Fraud: What It Is, and What It Is Not

November 24, 2009
By Lee E. Berlik on November 24, 2009 9:12 AM |

Fraud is a word that is thrown around a lot in everyday life. When pundits discuss the latest political or Wall Street scandal, the discussion often turns to the bad actors' "fraudulent" behavior. In ordinary, non-legal parlance, the word fraud can mean anything from merely bad intent to criminal behavior. Outside the courtroom, accusing someone of fraud is generally synonymous with calling that person a cheat or a swindler. Sometimes this casual definition of fraud will overlap with the legal definition, but more often it does not. The law does not consider every act of dishonesty to amount to actionable fraud. You may be owed compensation, however, if you have truly been defrauded in a legal sense.

Actionable fraud requires more than just broken promises or a breach of contract. The law looks more harshly upon fraud. It is considered a tort, for which punitive damages are available. (Punitive damages are not recoverable in actions for breach of contract). Because a successful fraud claim will usually result in a higher damages award than an ordinary contract claim, lawyers often try to convert a contract claim into a fraud claim through artful drafting of their client's complaint. Under Virginia law, a party alleging fraud must prove by clear and convincing evidence (1) a false representation, (2) of a present, material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reasonable reliance by the party misled, and (6) resulting damage to him. (See Thompson v. Bacon, 245 Va. 107, 111 (1993)). Let's take a closer look at these elements.

1. False Representation. This is the essence of a fraud claim. The defendant must have misrepresented the truth. If somebody steals your wallet but does not communicate with you, you have not been "defrauded" and cannot maintain a fraud action against that person. (You would have other remedies you could pursue, but the correct legal theory would not be fraud because no misrepresentation was made).

2. Present, Material Fact. The defendant must have made a misrepresentation about a present fact. A fact is present only if it could have been definitively determined at the time the misrepresentation was made. It is not a promise that something will or will not happen in the future. For example, if a car salesman promises a car will resell in 10 years for at least half of its new value, it is not a fraudulent statement even if it proves untrue. This is because, at the time the statement was made, its falsity could not be known. If, however, that same salesman promises that the car has anti-lock brakes when it, in fact, does not, then the statement can form the basis for fraud.

The misrepresented fact must also be material in some respect. For example, when a fraudulent statement is made in connection with a commercial transaction, materiality means that the fact must go to the essence of the deal itself (the thing being bargained for), and it must be of such importance that the deal hinges upon its being true. Going back to the car sale, the lie about the anti-lock brakes is material because it concerns the car, the thing the parties are bargaining for, and, because anti-lock brakes are an important safety device, if the car did not have them it is likely that a sale would not be made. If, however, the car salesman had lied by stating that he, like the potential buyer, was a former Boy Scout, then the misrepresentation would not be deemed material because the deal concerned the sale of a car and the lie had nothing whatsoever to do with the car.

3, 4. Intent. A fraud case arises when a defendant intentionally lies about something and does so for a reason. While a separate tort of "negligent misrepresentation" exists, the tort of fraud does not supply a cause of action against someone who mistakenly misrepresents a fact. The bad actor must have intentionally misrepresented the truth, with the further intent of inducing you to rely on the statement to your detriment.

5. Reasonable Reliance. You cannot sue someone for fraud, even if that person lied to you, if you didn't take any action in reliance on the statement. For example, if you don't believe the false statement, then you haven't really been defrauded. If you do believe the misrepresentation and rely on it, then your reliance must be reasonable. The law will only grant relief to those who act prudently and with ordinary care for their own well being. If common sense dictates that a quick phone call or Google search could verify the defendant's statement, but you decide unwisely to simple accept the person's statement as true without independent verification, a court may deny you any recovery. In the used-car scenario, your fraud claim against the salesman would likely be defeated if a prominently displayed sticker on the car read "NO ANTI-LOCK BRAKES" and you chose to ignore it.

6. Damages. Finally, the plaintiff must have suffered damages as a result of the false statement. The law strongly believes in the "no harm, no foul" concept.

The above criteria are the essential elements of a civil action for fraud. There is much more to it than is commonly understood. If you or your business have been wronged by another but your fact pattern does not fit within the legal definition of fraud, not all hope is lost. There are several paths to recovery in Virginia's courts. Meet with a Virginia lawyer to learn whether you are entitled to monetary or non-monetary relief under the law.