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Fraud Requires Deceitfulness and Reliance

Liability for fraud exists when six elements are proven: (1) knowingly, 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. This article discusses the third element, deceitfulness, and the fourth element, reasonable reliance.

Deceitfulness

To be potentially liable for fraud, a person must intend to deceive another or recklessly not care whether another will be deceived. The state of mind is known as scienter. Scienter, in Latin, means knowledge. In other words, to be potentially liable for fraud, a person must know, or ought to know, that he or she is being deceitful for an evil purpose.

All false statements are not deceitful. Many are mistakes. Some do not have an evil purpose. In a book of fiction, the author makes many false statements (e.g., claiming that fictitious characters exist and that fictitious events have occurred), but he or she does not intend to deceive another into believing that those false statements are true. The author is not being reckless because reasonable persons understand that fiction is a literary form. Almost by definition, fiction parallels reality instead of duplicating it.

Reasonable Reliance

To be a victim of fraud, those who receive a false statement must reasonably rely on it to their detriment. A person need not be the intended recipient of a false statement to be a victim of fraud, as long as the person’s reliance was reasonably foreseeable to the maker of the statement. If fraud is committed intentionally, it is reasonably foreseeable that there will be harm to many people. If fraud is committed unintentionally, it is not reasonably foreseeable that there will be harm to many people.

In most states, if a person makes a statement knowing that it will be passed along to a limited number of people, and the statement is false, he or she may be held liable to one or more of the limited number of people.

Defenses Related to Deceitfulness and Reliance

Because a person alleging fraud has the burden of proving that he or she reasonably relied on a material misrepresentation, contributory negligence and assumption of the risk are not defenses to intentional fraud. Contributory negligence and assumption of the risk are defenses to unintentional fraud. Before a person can legitimately allege reliance on a statement, that person first has, in essence, a duty to make a cursory examination of the facts and to not overlook obvious clues indicating that the statement is not true.