19 Fraud and Misrepresentation
Library | Elements of Civil Causes of Action (SCBar) (2015 Ed.) |
19 Fraud and Misrepresentation
A. Elements
To establish a cause of action for fraud and deceit based upon misrepresentation, the following elements must be shown by clear, cogent and convincing evidence:
(1) a representation
(2) its falsity
(3) its materiality
(4) either knowledge of its falsity or a reckless disregard of its truth or falsity
(5) intent that the representation be acted upon
(6) the hearer's ignorance of its falsity
(7) the hearer's reliance of its truth
(8) the hearer's right to rely thereon; and
(9) the hearer's consequent and proximate injury.1
Failure to prove any one of the foregoing elements is fatal to recovery.2 Specifically, the plaintiff must set forth sufficient facts to show that each of these nine elements is present in the complaint or the complaint will be "fatally defective."3 However, as long as the complaint sets forth the basis for an action in fraud, it may not be necessary to list the nine elements explicitly.4
Moreover, the Supreme Court has been liberal in construing conclusory pleadings,5particularly where the defendant has not moved to make the allegation more definite and certain.6
B. Elements Defined
Fraud must be shown by clear, cogent and convincing evidence, but rules concerning the admission of evidence are very liberal because of the difficulty of proving that the defendant knew that the representation was false and intended that the plaintiff rely on it.7Standards for alleging and proving fraud are the same whether the claim of fraud is a cause of action or an affirmative defense.8
1. Representation Must Concern Existing Fact
To be actionable, the representation must be a statement or a set of actions9 which concerns an existing fact.10 Statements of opinion,11 predictions of future events,12 and broken promises13 do not amount to fraud. Statements of law, except where one deliberately takes advantage of the ignorance of others are also not examples of fraud.14
2. Falsity
A fraudulent act is characterized by dishonesty in fact, unfair dealing, or unlawful appropriation of another's property by design.15 Nondisclosure, or silence, becomes fraudulent when it is the duty of the party having knowledge of the facts to uncover them to the other.16 Absent such a duty, nondisclosure is not fraudulent.17 Deliberate concealment can also constitute misrepresentation.18
3. Materiality: Affected Decision
If an objective, reasonable person using the misrepresentation would have viewed the representation as sufficiently important and significant that it would have played a role in the decision to enter into a contractual relationship, the relationship may be deemed material.19 The representation need not be the sole cause of the transaction, it need only play a part in inducing the victim to transact.20
Gaskins v. S. Farm Bureau Cas. Ins. Co. ,21 provides an example of the meaning of materiality. In Gaskins the plaintiffs alleged an insurer fraudulently induced them to sign a release of a claim. The court said the plaintiffs could not maintain an action against the insurer until they proved the materiality of the false representation, and to establish materiality they would have to demonstrate the insurer had an obligation to pay by alleging and proving the liability of the tortfeasor.
4. Knowledge of Falsity or Reckless Disregard of Truth: Standards
The plaintiff must show the defendant knew his or her statement was false.22 The knowledge of falsity extends to statements made in the reckless disregard of the truth.23Reckless disregard exists where one makes a statement and knows that he lacks the knowledge necessary to be confident that the statement is true.24 An action for "constructive fraud," however, may lie where the defendant has not acted with knowing or reckless disregard of falsity but the other elements of fraud are present.25 Additionally, a plaintiff may recover for a defendant's conduct under the theory of negligent misrepresentation despite the absence of fraudulent conduct when circumstances exist indicating a duty to avoid mistake or a duty of due care.26 Also see fraudulent inducement.
