11.3 Fraud

• Library: Employment Law in Virginia (Virginia CLE) (2020 Ed.)

11.3 FRAUD

11.301 In General. Allegations of fraud may arise in an employment dispute, in a claim between competing businesses, or when a sale or merger is contemplated. For example, after an employment relationship has soured, an employee may allege that the employer fraudulently induced the employee to leave a prior position or to perform an executory contract.

11.302 Actual Fraud.

A. Elements of Fraud.

1. In General. In order to recover in an action for actual fraud, a plaintiff must prove (i) a false representation; (ii) of a material fact; (iii) made intentionally and knowingly by the defendant or the defendant's agent; (iv) with intent to mislead; (v) upon which the plaintiff reasonably relied; (vi) resulting in damage to the plaintiff. ⁵⁸

2. False Representation of Material Fact. Under Virginia law, for statements to amount to fraud, they must be "positive statements of fact and not mere expressions of opinion." ⁵⁹ A matter "susceptible of exact knowledge when the statement is made, is usually considered as a matter of fact." ⁶⁰ The misrepresentation cannot be vague or inconclusive or a mere expression of opinion. ⁶¹ In Woodring v. Board of Grand Trustees, ⁶² the plaintiff alleged that when, before starting work, he expressed a fear to the defendant

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that he might be fired, the defendant's agent told him "don't worry about it." When his prediction proved true, he filed a claim for fraudulent inducement. The court, however, found the defendant's statement vague and therefore insufficient to support a finding of fraud. ⁶³

The rationale for why a statement of mere opinion cannot form the basis for a claim of fraud has been aptly explained as follows:

The mere expression of an opinion, however strong and positive the language may be, is no fraud. Such statements are not fraudulent in law, because . . . they do not ordinarily deceive or mislead. Statements which are vague and indefinite in their nature and terms, or are merely loose, conjectural or exaggerated, go for nothing, though they may not be true, for a man is not justified in placing reliance upon them. ⁶⁴

No bright-line test has been established to determine whether a false representation is a matter of fact or opinion. Instead, "each case must . . . be adjudged upon its own facts, taking into consideration the nature of the representation and the meaning of the language used as applied to the subject matter and as interpreted by the surrounding circumstances." ⁶⁵

Generally, it appears that whether a statement is one of fact or opinion depends on whether it was reasonable for the plaintiff to rely on the statement and whether the statement is provably true or false. Thus, "[c]ommendatory statements, trade talk, or puffing, do not constitute fraud because statements of this nature are generally regarded as mere expressions of opinion which cannot rightfully be relied upon, at least where the parties deal on equal terms." ⁶⁶ For example, the Virginia Supreme Court has held that a vendor's promises of how a product would perform in the future or a builder's

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statement that a new dwelling was of the highest quality are nonactionable statements of opinion. ⁶⁷

On the other hand, objective statements of quality, such as a representation that the product or structure lacks any material defects, have been held to go beyond mere seller's talk and to constitute statements of fact on which a claim for fraud may be sustained. ⁶⁸ Similarly, a statement that a car "would be in perfect condition, thoroughly checked, gone over carefully and in as good running condition as it could be when delivered" is also a statement of fact. ⁶⁹ Additionally, that special expertise is required to ascertain a fact, and the fact is relied on to reach an expert opinion, will not convert a statement of fact into one of opinion. ⁷⁰ Similar to statements of opinion, "[i]n general, 'a misrepresentation or misunderstanding of the law does not amount to actionable fraud.'" ⁷¹ However, exceptions to this general rule include statements that are more in the nature of fact than law or when there is a special relationship between the parties justifying reliance. ⁷²

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To be actionable as fraud, the alleged misrepresentation also "must relate to a present or pre-existing fact, and cannot ordinarily be predicated on unfulfilled promises, or statements as to future events." ⁷³ But one recognized exception to the general rule that "statements about future events" cannot form the predicate for a fraud claim is a promise made with the "present intention not to perform." ⁷⁴ Accordingly, although failure to perform a term of a contract does not constitute fraud, when a defendant "makes a promise, intending not to perform, his promise is a misrepresentation of present fact, and if made to induce the promisee to act to his detriment, is actionable as an actual fraud." ⁷⁵ Additionally, fraudulent inducement is not limited to the formation of a contract but can also extend to fraudulently inducing another to perform under a contract. ⁷⁶ Although the defendant's failure to perform a promise may constitute a breach of the parties' contract, it cannot be fraud unless there was a present intention not to perform at the time the promise was made. ⁷⁷

