Key Takeaways

  • Business tort fraud involves intentional deceit that causes financial harm to a business.
  • Fraudulent misrepresentation is a key type of business tort that can void contracts and result in damages.
  • Elements of fraudulent misrepresentation include false representation, intent to deceive, and justified reliance.
  • Types of misrepresentation include fraudulent, negligent, and innocent.
  • Victims may seek remedies like rescission of contract or compensatory damages.
  • Business tort fraud may also intersect with other torts like interference with contracts and breach of fiduciary duty.
  • Consulting a qualified attorney is essential for evaluating claims and legal strategy.

Fraudulent misrepresentation tort occurs when one party deliberately deceives another party, prompting litigation from the offended party. Contract law dictates that plaintiffs can recoup damages against a defendant if a court determines that a defendant has committed fraud in some capacity. A court will usually determine if the defendant has indeed committed fraud or misrepresented an issue when six criteria have been met:

  • Factor One: The representation was presented.
  • Factor Two: The presentation in question proved to be false.
  • Factor Three: When the presentation was made, a defendant was aware that the presentation was untrue or that a defendant recklessly made a statement in ignorance.
  • Factor Four: The fraudulent presentation was made with an intention that the plaintiff believes the claim.
  • Factor Five: The plaintiff did indeed believe the fraudulent presentation.
  • Factor Six: The plaintiff suffered from the false presentation.

Contract Forms

Any person who manages a business should know that most transactions and agreements are contained within a contract, even if it comes in the form of a simple handshake. Most notably, contract law manages transfer rights from a single party to another, holding all parties accountable to the contract itself. It’s vitally important in an agreement that all parties agree to the terms and act in good conscience. However, if a party makes misleading or false statements to coerce another party into the agreement, which causes harm, the aggrieved person can sue the transgressor.

An agreement is not valid until all parties agree to the conditions. If the stated terms are incorrect, the agreement stems from false statements, rendering the contract invalid. Intentionally making false statements, whether verbally or in writing, even in silence, constitutes fraud if such fraudulent statements have an adverse effect on a business transaction.

For example, a drug company wishes to acquire another company and boasts of powerful drugs in clinical stages, but does not mention that the drugs will not go on the market based on failing results. Because the acquiring business assumed the drugs would add value to the transaction, it was misled into overpaying based on fraudulent information.

Even if a presentation was made without knowledge that the drugs had failed, it can still qualify as fraud because the claim was made in a reckless manner. In such cases, the party making a presentation acts recklessly with the sole aim of including another party into the agreement. Using the aforementioned example, the drug company claims it is the sole company forming a certain class of drugs, even though it’s not certain that such a claim is true. If other companies are working on the same class of drugs, such a misrepresentation could have a negative effect on the deal.

Common Types of Business Tort Fraud

In the broader context of business torts, fraudulent misrepresentation is just one example of wrongful conduct. Other common types of business tort fraud include:

  • Fraudulent Inducement: When a party is tricked into entering a contract based on false statements or omissions.
  • Misappropriation of Trade Secrets: The unauthorized use or disclosure of confidential business information.
  • Breach of Fiduciary Duty: When a person in a position of trust (e.g., a partner or officer) acts in their own interest at the expense of the business.
  • Tortious Interference: Occurs when a third party intentionally disrupts an existing contract or business relationship through fraudulent or deceitful means.

Understanding how these different types of fraud intersect helps businesses better assess risk and pursue litigation when wronged.

Misrepresentation Types

Be aware of the following other types of misrepresentation:

  • Negligence: Where one party fails to ensure the accuracy of a presentation.
  • Innocent Representation: Does not constitute negligence or fraud. The offending party does not intend to harm or coerce another into an agreement on false pretenses.

