FRAUD AND DECEIT
§2. Definitions and Distinctions.
– The statutory definitions, though broad, do not embrace every
species of fraud. Fraud has been judicially defined as the
successful employment of cunning, deception, or artifice to circumvent,
cheat, or defraud another, and also is the unlawful appropriation of
another’s property by design.
It is been said that undue
influence and fraud are not identical; one has reference to the
subjugation of the will, the other to a deception. In a
sense undue influence is a species of fraud, but it may be exercised
without any actual fraud or false representation. It
follows that no allegation of fraud is necessary in a charge of undue
influence. On the other hand, undue influence may be
exerted by means of fraud; confidence or influence may be used to
obtain unfair advantage and of a variety of ways, no less by means of
fraudulent misrepresentations than by means of duress or other pressure.
An act done in good faith is, of course, one done honestly, without fraud, collusion, deceit, or pretense.
§3. Fraud in General; Actual Fraud.
– Fraud is broadly classified as actual or as
constructive. And though the statutory provisions defining
fraud are found in the part of the code relating to contracts, there is
nothing there to show that such provisions are not intended to apply to
Actual fraud is defined and the
Civil Code is any of the following acts committed by a party to a
contract or with his connivance, with intent to deceive another party
thereto or to induce him to enter into a 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 a manner not warranted by the
information of the person making it of that which is not true, though
he 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; or any other act fitted to deceive.
– The willful deceit of another with intent to induce him to
alter his position to his injury or risk, for which the deceiver will
be liable, may consist of the suggestion as a fact of that which is not
true by one who does not believe it to be true; of the assertion as a
fact of that which is not true by one who has no reasonable ground for
believing it to be true; of the suppression of a fact by one who is
bound to disclose it or who gives information of other facts likely to
mislead for want of communication of that fact; or of a promise made
with no intention of performing it. Deceit is, of
course, species of fraud, and a comparison of the above with the code
definition of actual fraud indicates the futility of attempting to
differentiate the two. In fact, deceit has been defined as
actual fraud. But deceit may be said to have a broader
significance in fraud when the latter term is used to indicate an act
whereby one does, or may, suffer financial loss. Any device
by which one misleads or deceives another to his injury constitutes
deceit. It should be noted that the suppression of a fact
is deceit only one the one withholding information owes a duty to
another to disclose it.
§5. Constructive Fraud.
– Constructive fraud consist of any breach of duty that, without
any actually fraudulent intent, gains an advantage to the person and
fault or one claiming under him, by misleading another to his prejudice
or to that of anyone claiming under him or of any act or omission that
the law specially declares to be fraudulent without regard to actual
fraud. Constructive fraud is most often encountered in the breach of
duty where relation of trust and confidence exists, or in the taking
advantage over incompetent persons, or an otherwise gaining
§6. Confidential Relations.
– Constructive fraud often arises in transactions where there
exist confidential or fiduciary relationships that have been abused by
the party in whom a confidence is reposed. In such cases
there may be no actual fraud, but fraud is presumed from the fact that
the one in whom confidence is reposed availed himself of that trust to
obtain an advantage at the expense of the confiding party, without
reference to the question of fraudulent intent. This is
particularly true where relation of dependence, trust, and confidence
is combined with gross inadequacy or entire failure of consideration.
Confidential and fiduciary
relations are in law synonymous may be said to exist whenever trust and
confidence are reposed by one person in the integrity and fidelity of
another. In such a relationship, the party in whom the
confidence is reposed, if he voluntarily accepts or assumes to accept
the confidence, may take no advantage from his acts relating to the
interest of the other party without the latter’s knowledge or consent;
he must refrain from abusing such confidence by obtaining any advantage
to himself at the expense of the confiding party.
A. AS TO EXISTING FACT
§11. In General; Elements of Actionable Fraud.
- Generally, to establish a cause of action for fraud or deceit based
on misrepresentation, the plaintiff must show that the representation
was as to a material fact; that it was false and known to be
false by the party making it, or else made recklessly, or without
reasonable grounds for believing its truth; that the
representation was made with intent to induce the other party to do or
refrain from doing some act; that I was relied on by the other
party, this, that such other party was actually mislead and deceived
and induced by to act or refrain from acting; that in so acting
or refraining from acting the latter was ignorant of the falsity of the
representation and reasonably believed it to be true; and that he
thereby suffered damage or injury. The absence of any one
of these elements is generally fatal to a recovery.
FOOTNOTES RELATED TO THE PRECEEDING SECTIONS
There can be no fraud in the pursuance of a remedy allowed by law.
Pehrson v. Hewitt (1889) 79 Cal. 594
Pertinacious zeal to secure the payment of a just debt is not fraudulent.
