a fraud claim are 1) the making of a statement, 2) the falsity of the statement, 3) an intent to deceive, called "scienter", 4) reasonable reliance on the statement by the injured party and 5) injury sustained as the result of the reliance. Often a fraud or a scam will be both a civil wrong and a crime.

The Statement. With respect to the making of a statement or a material omission, the statement must be one of fact, not of opinion. Thus, if the defendant says, "Our company has a great future," that won't support a claim of fraud. But if the defendant says, "Our profits were $1 million this year," that's a statement of fact which will support a claim of fraud.

A failure to state an important fact-- i.e., an omission-- may support a claim of fraud. Thus, for example, if the seller of a business fails to disclose a big law suit against the business, that may be an omission that will support a claim of fraud.

Falsity. With respect to falsity, a half truth in an arms length bargaining situation will typically not support a claim of fraud. But if the defendant has a close and trusting relationship with the plaintiff, such as an investment advisor has with its client, a half truth may constitute a false statement.

Scienter. With respect to the scienter element, that's the hardest one to prove because the evidence of intent will typically be in the sole possession of the defendant. But sometimes the intent may be inferred from the circumstances, such as where the defendant stands to make a great deal of money from a deception. But many fraud claims are dismissed because the plaintiff can't allege facts showing an intention to deceive.

Reliance. With respect to the reliance element, the reliance has to be reasonable. If the defendant tells a whopper that no one would believe, reliance on the whopper will not be reasonable. Furthermore, some courts have held that the reliance was not reasonable if publicly available facts would have enabled the plaintiff to discover that he was lied to.

Damages. With respect to the damage element, the damages can't be speculative. Thus, if the plaintiff is a start up company, it may be hard for him to say that, in the absence of the lie, the start up would have made $X. That's because a start up has no track record of profits that would permit that inference.

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