The Basic Law of Fraud

The Basic Law of Fraud

As a general rule, it is not illegal to say something that is not true. The general rule probably evolved from the fact that, in addition to engaging in intentional deception, human beings can simply be mistaken. It is also true that some false statements do not deceive because they come from sources known to be unreliable. If we do not rely on the mistaken statements of others, they do us no harm.

Sometimes, however, there ought to be legal liability for a false statement. Sometimes, as a practical matter, we have to rely a statement of another. If a false statement is made under such circumstances, it can cause harm.

Those who know that their words are being relied upon are in a position to intentionally deceive and cause harm by saying something that is not true. As a general rule, a person may be found liable for fraud when he or she causes harm by making a false statement that is reasonably relied upon.

The Elements of Fraud

Potential liability for fraud exists when six elements are shown to be present: (1) knowing, recklessly, or without reasonable grounds, (2) making a material misrepresentation (3) to deceive another (4) who reasonably relies on the misrepresentation (5) causing that person (6) actual damages. Only the person who is damaged may bring a lawsuit for fraud. In most states, only economic damages can be recovered.

The first element points out that, to be potentially liable for fraud, a person must know that his or her statement is false, have reckless disregard the truth or falsity of their statement, or make their statement without reasonable grounds for believing it to be true. Thus, a person who can reasonably determine the truth or falsity of his or her statement cannot claim that he or she reasonably believed that his or her false statement was true.

Negligent Misrepresentation

The word fraud is sometimes used in the narrow sense of knowing, intentional fraud. When fraud is committed unintentionally, because a false statement is made without reasonable grounds for believing its truth or with reckless disregard for its truth or falsity, it may be referred to as negligent misrepresentation. In many lawsuits, intentional fraud and negligent misrepresentation are pleaded in the alternative as separate causes of action.

The Difficulty of Proving Fraud or Negligent Misrepresentation

It is difficult to prove fraud or negligent misrepresentation. Defendants in fraud and negligent misrepresentation lawsuits often challenge the plaintiff on every element. If the court does not rule in favor of the plaintiff on every element, the lawsuit fails. Plaintiffs with high moral values are often shocked to learn that they have been deemed to have "unreasonably" relied on the defendant's false statement.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.