Liability for Fraud and Deceit

In the business world, making fraudulent or deceitful representations to others may give rise to liability. A “representation” may consist of words or conduct.

Liability for certain conduct

In order for a defendant to be held liable for fraud or deceit, an injured party must show that the defendant knowingly made a fraudulent representation of a material fact with the intent to induce the injured party to act upon the representation. If the defendant did not make the representation knowingly but did so with reckless disregard as to its truth or falsity, he may still be liable.

When the injured party acts upon the representation, he must do so justifiably. Generally, a defendant’s statements of fact, as opposed to opinions, may justifiably be relied upon. For example, if a supplier intentionally misrepresents to a grocer that all of the grocer’s other suppliers were on strike in order to induce the grocer to buy all of his goods from the misrepresenting supplier, the misrepresenting supplier may be liable for the misrepresentation. This is because the grocer is not under a duty to investigate the misrepresenting supplier’s statement of fact.

It may be justifiable for a third party to rely on a defendant’s misrepresentation that he made to another person, and the third party may seek to hold the defendant liable. For example, a company that intentionally files a false annual report with the Securities and Exchange Commission may be liable to a buyer who purchases the company’s stock in reliance on the annual report.

The injured party must also demonstrate that the misrepresentation caused him damage. Generally, the injured party must have suffered some monetary loss.

Liability for not acting

Usually, a person is not obligated to disclose information to other people. However, there are exceptions to this general rule under which a person may be liable:

* Persons who are involved in a fiduciary relationship are under an obligation to disclose material facts. A fiduciary is a person or an entity in a position of trust and confidence acting for the benefit of another. Some examples of fiduciaries are trustees and guardians.

* Even if a person is not under a duty to disclose information, if he does so, he must do so fully. He may not give only part of the information so that the failure to disclose the remainder misleads the injured party. In addition, he may not give the full information and fail to update that information if circumstances change so that the injured party is relying on incorrect information.

* A defendant who is selling or renting real property has a duty to disclose certain information about the premises to the buyer or tenant.

* A defendant may not actively conceal a material fact.