Van Valkenberg v. Oldham (1910) 12 Cal.App. 572
Thompson v. Mortgage Investment Company (1929) 99 Cal.App. 205
pertinacious >adjective formal stubborn; persistent.
-DERIVATIVES pertinaciously >adverb pertinacity >noun.
-ORIGIN from Latin pertinax 'holding fast'.
All deceitful practices in
depriving or endeavoring to deprive another of his known right by means
of some artful device or plan, contrary to the rules of common honesty,
Newman v Smith (1888) 77 Cal. 22
Fraud includes all surprise, trick, cunning, dissembling, and unfair ways by which another is deceived.
Wells v. Zenz (1927) 83 Cal.App. 137
To defraud means to deprive of
right, either by procuring something by deception or artifice, or by
appropriating something wrongfully.
People v. Wilkins (1924) 67 Cal.App. 758
Undue influence is a species
of constructive fraud which the court will not undertake to defined by
any fixed principles less the definition itself point out the path by
which it may be evaded.
Sparks v. Sparks (1950) 101 Cal.App.2d 129
Fraud or arises out of a breach of duty or obligation which one owes another.
Brady v. Bartlett (1880) 56 Cal. 350
Constructive fraud in its
generic sense comprises all acts, omissions, and concealments involving
a breach of legal or equitable duty, trust, or confidence resulting in
damage to another.
Arbuckle Estate (1950) 98 Cal.App.2d 562
Breach of duty is used in CC
§1573 may be fairly said to be but the correlate of for injury suffered
by one and caused by the participation or cooperation in a wrong way by
McFate v. Bank of America (1932) 125 Cal.App. 683
if there is a duty to speak
because of a trust or confidential relationship, failure to do so is a
species of fraud for which equity may afford relief.
Blair v. Mahon (1951) 104 Cal.App.2d 44
Where confidential relation
exists, a transaction between them by which the person in the superior
position gains an advantage over the other is constructively
fraudulent, and the burden is on the party who has gained the advantage
to show fairness in good faith in all respects.
Johnson v. Clark (1936) 7 Cal.2d 529
Individuals and confidential
relations are not prohibited from dealing with each other, but in all
their dealings respecting the subject matter of the relation the utmost
good faith is required in the burden of proof is on the person trusted
to show affirmatively that he acted in good faith, fairly, and honestly.
Hemenway v. Abbott (1908) 8 Cal.App. 450
Confidential relation may in
law be defined to be any relation existing between parties to a
transaction wherein one of the parties is bound to act with the utmost
good faith for the benefit of the other.
Bacon v. Soule (1912) 19 Cal.App. 428
A cause of action for
constructive fraud predicated on the relation of the parties arises
only one a special confidential or fiduciary relation exists between
them investing one of them with the power and means to take undue
advantage of or exercise undue influence over the other.
Menke v. Rand Mining Company (1947) 81 Cal.App.2d 169
Equity always views with
strictness the business dealings of a man with one who stands in a
position of dependence or confidence to him, whether that relationship
is voluntarily assumed or is imposed by operation of law.
Ruhl v. Mott (1898) 120 Cal. 668
Subsequent developments may throw light on a party’s good faith.
Wehner v. Wehner (1924) 68 Cal.App 789
The charge of fraud is usually made out solely from statements and acts of the perpetrators.
Brandenburger v. Chipman (1924) 87 Cal.App. 707
Intent to deceive is usually proved by inference rather than by direct evidence.
Bell v. Graham (1951) 105 Cal.App.2d 765
Since direct proof of
fraudulent intent is often impossible, proof indicative of fraud may be
given by inference, by circumstances surrounding the transaction, and
by the relationship and interest of the parties.
Taylor v. Osborne-Fitzpatrick Fin. Co. (1943) 57 Cal.App.2d 656
Dyke v. Zaiser (1947) 80 Cal.App.2d 639
Bohn v. Watson (1954) 130 Cal.App.2d 24
In the investigation of a
question of fraud, courts should be exceptionally liberal in the
receipt of evidence tending to disclose the true nature of the
Butler-Veitch, Inc. v. Barnard (1926) 77 Cal.App 709
No matter how slight the tendency of evidence may be to prove fraud, it is not for that reason incompetent.
Corson v. Butler (1890) 86 Cal. 433
One’s intent not to perform a
promise, at the time the promise was made, is usually not susceptibel
of direct proof, but such intent may be ascertained from subsequent
conduct and speech.
Klutts v. Rupley (1943) 58 Cal.App.2d 560
It is usually difficulty to establish fraud clearly, and positive and express proof is not required.
Shively v. Eureka Tellurium Gold Min. Co. (1907) 5 Cal.App 236
Fraud is generally proved by inference from facts and circumstances and not by direct and positive proof.
