When we think of fraud the tendency is to think exclusively of fraud in the inducement to enter into a contract. There is more to fraud than the inducement. There is fraud in the factum. Hayes v. Virginia Mut. Protection Ass’n, 76 Va. 225 (1882) and there is what we call non-contractual fraud.
Any of these types of fraud can come in the form of actual fraud or constructive fraud. The difference between these two latter forms of fraud is simply the element of intent.
Fraud in the inducement consists of a misrepresenatation of a material existing or past fact which is intentionally made to procure a contract and upon which the Plaintiff justifiably relies to enter into the contract. Max Meadows, etc., Co. v. Brady, 92 Va. 77, 22 S.E. 247 (1895).
In analyzing a fraud claim the first thing that must be done is determine whether or not a duty in tort even exist. In the 2007 case of Augusta Mutual Insurance Company v. Mason, 274 Va. 199, 645 S.E.2d 290 (2007) the Virginia Supreme Court defined the scope of fraud claims. In Augusta the insurance carrier claimed that its agent defrauded it by filing an insurance application for a client in which the agent misrepresented significant facts. The agent owed certain duties to the insurance company based upon the agent’s contract with the company and each alleged misrepresenation related to a duty or obligation that was called for by the contract. Augusta failed to allege any duties other than contractual duties. Because of that the Court said that there was no duty in tort but rather simply a contract duty and therefore no basis for a fraud claim. A similar narrow interpretation of the duty in tort is found in Atlas Partners II, L.P. v. Brumberg, Mackey & Wall, PLC, 2006 U.S. Dist. Lexis 983 (W.D.Va. 2006). As such, the intitial analysis before even getting to the elements of a fraud claim must be whether or not a duty in tort even exists or is the duty purely a contractual duty thereby limiting the breadth of the claim.
The first element of a fraud claim that must be established is that of misrepresentation. Typically, that misrepresentation comes in the form of a false statement. It may, also, come in the form of concealment or non-disclosure of facts. Concealment or non-disclosure of material facts may exist where there is evidence of a deliberate decision not to disclose a mterial fact and knowledge by that party that the other party is acting on the assumption that the fact does not exist. Allen Realty Corp. v. Holbert, 227 Va. 441, 450, 318 S.E.2d 592, 597 (1984); Cohn v. Knowledge Connections, Inc., 266 Va. 362, 368, 585 S.E.2d 578, 581 (2003); Spence v. Griffin, 236 Va. 21, 28, 372 S.E.2d 595, 599 (1988).
A lingering question relating to claims based upon concealment or non-disclosure is whether or not there must be first a duty to disclose. There is no Virginia Supreme Court decision that imposes an absolute duty to disclose. In Van Deusen v. Snead, 247 Va. 324, 328, 441 S.E.2d 207 (1994) the Court said there was a duty to disclose where non-disclosure would be the equivalent of a knowing act of concealment with the intent to deceive. To survive a Demurrer a claim based upon concealment should allege that:
- The information was not equally accessible to the Plaintiff.
- The Defendant did or said something to throw the Plainiff off guard
- The Defendant had a greater level of expertise than the Plaintiff in regards to the particular transaction.
- The Defendant actively concealed or suppressed the information.
The second element of a fraud claim is that the misrepresentation must be of a material existing or past fact. Materiality in this context is much the same as it is in regards to a breach of contract, i.e. it must be what influences the person to enter into the contract. Packard Norfolk, Inc. v. Miller, 198 Va. 557, 563, 95 S.E.2d 207, 211-12 (1956). To put it in the context of a breach of contract claim to be material the misrepresenation must go to the heart of the deal.
The “fact” that is the subject of the misrepresentation is something that is susceptible of “exact knowledge when the statement is made”. Poe v. Voss, 196 Va. 821, 86 S.E.2d 47, 49 (1955). To put the issue of “fact” in the context of defamation claims, to be a “fact” it must be something that is provably true or false. Raytheon Tech Servs. Co. v. Hyland, 273 Va. 292, 641 S.E.2d 84 (2007).
There are several examples that arise in the case law of instances of things that are not assertions of fact:
- Commendatory statements, trade talk or puffing. Tate v. Colony House Builders, 257 Va. 78, 84, 508 S.E.2d 597, 600 (1999).