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The misrepresented fact is "material" only when it "influences a person to enter into a contract, when it deceives him and induces him to act, or when without it the transaction would not have occurred." ⁷⁸ A fact is material if it influences a person to act, even if the person anticipates that they will only obtain nonmonetary benefits as a result of the transaction. ⁷⁹

Finally, fraud may be based on concealment as well as on affirmative misstatements. "[C]oncealment of a material fact by one who knows that the other party is acting upon the assumption that the fact does not exist constitutes actionable fraud." ⁸⁰ In addition, concealment by "halftruths" constitutes a statement of fact on which a fraud claim can be based. ⁸¹ However, "[p]roof of fraud by nondisclosure 'requires evidence of a knowing and deliberate decision not to disclose a material fact.'" ⁸²

3. Made Intentionally or Knowingly with Intent to Mislead. To recover in an action for actual fraud, a plaintiff must prove that the false representation was made intentionally and knowingly by the defendant or the defendant's agent and that the defendant made the misrepresentation with the intent to mislead the plaintiff. ⁸³ As stated above, fraud claims often

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arise when the plaintiff alleges that fraudulent inducement by the defendant caused the plaintiff to take some detrimental action. Accordingly, in an actual fraud case, the plaintiff carries the burden of proving that the defendant knowingly made a false promise with the intent of inducing the plaintiff to enter a contract or to perform the plaintiff's part of an executory contract. ⁸⁴ In other words, whatever the promise of the defendant, it must be made with a present intention not to perform. ⁸⁵

4. Reasonable Reliance. For both actual and constructive fraud, claimants must prove reliance on the misrepresentations by the injured party." ⁸⁶ Related questions are whether the plaintiff's reliance was reasonable and whether the plaintiff was negligent in failing to discover the fraud. The general rule is that "one cannot, by fraud and deceit, induce another to enter into a contract to his disadvantage, then escape liability by saying that the party to whom the misrepresentation was made was negligent in failing to learn the truth." ⁸⁷ In other words, the relevant question is not whether the allegedly defrauded party might have acted otherwise had he known the truth but whether that party actually relied on the misrepresentations to his or her detriment. ⁸⁸

However, Virginia courts have also held, mainly in the context of real estate transactions, that when a party undertakes an investigation of

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the facts surrounding the underlying misrepresentation, the party may be charged with the knowledge the investigation has or should have revealed. This knowledge may tend to prove that the party's reliance was not reasonable. ⁸⁹

"The legal boundaries of justifiable reliance depend upon the facts of each case." ⁹⁰ The Virginia Supreme Court has "stated that 'to establish fraud, it is essential that the defrauded party demonstrates the right to reasonably rely upon the misrepresentation,' which is an element of fraud sometimes labeled 'justifiable reliance'" ⁹¹ When a party has reason to be skeptical of an alleged misrepresentation, any alleged reliance by that party on that information is likely unjustified. ⁹²

The reasonableness of a plaintiff's reliance on pre-employment representations made by a defendant is often at issue, particularly when those representations are contrary to a subsequent written agreement. This circumstance arises, for example, where a plaintiff alleges an oral representation of employment for a fixed term, but the documentation of the employment clearly contemplates an at-will relationship. In cases such as these, the existence of a subsequent written agreement inconsistent with the defendant's oral misrepresentations may not bar a fraud claim under Virginia law.

For example, in George Robberecht Seafood, Inc. v. Maitland Bros., ⁹³ the Virginia Supreme Court held that a cause of action for fraud may lie based on oral misrepresentations despite a subsequent written agreement between the parties containing covenants and warranties disclaiming and

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limiting liability. In George Robberecht Seafood, Inc., one corporation had purchased an airplane from another corporation based on fraudulent oral representations even though the written contract stated that the plane was sold "as is." ⁹⁴ In reversing the trial court's granting of summary judgment, the Virginia Supreme Court recognized that "'[w]hen fraud in the procurement of the written contract is...