A. Fraud and Other Misrepresentation

• Library: The South Carolina Law of Torts (SCBar) (2023 Ed.)

A. Fraud and Other Misrepresentation

Misrepresentation can take many forms and can give rise to a variety of claims. This section will address these claims in terms of: (1) fraud; (2) negligence; (3) strict liability in tort; (4) contractual and equitable claims; and (5) statutory claims.¹⁶

1. Fraud

Fraud is an intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to that person or to surrender a legal right.¹⁷ There are nine elements of proof to sustain a claim for fraud: (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 on its truth; (8) the hearer's right to rely thereon; (9) the hearer's consequent and proximate injury.¹⁸

The plaintiff's complaint must set forth sufficient facts to show that each of these nine elements is present,¹⁹ and that the court should grant a motion to dismiss where the "complaint fails to allege all nine essential elements of fraud."²⁰ However, cases have indicated that it is not necessary to list the nine elements explicitly so long as the complaint sets forth the basis for an action in fraud.²¹ Moreover, the South Carolina Supreme Court has on occasion been very liberal in construing conclusory pleadings, particularly where the defendant has not moved that an allegation be made more definite and certain.²²

Fraud must be shown by clear, cogent, and convincing evidence.²³ Occasionally, however, the admission of evidence is handled in a liberal manner because of the difficulty of proving some of the elements of fraud²⁴ —for example, in proving that the defendant knew that the representation was false and intended that the plaintiff rely on it.²⁵

Fraud may also be used in a defense to a legal action²⁶ —for example, fraud in the making of a contract could bar suit for breach of that contract.²⁷ Where the defendant wants to use fraud as a defense, then the elements must be alleged in the answer;²⁸ and the same burden of proof applies such that the defendant must show the alleged fraud by clear, cogent, and convincing evidence.²⁹

a. Elements of the Cause of Action

(1) The Representation

(a) Existing Fact

In order to be actionable, the representation must be a statement (or a set of "communicative" actions)³⁰ which concerns an existing fact. Thus, the following statements are not normally actionable:

(i) mere "puffing" or "sales-talk;"³¹
(ii) opinion,³² except where a special relationship exists or the opinion involves factual matters;³³
(iii) predictions of future events,³⁴ unless the prediction is simply a lie or is based upon special knowledge;³⁵
(iv) promises (regardless of whether a contract or breach thereof is involved)³⁶ as opposed to: (1) a knowing or reckless misrepresentation about one's intention to perform the contract, which conduct constitutes "fraud in the inducement" of the contract;³⁷ or (2) a "breach of contract with fraudulent intent."³⁸
(v) legal conclusions,³⁹ except where one deliberately takes advantage of the ignorance of others⁴⁰ or where a "factual" matter is intertwined.⁴¹

(b) Falsity, "Half-truths," and the Duty to Disclose

In determining whether "falsity" exists,⁴² two types of issues often arise. First, determining whether the statement is ambiguous or half-true—i.e., a statement that is literally true but which, in the context of the situation involved, can result in a misrepresentation. The general rule is that such a statement is a false misrepresentation where the maker of the statement knows that the statement can be interpreted in a way that is false.⁴³

Second is the issue of whether silence can constitute a "false representation." In other words, whether a defendant has a duty to disclose facts under the circumstances. Absent such a duty, nondisclosure is not fraudulent.⁴⁴ Normally, the parties to a transaction do not owe any duty of disclosure to one another.⁴⁵ However, there are exceptions to this rule,⁴⁶ including, for example, the following: (1) where a party has a fiduciary relationship;⁴⁷ (2) where a party is aware that he or she knows material facts that cannot be discovered by the other party;⁴⁸ or (3) where fair dealing would require disclosure.⁴⁹ In addition, deliberate concealment can constitute misrepresentation.⁵⁰

The duty to disclose may be reduced to three distinct classes: (1) when it arises from a preexisting definite fiduciary relation between the parties; (2) when one party expressly reposes a trust and confidence in the other with reference to the particular transaction in question, or else from the circumstances of the case, the nature of their dealings, or their position towards each other, such a trust and confidence in the particular case is necessarily implied; and (3) when the very contract or transaction itself, in its essential nature, is intrinsically fiduciary and necessarily calls for perfect good faith and full disclosure without any regard to any particular intention of the parties.⁵¹