- An assertion that an object was in excellent condition. Lambert v. Downtown Garage, Inc., 262 Va. 707, 553 S.E.2d 714 (2001).
- How synthetic stucco would perform in the future if used in constructing a home. McMillion v. Dryvit Systems, Inc., 262 Va. 463, 552, S.E.2d 364 (2001).
- Insurer’s statement that the company’s insurance policy requirement for reporting and treating all work related injuries would eventually reduce the cost of workers’ compensation coverage to the Plaintiff. Lumbermen’s Underwriting v. Dave’s Cabinet, Inc., 258 Va. 377, 520 S.E.2d 362 (1999).
Instances of factual assertion that have been recognized by the Virginia Supreme Court are:
- The assertion by Dryvit that it uses only 100% acrylic polymer formula in its coating. McMillion, Supra.
- The new dwelling house was free from structural defect, constructed in a workmanlike manner and was fit for habitation. Tate v. Colony House Builders, Inc., 257 Va. 78, 508 S.E.2d 597, 600 (1999).
- Defendant agent’s advice to the Plaintiff that the revised insurance policy would cover all medical expenses in excess of a certain sum. Even though to some extent this was a matter of opinion the Court held that it was a factual assertion since the insurance professional presumably had information available to him about the policy that was not equally available to the lay customer. Nationwide Ins. Co. v. Patterson, 229 Va. 627, 331 S.E.2d 490 (1985).
- The car was in perfect condition. Packard, Supra.
The facts that are pled must be either past or present facts as opposed to future facts. The only exception to the future fact prohibition is where the Defendant makes a promise which is made with a present intention not to perform. Sea-Land Service, Inc. v. O’Neal, 224 Va. 343, 297 S.E.2d 647 (1982); Lloyd v. Smith, 150 Va. 132, 145, 142 S.E. 363 (1928); Elliott v. Shore Stop, Inc., 238 Va. 237, 245, 384, S.E.2d 752 (1989).
The pleading of these “facts” must be with specificity including the identity of the individual who perpetrated the fraud as well as the time and place of the fraudulent act. Tuscarora v. B. V. A., 218 Va. 849, 858, 241 S.E.2d 778 (1978).
The third element of fraud is that the representation must be made intentionally for the purpose of procuring the contract. It is the element of intent that distinguishes an actual fraud claim from a constructive fraud claim. With constructive fraud the misrepresentation may be innocent or negligent. As is true with actual fraud claims, a constructive fraud claim may be based either upon an overt misstatement or an omission or concealment of facts where there is a duty to disclose. Nationwide Mutual Ins. Co. v. Hargraves, 242 Va. 88, 405 S.E.2d 848 (1991)
The unusual aspect of a constructive fraud claim is that to the extent that the misrepresentation is innocent then it in effect becomes a strict liability claim. That is, without proof of any fault the Plaintiff may recover even though the misrepresenation is purely innocent. For instance, if an agent receives information from a principal and then conveys that information to a third-party believing that it is true, that innocent misstatement may become the basis of a constructive fraud claim. In general, strict liability is not recognized in Virginia. Harris v. T. I., Inc., 243 Va. 63, 413 S.E.2d 605 (1992). The one exception to that is dynamite blasting cases. Pope v. Overbay, 196 Va. 288, 83 S.E.2d 365 (1954). The logic of allowing strict liability in regards to a blasting case is that the activity is inherently dangerous. There is nothing within a constructive fraud claim that typically would involve any element of inherent danger and as such there is some question as to whether or not an innocent misrepresentation could withstand close scrutiny as being the basis for constructive fraud liability.
The fourth element of a fraud claim is that of justifiable reliance. Justifiable reliance, in this context, becomes somewhat akin to proximate cause. That is, was it the misrepresentation that caused the resulting damage or did the Plaintiff in fact rely upon other facts such as the Plaintiff’s known prior experience or other motive to engage in the transaction.
The final element of a fraud claim is detriment or damage. Any detriment or damage in the context of fraud must be looked at in the greater framework of the purpose of a tort claim, i.e. to compensate the Plaintiff for violations of certain common law or statutory duties involving the safety of persons and property. Filak v. George, 267 Va. 612, 618, 594 S.E.2d 610, 613 (2004). Tort law is not designed to compensate parties for losses resulting from the breach of an agreement. Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 236 Va. 419, 425, 374 S.E.2d 55, 58 (1988). The economic loss rule which precludes tort recovery for economic losses where parties are not in privity is not applicable to a fraud in the inducement claim since fraud in this context precedes the formation of the contract. Filax, Supra.