5. Intent that the Representation be Acted Upon: Privity Not Necessary
A defendant may be held liable for misrepresentations made to "the persons or class of persons whom he intends or has reason to expect to act or to refrain from action in reliance upon the fraudulent misrepresentation."27 The intent requirement may, therefore, be extended to parties who are not in privity.28
6. Hearer's Ignorance of Its Falsity
If the plaintiff knew that the misrepresentation was false, there is no cause of action because there could not have been any reliance on the truth of the statement.29 Similarly, where a person fails to read a written instrument, he or she cannot complain of fraud in the misrepresentation of the instrument's contents where the truth could have been determined by reading it.30
7. Hearer's Reliance of Its Truth
To recover for misrepresentation, the plaintiff must have relied on the misrepresentation.31 The two reliance elements — actual reliance, and right to rely — together make class actions problematic in fraud cases.32
8. Hearer's Right to Rely Thereon
A victim of fraud has a right to rely on a misrepresentation so long as his reliance is not reckless or grossly negligent.33 Legitimacy of reliance is a jury issue to be resolved in a case by case manner.34 Additionally, where the plaintiff would have undertaken the transaction regardless of whether the representation was true, then there is no reliance and, therefore, no cause of action for fraud.35 A plaintiff's action will not be found to have been "fraudulently induced" if the plaintiff was legally required to enter into the transaction.36
9. Consequent and Proximate Injury
There is no tort cause of action for a fraudulent statement unless the plaintiff is injured.37The plaintiff must show the injury clearly,38 and the damages must not be excessively speculative.39 Plaintiff may recover punitive and actual damages where defendant acted in reckless or in conscious disregard of plaintiff's rights.40
C. Defenses
The plaintiff's conduct may be a defense to a fraud action if that conduct either constitutes a waiver,41 provides a ground for an assertion of estoppel or bars by laches from claiming fraud.42 Neither the parol evidence rule nor a merger or general non-reliance clause in a contract prevents a party from proceeding on the tort theory of fraud.43 A release may be a defense.44 Contractually required arbitration may also be a defense to fraud.45Additionally, statutes of limitation may bar the claim.46 Statutory bars also exist where a governmental defendant is involved.47 The South Carolina Tort Claims Act48 waives the immunity of the State, its agencies, political subdivisions, and governmental entities from liability in tort. It contains, however, many limitations on liability and damages which may preclude or restrict a plaintiff's cause of action.49 The Act is the exclusive and sole remedy for any tort committed by an employee of a governmental entity while acting within the scope of his or her official duty and must be liberally construed in favor of limiting the liability of the governmental entity.50 A limitation specifically applicable to an action for fraud is that governmental entities51 are not liable for a loss resulting from "employee conduct . . . which constitutes actual fraud . . .".52
Common law causes of action, including misrepresentation may be preempted by the federal Employment Retirement Income Security Act (ERISA) of 1974.53
D. Remedies
Actual54 and punitive55 damages may be awarded in fraud cases. Generally, the plaintiff is entitled to recover damages that will place him or her in the position occupied before being defrauded,56 however, "... only damages which are the natural and proximate consequence of the fraudulent misrepresentations of the defendant which can be clearly defined and ascertainable are recoverable."57 An award of punitive damages does not require the knowledge of the defendant that the representations were false, it is only necessary that the defendant was "conscious or chargeable with consciousness" of the wrongdoing.58
A constructive trust is also a potential remedy for fraud.59 It may be invoked even though based on an agreement which is not legally enforceable.60
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Notes:
[1] Kahn Construction Co. v. South Carolina National Bank of Charleston, 275 S.C. 381, 384, 271 S.E.2d 414 (1980); Hooters of Am. v. Phillips, 39 F. Supp. 2d 582 (D.S.C. 1998), aff'd, 173 F.3d 933 (4th Cir. 1999); Kiriakides v. Atlas Food Sys. & Servs., Inc., 338 S.C. 572, 527 S.E.2d 371, (Ct. App. 2000), modified, 343 S.C. 587, 541 S.E.2d 257 (2001).
[2] Id.
[3] E.g., Mutual Savings & Loan Ass'n v. McKenzie, 274 S.C. 630, 633, 266 S.E.2d 423 (1980).
[4] E.g., Outlaw v. Calhoun Life Ins. Co., 236 S.C. 272, 274, 113 S.E.2d 817 (1960), reversed in part on other grounds, 238 S.C. 199, 119 S.E.2d 685 (1961); Eskew v. Life Ins. Co. of Virginia, 190 S.C. 515, 3 S.E.2d 251 (1939), overruled on other grounds, Crystal Ice Co. v. First Colonial Corp., 273 S.C. 306, 257 S.E.2d 496 (1979).
[5] See, e.g., Outlaw v. Calhoun Life Ins. Co., 236 S.C. 272, 113 S.E.2d 817 (1960), reversed in part on other grounds, 238 S.C. 199, 119 S.E.2d 685 (1961).
[6] See, e.g., Pilkington v. McBrain, 274 S.C. 312, 314-15, 262 S.E.2d 916 (1980).
[7] See, e.g., Allen-Parker Co. v. Lollis, 257 S.C. 266, 185 S.E.2d 739 (1971).
[8] Hansen v. DHL Laboratories, Inc., 319 S.C. 79, 450 S.E.2d 624 (Ct. App. 1994), aff'd, 319 S.C. 79, 459 S.E.2d 850 (1995). Other causes of action can involve fraud but are judged by different standards. For example, see Ball v. Canadian American Express Co., Inc., 314 S.C. 272, 442 S.E.2d 620 (Ct. App. 1994) (breach of contract accompanied by a fraudulent act is not simply a combination of a claim for breach of contract and a claim for fraud and has different elements), and Green v. Sparks, 232...
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