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Fraud, Silent Fraud, and Innocent Misrepresentation

Contents

Introduction

In simple terms, fraud occurs when somebody makes a misrepresentation of material fact, in order to obtain action or forebearance by another person, where the other person relies upon the misrepresentation and suffers injury as a result of the act or forebearance taken in reliance upon the misrepresentation. In most fraud cases, there is active misrepresentation by the defendant. In some, the misrepresentation occurs through the defendant's silence on a key issue.

Material Fact

A material fact is a fact which, if known, would have affected the judgment of one or more of the parties to a transaction. In an action for fraud, a material fact must be of sufficient importance to the matter that a reasonable person would have been likely to rely on it. A material fact cannot be an opinion, belief, prediction, or speculation, and typically must relate to something in the past or present that can be proved or disproved.

Reliance

Within the context of fraud, reliance means that plaintiff would not have taken the particular action which underlies the fraud action (e.g., would not have entered into a contract with the defendant), had the defendant had not made the representation, promise or created the false impression, even if the representation, promise, or false impression was not the only reason for plaintiff’s action.

Fraud

To establish fraud, a plaintiff typically has the burden of proving each of the following elements:

  • The defendant made a representation of one or more material facts;

  • The representation was false when it was made;

  • The defendant knew the representation was false when the defendant made it, or defendant made it recklessly (i.e., without knowing whether or not it was true);

  • The defendant made the representation with the intention that the plaintiff rely upon it;

  • The plaintiff relied upon the representation; and

  • The plaintiff suffered damages as a result of the reliance.

For example, if the plaintiff wishes to purchase a house from the defendant, and the defendant knows the house is infested with termites, the defendant's actual representation that the house is free from termites coupled with the plaintiff's reliance upon that representation might support a subsequent action by the plaintiff for fraud. (Please note that the terms of a sales contract can affect the viability of a claim for fraud arising from the sale of a home.)

Silent Fraud

Silent fraud occurs when a defendant fails to disclose material facts. To establish this, plaintiff has the burden of proving each of the following elements by clear and convincing evidence:

  • The defendant failed to disclose one or more material facts about the subject matter of the claim;

  • The defendant had actual knowledge of the fact(s);

  • The defendant’s failure to disclose the fact(s) caused the plaintiff to have a false impression;

  • When the defendant failed to disclose the fact(s), the defendant knew the failure would create a false impression;

  • When defendant failed to disclose the fact(s), defendant intended that plaintiff rely on the resulting false impression;

  • The plaintiff relied on the false impression; and

  • The plaintiff was damaged as a result of the reliance upon the false impression.

For example, where a defendant sells a plaintiff a car where the defendant knows the odometer had been rolled back, but the defendant does not mention to the plaintiff that the odometer is not accurate, the defendant knows that it is highly probable that the plaintiff would rely upon the mileage figure from the odometer in making the decision to purchase the car. It is likely that the defendant's silence under these circumstances would support a subsequent action for silent fraud.

Innocent Misrepresentation

Even an innocent misrepresentation of a material fact may support a cause of action. Typically, to sustain a claim of innocent misrepresentation, a plaintiff must establish that:

  • The defendant made a representation of one or more material facts;

  • The representation was made in connection with the making of a contract between the plaintiff and defendant;

  • The representation was false when it was made;

  • The plaintiff would not have entered into the contract had the defendant not made the representation;

  • The plaintiff suffered a loss as a result of entering into the contract; and

  • The plaintiff’s loss benefited the defendant.

There may be circumstances where a plaintiff is unable to prove a defendant acted with the intent to defraud, but can nonetheless establish a cause of action for innocent misrepresentation. For example, the plaintiff may be unable to establish that the defendant knew or should have known that his representation of a particular material fact was false at the time it was made.

Under standard pleading practice, a lawyerly term for drafting a complaint for a lawsuit, a plaintiff can plead more than one theory of liability against a defendant, even where there is some inconsistency between the theories of liability. As even where fraud exists it can often be difficult to prove absent a confession by the defendant, innocent misrepresentation can provide a good alternative theory of the defendant's liability - such that the defendant's denial of knowledge in order to defeat the fraud claim may actually support the plaintiff's alternative claim for innocent misrepresentation.