The types of recovery allowable where fraud has been proved by clear and convincing evidence are:
- Delay damages. Jefferson Standard Life Ins. Co. v. Hedrick, 181 Va. 824, 835, 27 S.E.2d 198, 203 (1943).
- Damages for embarrassment and humiliation and mental anguish. Sea-Land Serv., Inc. v. O’Neal, 224 Va. 343, 297 S.E.2d 647 (1982); Humphreys v. Baird, 197 Va. 667, 90 S.E.2d 796 (1956).
- In cases dealing with property the damages are the difference between the actual value of the property at the time the contact was made and the value that the property would have possessed if the representation had been true. Prospect Development Company, Inc. v. Bershader, 258 Va. 75, 91, 515 S.E.2d 291, 300 (1999). Repair or relpacement costs are not the proper measure of damages in these cases. Klaiber v. Freemason Assocs, Inc., 266 Va. 478, 486, 587 S.E.2d 555, 559 (2003).
- Loss of potential future earnings. Sea-Land Serv., Inc. v. O’Neal, 224 Va. 343, 297 S.E.2d 647 (1982).
- Attorney’s fees. Prospect Development Company, Inc. v. Bershader, 258 Va. 75, 92, 515 S.E.2d 291, 300 (1999).
- Punitive damages. Jordan v. Sauve, 219 Va. 448, 452, 247 S.E.2d 739, 741 (1978).
- Rescission, Ashmore v. Herbie Morewitz, Inc., 252 Va. 141, 148 (1996).
Although the elements of fraud in general must be proven by clear and convincing evidence the amount of damage need only be proven by the greater weight of the evidence. Jefferson Standard Life Ins. Co. v. Hedrick, 181 Va. 824, 835, 27 S.E.2d 198, 203 (1943).
The second type of fraud is what is called fraud in the factum. Factum literally menas “doing” or “done”. Fraud in the factum might be found in a forgery of a signture on a contract that had been previously agreed to or an alteration of contract terms unilaterally without the knowledge of the other party. Fraud, however, can go beyond the execution of the oral contract and may relate to either performance of the contract or, in some instances, be totally non-contractual. For instance, suppose a home builder builds a home and as part of that construction process represents that a deck has been constructed in a workman-like manner when in fact he knows it has not been. The homowner relies upon that representation and uses the deck and while using it the deck collapses. Certainly in that context the homebuilder may be liable in tort. The representation at issue did not cause the homeowner to enter into a new contract, it simply caused the homeowner to use the deck that was built pursuant to the contract. The builder’s duty, in part, arose from contract as was the case in Augusta. However, in Augusta the agent had certain fiduciary duties to the company he worked for. The builder in this context probably has no fiduciary duty to the homeowner. This type of fraud in the performance of the contract does not fit into the neat category of fraud in the inducement or fraud in the factum and as such should not appropriately be called non-contractual fraud.
Fraudulent inducement to perform a contract may exist where the contract is executory and one party induces the other party to perform by concealing some fact which otherwise would excuse performance by the latter party. Ware v. Scott, 220 Va. 317, 257 S.E.2d 855 (1979).
It is conceivable that fraud can be found in a totally non-contractual circumstance. For instance, a sinister motorist stops in his lane of traffic to allow a left turning vehicle to turn in front of him knowing that there is a speeding vehicle coming up on his right that the left turning motorist does not see. The left turning motorist completes the turn and then is struck by the fast moving vehicle in the lane to the right of the sinister motorist. Have the elements of fraud been satisfied? The action of the sinister motorist in waving the left turning motorist through constitutes a false representation of a material existing fact done intentionally to mislead and upon which the left turning motorist justifiably relies all to his detriment. In that context there is fraud, there is an inducment but there is no contract.
The point to be made is that the claim of fraud is considerably broader than simply fraud in the inducement. Indeed, the fraud may relate to the performance of a contract or in some instances it may even be non-contractual.
Brien Roche is a tort lawyer which has been serving the Northern Virginia and D.C. area for over 35 years. Feel free to contact him today or read more about his expertise in terms of helping you with your case.