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Fraud consists of five elements:

  • The making of a false statement;
  • With knowledge that the statement is false or with reckless disregard as to whether or not the state­ment is false or true;
  • With the intent that the listener rely on the statement;
  • With the result that the listener relies on the statement;
  • With the consequence that the listener is harmed.

Smith was thinking of buying the house of Jones.  Smith noticed watermarks on the ceiling, but Jones stated that the roof had been repaired and was in good condition.  Smith was not told that the roof still leaked and that the repairs had not been able to stop the leaking.  Smith bought the house.  Some time later, heavy rains caused water to leak into the house.  Smith claimed that Jones was guilty of fraud.  Was he correct?  Yes.  The statement that the roof had been repaired would suggest to the ordinary person that the repairs had been successful.  This conclusion was reinforced by the statement that the roof was “in good condition.”  The net result was that what was said and what was not said had the effect of representing an untrue condition of the roof and therefore misled Smith and caused him to be harmed.  Because this was done with knowledge of the true facts, Jones had committed fraud.

An essential element in proving fraud is to prove that one relied on the statement which is alleged to be fraudulent.  If the alleged victim had the same knowledge of the true facts as the alleged wrongdoer, no fraud is present.  If the victim should have known the facts or if a reasonable person would have known that the statement was not true, there is no fraud.  If false statements are made after a contract has been signed, it is obvious that there was no reliance on the false statements and therefore there is no fraud.

Smith offers to sell Jones a car and represents that the car has never been in a wreck.  Jones, who has worked on cars for many years, notices some dents underneath the car that could only have been made by a wreck.  Jones buys the car anyway.  Even if Smith knew this statement was false and was trying to deceive Jones, there is no fraud since Jones did not rely on Smith’s representation.

Ordinarily, a statement of opinion cannot be the basis for fraud liability.  The theory is that a person hearing the state­ment should recognize it as merely the speaker’s personal viewpoint.

A statement of law that is false is ordinarily treated in the same manner as an opinion and cannot be treated as fraud.  The theory behind this is that the listener has an opportunity of discovering what the law is.  However, if the speaker has an expert’s knowledge of the law or claims to have such a knowledge, the statement can be the basis for fraud liability.  Of course, an obvious example of this would be a statement of law made by a lawyer to a non-lawyer which the lawyer knew was false.  The other elements of fraud would also have to be present.

Les purchased a used automobile from Acme Motors.  He asked the seller if the car had ever been in a wreck.  The Acme salesperson had never seen the car before that morning and knew nothing of its history, but quickly answered the question of Les  by stating:  “No, it has never been in a wreck.”  In fact, the auto had been seriously damaged in a wreck and, although repaired, was worth much less than it would have had it not been in a wreck.  When Les learned the truth, he sued Acme and the salesperson for damages on the basis of fraud.  They raised the defense that the salesperson did not know that the statement was false and had not intended to deceive Les.  Did the conduct of the salesperson constitute fraud?  Yes. The salesperson making the statement did not know whether the car had been in a wreck or not.  Nevertheless, the salesperson made the statement as though it were true and as though he knew that the statement were true.  This constituted reckless indifference as to whether or not the statement was true.  The reckless indifference as to the truth of a statement satisfies the mental state element of fraud.  The salesperson was therefore guilty of fraud.

Inside Fraud