What Is Fraud in The Eyes of The Law

In today’s society there is a great deal of litigation whether its breach of contract based on a lie or a Madoff ponzi scheme – bottom line is you have rights to different types of damages other than out of pocket losses. The following gives you a perspective of California’s law on Fraud.

Deceit and fraud are defined separately in statutes. Deceit is defined in California Civil Code §§1709 and 1710, while Fraud is defined in California Civil Code §§1572 and 1573. There are two types of fraud, actual fraud and constructive fraud. Liability for actual fraud under California Civil Code §1572 is limited to acts committed by or with the participation of a party to a contract with the intent to deceive another party to the contract and induce that party to enter into the contract.

On the other hand, deceit is one who willfully deceives another with intent to induce the other to alter his or her position to his or her injury or risk is liable for any damage suffered as a result of the deceit. There are four categories of deceit:

• • the suggestion, as a fact, of that which is not true, by one who does not believe it to be true, commonly referred to as intentional misrepresentation;

  • the assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true, commonly referred to as negligent misrepresentation;

  • the suppression of a fact, by one who is bound to disclose it or who gives information of other facts which are likely to mislead for want of communication of that fact, commonly referred to as concealment; and

  • a promise, made without any intention of performing it, commonly referred to as false promise.

Actual fraud consists of any of the following acts, committed by or with the connivance of a party to a contract with intent to deceive another party to the contract, or to induce the other party to enter into the contract.

• • the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

  • the positive assertion, in any manner not warranted by the information of the person making it, of that which is not true, though the person making the assertion believes it to be true;

  • the suppression of that which is true, by one having knowledge or belief of the fact;

  • a promise made without any intention of performing it; and

  • any other act fitted to deceive.

Alternatively, constructive fraud consists of any breach of duty which, without actual fraudulent intent, gains an advantage to the person in fault, or any one claiming under the person in fault, by misleading another to the prejudice of the person misled, or to the prejudice of anyone claiming under the person misled. In addition, constructive fraud consists of any act or omission that the law specially declares to be fraudulent, without respect to actual fraud. This can occur in business partnerships, or landlord/tenant relationships whereby a fiduciary duty or in other words due to the relationship created between the parties, a breach of that duty could be considered constructive fraud.

For example a partner finds a new partner, know that the new partner will pay $1,000,000.00 for the fifty-percent shares of the business. This partner knows that his current partner has mentioned going different ways, finding a new path and uses the opportunity to buy his partners shares for the value of the inventory, $50,000.00 and fails to tell his then partner that a new partner would pay $1,000,000.00 for those same shares. To some this may be a fact pattern of a smart business man. However, in the eyes of the law, it is constructive fraud. As partners they had a duty to disclose. The non-disclosure of the material fact is the fraud.

As a result, the partner who was deceived can recover the $1,000,000.00 less the $50,000.00 he received plus punitive damages. Protect your rights and understand your obligations.