Proximate Cause Is Required to Win Your Fraud Claim

To state a cause of action for fraud in Virginia, a plaintiff must plead that there was (1) a false representation of (2) a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, and that the plaintiff (5) reasonably relied on that false representation and (6) that his reliance resulted in damages. What lawyers and judges often overlook is that to survive demurrer, a plaintiff must also show (as part of the causation requirement of elements 5 and 6) that the damage was proximately caused by the defendant’s alleged misrepresentation. (See, e.g., Cohn v. Knowledge Connections, Inc., 266 Va. 362, 369 (2003); Murray v. Hadid, 238 Va. 722, 731 (1989)). Not just caused–proximately caused.

The Virginia Supreme Court has defined proximate cause of an event as “that act or omission which, in natural and continuous sequence, unbroken by an efficient intervening cause, produces the event, and without which that event would not have occurred.” Beale v. Jones, 210 Va. 519, 522 (1970). According to the Restatement of Torts, the concept of proximate cause encompasses both (1) causation in fact, which exists where a plaintiff’s reasonable reliance is a “substantial factor in determining the course of conduct” that results in the plaintiff’s loss; and (2) legal causation, which exists where the loss might “reasonably be expected to result from the reliance.” (See Restatement (Second) of Torts ยงยง 546, 548A). It’s this second element that is most often neglected. Proximate cause is more than simple “but for” causation, which refers only to the first element of the test (i.e., causation in fact).

Striving to define proximate cause using plain English, the Virginia Model Jury Instructions offer this definition: “A proximate cause of an accident, injury, or damage is a cause that, in natural and continuous sequence, produces the accident, injury, or damage. It is a cause without which the accident, injury, or damage would not have occurred. There may be more than one proximate cause of an accident, injury, or damage.”

These definitions all basically mean the same thing: to establish the causation element of a fraud claim, it must appear to an chain.jpgappreciable degree that the damage flowed naturally from the misrepresentation. Unforeseeable consequences do not meet this test and should not result in liability for fraud. An example will help clarify what I mean.

Suppose a corporate CEO misrepresents the company’s financial condition with the intent of misleading investors and inflating the stock price. You rely on the statements and purchase several shares of stock. Soon afterwords, the true financial outlook is revealed and the stock price plummets. You would have a valid securities-fraud claim for the lost value, because the change in the value of your shares was the obvious and foreseeable result of the misrepresented facts. The natural and expected consequence of the CEO’s misrepresentation is that people would pay more for the shares than they were really worth; when the truth came out, the damage “flowed naturally” from the fraud.

Conversely, suppose an independent, intervening force (i.e., having nothing to do with the company’s financial condition) caused the drop in stock price; the merger of two competitors, for example, or an earthquake that causes damage to a warehouse. You still lose money when the stock price goes down, but because the loss was unforeseeable and unexpected and had nothing to do with the misrepresented financial statements, there is no proximate cause and therefore no fraud liability. Note that this is true even though the misrepresentation in fact caused the loss in the sense that you would not have purchased the shares but for the misrepresentation. In other words, in this latter example, there is causation in fact, but no legal causation.

Fraud claims, like defamation claims, are subject to a heightened pleading standard. An allegation of fraud in the abstract does not give rise to a cause of action; it must be accompanied by allegations (and eventually proof) of damage proximately caused by the misrepresentation. As the Virginia Supreme Court held in Mortarino v. Consultant Eng’g Servs., Inc., 251 Va. 289, 295 (1996), “Where fraud is relied on, the pleading must show specifically in what the fraud consists, so that the defendant may have the opportunity of shaping his defence accordingly, and since fraud must be clearly proved it must be distinctly stated.” (Note: the court was quoting an 1899 case; hence the old spelling of “defence”). Thus, to bring a successful fraud claim, a plaintiff should allege with particularity exactly how her alleged reliance on the fraudulent misrepresentation proximately caused her to suffer damages.

The question of proximate cause is normally a question of fact for the jury to decide. However, its existence or non-existence can become a question of law if the facts are such that reasonable minds could not disagree on the inferences to be drawn therefrom. In circumstances where proximate cause is so clearly lacking that no reasonable jury could conclude otherwise, it will be appropriate for the trial court to dispose of the fraud claim on demurrer. (See United Leasing Corp. v. Thrift Ins. Corp., 247 Va. 299, 304 (1994)).

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