This article is part of Vail Law’s open-source litigation and legal risk management checklist. Connect with me on LinkedIn.
One of the more common business torts is that of fraud, sometimes also called fraudulent misrepresentation, and the related torts of fraudulent concealment and fraudulent non-disclosure. Essentially, in any business relationship, if one party tells the other something material (critical to the business deal in question) and that they know to be false, and this causes the recipient of this false information to reasonably rely on the false information to their detriment, then the tort of fraud has occurred. (Fraudulent non-disclosure is when a key piece of information is not disclosed where there was a duty to disclose it, but otherwise functions the same as fraud).
There can be a fine line between “salesmanship” and “fraud” in some business dealings—generally speaking, a party crosses the line into fraud when they make a representation of FACT as opposed to opinion or “sales puffery.” For example, “our heat exchanger is the best value in the industry” will not support a claim for fraud. However, “our heat exchange can tolerate sustained temperatures of 1500 degrees Fahrenheit,” if false, could well support a claim for fraud.
The elements of the tort of fraud are:
(1) The defendant made a false representation of a past or present fact;
(2) The fact was material;
(3) At the time the representation was made, the defendant knew the representation was false, or was aware that he/she did not know whether the representation was true or false;
(4) The defendant made the representation with the intent that the plaintiff would rely on the representation;
(5) The plaintiff relied on the representation;
(6) The plaintiff’s reliance was justified; and
(7) This reliance caused damages to the plaintiff.
Some states or jury instructions will combine several of these elements into one (e.g., “the plaintiff justifiably relied on the representation to its detriment” combining 5, 6, and 7), but the basic requirements to prove the tort of fraud are essentially universal in common law jurisdictions.
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