(c) Materiality

The determination of whether a statement is "material" is a factual matter which depends upon the totality of circumstances in each case.⁵² The requirement is designed to promote stability in contractual relations by ensuring that trivial, irrelevant misrepresentations will not be seized upon by a person using the misrepresentation to avoid contractual obligations.⁵³ Consequently, one test of materiality is whether an objective, reasonable person 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.⁵⁴ This objective test enables each party to know which representations will be material to the transaction and which will be insignificant.⁵⁵

However, there is no need for such an objective test where one party knows that the other party's idiosyncratic views will result in reliance on a representation which is not material in terms of the objective test. Thus, where one knows of and deliberately takes advantage of the other party's personal, subjective views, then the test will be subjective—i.e., materiality will be determined by the parties' understanding that a particular, subjective, idiosyncratic view of materiality will be used.⁵⁶ Since one element of fraud is that the defendant intend that the injured party rely upon the representation,⁵⁷ it would seem that many cases of fraud will be determined by reference to this subjective test rather than the objective test.

(2) Mental State of Defendant—"Scienter"

The defendant's mental state (or standard of care) in fraud, which is often referred to by the term "scienter,"⁵⁸ has two aspects. First, the defendant either must know that the misrepresentation is false or must act with a reckless disregard of its truth or falsity.⁵⁹ Such reckless disregard exists where one makes a statement and knows that he or she lacks the knowledge necessary to be confident that the statement is true.⁶⁰ Second, the defendant must intend that the statement be relied upon.⁶¹ In proving either of these elements, "wide latitude is permitted in the admission of evidence, as it is a matter which is ordinarily not the subject of direct proof but is to be inferred from the circumstances surrounding the transaction."⁶²

On the other hand, constructive fraud is a breach of a legal or equitable duty which, irrespective of the moral guilt of the fraudfeasor, the law declares fraudulent because of its tendency to deceive others, to violate public or private confidence, or to injure public interests. To establish constructive fraud, all elements of actual fraud except the element of intent must be established. Neither actual dishonesty of purpose nor intent to deceive is an essential element of constructive fraud.⁶³

(3) Reliance by the Injured Party

(a) Ignorance and Actual Reliance

In order to recover for misrepresentation, the injured party must rely on the misrepresentation.⁶⁴ Thus, ignorance of falsity is an element of the tort of fraud.⁶⁵ If the plaintiff knew that the misrepresentation was false, there is no cause of action because there could not have been reliance on the truth of the statement.⁶⁶

In addition, where the plaintiff would have undertaken the transaction regardless of whether the representation was true, there is no reliance and, therefore, no cause of action for fraud.⁶⁷ Similarly, where the plaintiff did only what was legally required in any event, it cannot be said that he or she was "fraudulently induced to do so."⁶⁸

(b) The Right to Rely—Legitimacy of Reliance

The plaintiff must have a "right" to rely on the misrepresentation—i.e., his or her reliance must be "legitimate" or "reasonable."⁶⁹ One source of difficulty concerning the reasonableness of the injured party's reliance arises where the injured party could have discovered the falsity of the representations. In such cases, the court is forced to balance two competing policies.⁷⁰

As stated in Thomas v. American Workmen,⁷¹

The policy of the courts is, on the one hand, to suppress fraud, and on the other, not to encourage negligence and inattention to one's own interest. Either course has obvious dangers. But the unmistakable drift is toward the just doctrine that a wrongdoer cannot shield himself from liability by asking the law to condemn the credulity of the ignorant and unwary.

In developing this "just doctrine," the South Carolina Supreme Court noted in J. B. Colt Co. v. Britt:⁷²

Conceding that there are serious difficulties in the way of testing the conduct of a defrauded person by the application of the standard prescribed to determine the existence of negligence, viz., the due care of the man of ordinary reason and prudence, since the victim of fraud may be not the less but the more entitled to relief

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