Elements That Distinguish Business Tort Fraud

While many civil claims deal with financial losses, business tort fraud is distinct in that it requires intentional deceit and demonstrable harm. Courts often distinguish business tort fraud from simple breaches of contract or negligence by the following:

  • Intent to Deceive: The defendant must have knowingly made false statements or acted with reckless disregard for the truth.
  • Business Harm: The fraudulent act must result in economic damage to a business or its operations.
  • Corporate Actor Involvement: Business tort fraud frequently involves officers, employees, or agents acting within the scope of their duties or exceeding their authority to commit fraud.

These distinguishing elements make business tort fraud a serious offense that can lead to both civil and, in some cases, criminal liability.

Proving Fraud

You must also remember that misrepresentation does not have an adverse effect on the agreement and would not give cause to legal action. To qualify as fraud, omission or misrepresentation must pertain to existing facts and not a promise of something in the future, unless the party who made such promises did it without current intention to executive it, or with intent not to fulfill the promise.

A promise to execute something in the future, or a simple opinion, cannot be the foundation of claims unless a person making the opinion has superior or sole knowledge of current facts that are not consistent with such opinions. The omission or false statement must have material, meaning that it was important enough for the decision to be rendered.

However, it must be demonstrated that a plaintiff’s reliance was justified, and that upon reasonable questioning would not have found out the truth. To get damages or injuries stemming from fraud, it must be demonstrated that, with the exception of fraud, the damage or fraud would not have happened.

Depending on the case itself, the remedies in fraud may include rescission of the agreement, including damages. A contract rescission is the most common solution because the fraud renders the contract void. Therefore, the parties can choose not to rescind the agreement, restoring the parties to pre-contract positions, if this is possible. In regards to damages, actual losses deriving from the misrepresentation can be claimed.

Preventing and Defending Against Fraud Claims

Preventing business tort fraud starts with due diligence and implementing internal controls. Businesses can protect themselves by:

  • Conducting background checks on partners and vendors.
  • Clearly documenting all representations made during negotiations.
  • Including fraud-specific clauses in contracts.
  • Training employees on ethical conduct and whistleblower policies.

If your business is accused of fraudulent misrepresentation, an effective defense may include:

  • Proving that statements made were opinions or future expectations rather than false facts.
  • Demonstrating a lack of intent to deceive.
  • Showing that the plaintiff’s reliance on the statement was unreasonable or unjustified.

Whether initiating or defending a claim, working with an experienced business litigation attorney is essential. You can find a qualified attorney through UpCounsel’s legal marketplace.

Remedies and Legal Consequences in Business Tort Fraud

Businesses affected by fraudulent misrepresentation may pursue a range of remedies depending on the severity of harm and jurisdiction. Common remedies include:

  • Rescission of Contract: The contract is nullified, returning both parties to their original positions.
  • Compensatory Damages: Financial losses directly attributable to the fraud are recoverable.
  • Punitive Damages: In some cases, courts award punitive damages to punish egregious misconduct and deter future fraud.
  • Injunctive Relief: Courts may also order parties to cease ongoing fraudulent activities or prohibit the use of misappropriated information.

Legal consequences for the defendant may extend beyond civil penalties. In cases involving large-scale or repeat fraudulent behavior, regulatory investigations or criminal charges may follow.

Frequently Asked Questions

1. What is the difference between business tort fraud and breach of contract? Business tort fraud involves intentional deception, while breach of contract typically results from failing to fulfill terms without malicious intent.

2. Can a business sue for fraud even if there’s a signed contract? Yes, if a contract was entered into based on false statements, a business can still sue for fraudulent misrepresentation.

3. What’s needed to prove business tort fraud? The plaintiff must prove a knowingly false statement, intent to deceive, reliance on the statement, and financial harm.

4. Are there criminal penalties for business tort fraud? While most cases are civil, severe or repeated fraud may also trigger criminal investigations and charges.

5. How can I prevent business tort fraud in my company? Establishing clear contract terms, performing due diligence, and maintaining ethical training programs are key preventative measures.

If you need help with fraudulent misrepresentation tort, post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.