13.13 Actual and Constructive Fraud in the Inducement

• Library: Contract Law in Virginia (Virginia CLE) (2019 Ed.)

13.13 ACTUAL AND CONSTRUCTIVE FRAUD IN THE INDUCEMENT

13.1301 In General. Contracts can be induced by either actual fraud or constructive fraud. The principal difference between actual fraud and constructive fraud is that constructive fraud does not require knowledge of falsehood and the attendant intent to deceive. A contract induced by actual or

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constructive fraud is not void, but is voidable at the option of the party injured by the fraud.

13.1302 Elements of a Claim for Actual Fraud. The elements of a cause of action for actual fraud are: (i) a false representation; (ii) of a material fact; (iii) made intentionally and knowingly; (iv) with the intent to mislead; (v) reliance by the party misled; and (vi) resulting damage to the misled party. ⁴⁶⁰ The misrepresentation must lie outside the contract. A claim for actual or constructive fraudulent inducement will not lie where there is merely a breach of contract and not a misrepresentation that lies outside the contract. ⁴⁶¹ For a fraudulent inducement claim, there must be a breach of a common law duty, not a duty that exists merely because of a contract between the parties. ⁴⁶² Willful or deliberate nondisclosure or concealment of a material fact unknown to the other party may be the equivalent of a material misrepresentation and be actionable as fraud. ⁴⁶³

But "[s]ilence does not constitute concealment in the absence of a duty to disclose." ⁴⁶⁴ Nonetheless, "[i]f a person makes a promise that, at the time made, he does not intend to perform, that promise is a misrepresentation of present fact and may form the basis of a claim of actual fraud." ⁴⁶⁵

13.1303 Elements of a Claim for Constructive Fraud. Virginia common law constructive fraud arises even when the speaker does not have knowledge of the falsehood. This absence of knowledge removes the intent to deceive. Instead, the speaker may innocently or mistakenly make a false statement. The speaker's intent need only be that the statement be acted

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upon. The elements of common law constructive fraud in Virginia are: (i) a false representation of a material fact; (ii) made innocently or negligently; (iii) made so as to induce a reasonable person to believe it; (iv) meant to be acted upon; and (v) damage suffered by the injured party as a result of his or her reliance on the misrepresentation. ⁴⁶⁶

The Virginia Supreme Court has not ruled definitively on whether a claim of constructive fraud in the inducement will permit recovery of purely economic losses as an exception to the economic loss rule. ⁴⁶⁷ However, it has held that a misrepresentation of a present intent to fulfill a promise of future action will not support a claim of constructive fraud because "[i]f unfulfilled promises, innocently or negligently made, were sufficient to support a constructive fraud claim, every breach of contract would potentially give rise to a claim of constructive fraud." ⁴⁶⁸

13.1304 Damages. Where a party claims damages for fraud, he or she must show the damages were proximately caused by the fraud. ⁴⁶⁹ Where an intentional wrong is involved, however, the plaintiff enjoys a relaxed standard for proving damages ⁴⁷⁰ and need only present "the best evidence which is available" to show the amount of damages. ⁴⁷¹

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As the Supreme Court of Virginia has explained, "In Community Bank [v. Wright], we observed that 'the rule as to what constitutes damage [for fraud], in any case, may broadly be stated to be that there is no damage where the position of the complaining party is no worse than it would be had the alleged fraud not been committed.'" ⁴⁷² Where the alleged fraud occurs in a commercial transaction involving the transfer of real property, the measure of damages is "the difference between the actual value of the property at the time the contract was made and the value that the property would have possessed had the [fraudulent] representation been true." ⁴⁷³

If a contract was the product of fraud, under Virginia law the party committing the fraud cannot take advantage of any provisions of the contract with the buyer, including limitations of liability and other provisions which might limit the plaintiff's damages. ⁴⁷⁴ Some case law indicates that this rule applies whether the fraud is actual or constructive:

Whether the representation is made innocently or knowingly, if acted on, the effect is the same. In the one case the fraud is constructive; in the other it is actual.

For though the representation may have been made innocently, it would be unjust to allow one who has made false representation, even innocently, to retain the fruits of a bargain induced by such representation.

The intent of the party making the representation is wholly immaterial. The point is, has the other party been misled?

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It is sufficient that the statement is actually untrue, so as to mislead the party to whom it is made. The party making it need not know of its falsity, nor have any intent...