Fraud, Silent Fraud, and Innocent Misrepresentation

What is Fraud

In simple terms, fraud occurs when somebody misrepresents a material fact in order to obtain action or forbearance by another person, where the other person relies upon the misrepresentation and suffers injury as a result of the act or forbearance 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.

What is a Material Fact

A material fact is a fact that, 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 upon it. A material fact cannot be an opinion, belief, prediction, or speculation, and in most cases must relate to something in the past or present that can be proved or disproved.

By way of example, a statement along the lines of "I think you're going to be really happy with this purchase," or, "This is a really good deal and it won't be around for long", is not the type of statement that will support a claim of fraud, but a claim along the lines of "An independent testing agency rated our product as the best on the market" or "This car has never been involved in an accident" may support a fraud action if later determined to be false.

What is Reliance

Within the context of fraud, reliance means that a plaintiff would not have taken the particular action that underlies the fraud action, 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. For example, a plaintiff who has entered into a contract with a defendant might identify specific statements or representations by the defendant that are alleged to have been false or misleading and contend that, but for those false representations, they would not have entered into the contract.

The Elements of Fraud

To establish fraud, a plaintiff must ordinarily prove 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 (that is, 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 wants 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 would probably support a subsequent action by the plaintiff for fraud.

What is Silent Fraud

Silent fraud occurs when a defendant fails to disclose material facts. To establish this form of fraud, a 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 facts;

  • The defendant's failure to disclose the facts caused the plaintiff to have a false impression;

  • When the defendant failed to disclose the facts, the defendant knew that the failure would create a false impression;

  • When defendant failed to disclose the facts, the 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, consider the sale of a car by a defendant who knows that the car's odometer has been rolled back. If 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 will 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.

What is Innocent Misrepresentation

Even an innocent misrepresentation of a material fact may at times support a cause of action. To sustain a claim of innocent misrepresentation, a plaintiff must ordinarily 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.

Under a theory of innocent misrepresentation it may be circumstances where a plaintiff is unable to prove a defendant acted with the intent to defraud, but can nonetheless establish a basis to recover damages or set aside the contract. For example, a plaintiff may not be able to prove that a car seller knew that the statement, "This car has never been in an accident" was false at the time of a car sale, but may be able to rely upon a theory of innocent misrepresentation to ask that a court set aside the contract based upon mutual mistake relating to a material fact. That is, the seller valued the car based upon the belief it had not been in an accident, the buyer purchased the car based upon the belief that it had not been in an accident, and had the parties properly understood the facts they either would not have entered into a contract or would have agreed on a lower price.

Pursuing More Than One Theory of Fraud

When stating a claim for a lawsuit, a plaintiff may plead more than one theory of liability against a defendant, even where there is some inconsistency between the theories of liability. Even when fraud exists, absent a confession by the defendant it is often difficult to prove. Raising a claim of fraud along with an alternative theory of innocent misrepresentation may help a plaintiff recover compensation or gain other relief even if deliberate fraud is not proved. The defendant's denial of actual knowledge in order to defeat the fraud claim may even help support the plaintiff's alternative theory of innocent misrepresentation.

For an example, while a plaintiff may believe that a car seller knew that the statement, "This car has never been in an accident" was false at the time it was made, the plaintiff may not have strong evidence that the seller actually knew the statement to be false. If in order to deny an allegation of fraud the seller denies knowledge of a prior accident, by raising the alternate theory of innocent misrepresentation the plaintiff can argue that even if the defendant did not know about the accident the contract should be set aside based upon their mutual mistake.

Copyright © 2004 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Jul 8, 2016.