Fraud is a confusing and widely misunderstood tort. I wrote about the elements of fraud on this blog a few years ago, and last month I dug deeper into what it means to make a fraudulent misrepresentation. This month, I’m going to elaborate a bit more about the requirement that fraudulent misrepresentations be made with the intent to mislead someone before liability will arise. In other words, we’re talking about the expectation on the part of the speaker that the person hearing the statement (i.e., the person being defrauded) will take some action–or refrain from taking some action–as a direct result of hearing the statement. To win a case for actual fraud, you need to establish that the defendant not only misrepresented a fact, but did so intending to influence your behavior.
Who can sue? Generally speaking, anyone whose conduct the speaker intended to influence and who was, in fact, influenced as intended. Sometimes the defendant intends to defraud a single person. Sometimes the defendant seeks to influence an entire group of people. Even if a defendant did not specifically intend to defraud a particular plaintiff, if the defendant had reason to expect that the plaintiff would act or refrain from acting in reasonable reliance on his untrue statement, liability may attach. There may be a valid defense, however, if the defendant could not have anticipated that a particular plaintiff would hear the fraudulent statement and take action upon it. Let’s look at some examples.
Suppose Mr. Kim wants to sell his restaurant business to Mr. Lee. While the two discuss the possibility of a purchase over dinner in the restaurant, Mr. Kim overstates the restaurant’s average monthly revenues. Mrs. Park is sitting at a nearby table and overhears the conversation. Mr. Kim is unaware of her presence at the time he makes the misrepresentations to Mr. Lee and has no reason to believe that anyone other than Mr. Lee has an interest in buying his business. If Mrs. Park makes an unsolicited offer to buy the business at an inflated price, acting in reliance on the inflated figures she overheard, and the offer is accepted and suffers harm when the business turns out to be a flop, she will not be able to sue for fraud. Mr. Kim intended to defraud someone, but it wasn’t her, and he had no reason to believe that she would act as she did based on his untrue statements to Mr. Lee.
The situation would be different if the speaker intends or has reason to expect that the fraudulent statement will be repeated or shared with others, likely inducing those third parties to act in some way. There’s a gray area, of course, when the speaker is aware of the possibility that his fraudulent statement will be communicated to others who may act upon it, vs. having an intent to actually defraud those people. Liability will often depend upon the degree of foreseeability that third parties would hear the fraudulent statement and rely upon it. Usually, a mere possibility will not be enough.
If the maker of a fraudulent misrepresentation intends to influence the behavior of more than one person, he can be held liable for losses suffered by any of those people who rely justifiably on the fraudulent statement. For example, a person who lies to a credit agency for the purpose of unfairly influencing his credit rating can be liable in fraud to anyone to whom the maker’s financial condition is important, such as people who sell goods to him on credit, or a bank that grants a loan in reliance on the inflated credit rating.
Lies told merely for the purpose of avoiding embarrassment or to enhance self-esteem are not actionable as fraud. In Virginia, you can’t sue someone for lying. But you can sue them for fraud. Fraud cases deal with lies told for a specific purpose, and that purpose involves getting another person to behave in some way.