Del Vecchio v. Savelli (1909) 10 Cal.App 79
Williams v. Myers (1930) 110 Cal.App. 265
Anderson v. Medical Examiners (1931) 117 Cal.App. 113
O’Hare v. Peacock Dairies, Inc. (1938) 26 Cal.App.2d 345
FRAUD and FRAUD IN THE INDUCEMENT
Words or conduct of one party that
misrepresent facts (e.g. "this car has never been in an accident") or
conceal facts, or the failure of one party to disclose facts known to
her, may induce the other to enter a contract based on incorrect
assumptions. Justifiable reliance upon a misrepresentation, or
upon beliefs uncorrected because of concealment or non-disclosure, may
in some cases permit the party who is misled to escape the contract.
In contrast to fraud in the
inducement (where the resulting contract is voidable), no contract is
even formed where there has been fraud in factum.
Fraud is a subset of
misrepresentation. Misrepresentation (or concealment)
intended to induce assent of the other party is fraudulent when the
party making the representation (or concealing a fact) intends the
representation to induce assent by the other party and knows the
representation to be untrue (or the concealed fact to be true).
Negligent misrepresentation or
innocent misrepresentation, like fraud, are subsets of
misrepresentation, and each of the three subsets collectively
constitute "fraud in the inducement."
We apprehend, however, that the
California court has the authority to refuse to exercise judicial
jurisdiction if the basis of that jurisdiction, i.e., the physical
presence of the children in this state, has been obtained by fraud or
unlawful force. (Rest.2d Conflict of Laws, § 82, p. 247.) The rationale
behind this principle is that a person should not be permitted to
profit from his use of fraud or unlawful force. (Rest., supra.) In the
present case there is no contention that the physical presence of the
children in this state was procured by unlawful force since it is clear
that they were voluntarily sent to California by petitioner pursuant to
his agreement with real party.
Titus v. Superior Court, 23 Cal.App.3d 792
[Civ. No. 30332. Court of Appeals of California, First Appellate District, Division One. February 25,1972.]
Fn. 1 Fraud in the
inducement does not render a contract void, but rather renders it
avoidable and subject to ratification. 1A Corbin, Contracts 6 at 12-13
and 146 at 636 (1963). Fraud in the inducement thus does not nullify
the making of the contract, but may render the contract unenforceable
by a party because of his own conduct. By the same token, laches raised
as a defense does not nullify the obligations of a contract, but may
render them unenforceable by a party because of his own conduct.
HALCON INTERNATIONAL, INC., v. MONSANTO AUSTRALIA LIMITED, 446 F.2d 156, No. 18669.
United States Court of Appeals, Seventh Circuit. July 9, 1971, Rehearing Denied Aug. 11, 1971.
Fraud in the Factum is a type of
fraud where misrepresentation causes one to enter a transaction without
accurately realizing the risks, duties, or obligations incurred.
This can be when the maker or drawer of a negotiable instrument, such
as a promissory note or check, is induced to sign the instrument
without a reasonable opportunity to learn of its fraudulent character
or essential terms. Determination of whether an act constitutes fraud
in the factum depends upon consideration of “all relevant factors.”
Fraud in the factum usually voids the instrument under state law and is
a real defense against even an holder in due course.
Contrast this with the situation
where a trusted employee signs a check without permission. The employer
must still honor the check despite the fact that the check was a
fraudulent negotiable instrument. Here, the employer had a reasonable
opportunity to avoid the obligation by restricting access to the checks.
Fraud in the factum is often contrasted with fraud in the inducement.
Fraud in the factum is a legal defense, and occurs where A makes/signs
an agreement, but either does not realize that it is supposed to be a
contract, or does not understand the nature/content of the agreement,
because of some false information that B gave to A. For example,
suppose John tells his mother that he is taking a college course on
handwriting analysis, and for his homework he needs her to read and
sign a pretend deed. If Mom signs the deed believing what he told her,
and John tries to enforce the deed, Mom can plead "fraud in the factum."
2. Fraud in the
inducement is an equitable defense, and occurs when A enters into an
agreement, knowing that it is supposed to be a contract and (at least
having a rough idea) what the agreement is about, but the reason A
signed/made the agreement was because of some false information that B
gave to A. For example, suppose John tells his mother to sign a deed
giving him her property, Mom refuses at first, but then John falsely
tells her that the bank will foreclose on the property unless she signs
it over to him. If Mom signs the deed because of this statement from
John, and John tries to enforce the deed, Mom can plead "fraud in the
In Boro v. Superior Court, 163 Cal.
App. 3d 1224 (1985), the defendant phoned the victim saying he was "Dr.
Stevens" from the hospital and that the victim had a life-threatening
disease. He further presented two options for treatment: option
one was to have a painful surgery costing the victim $9,000; option two
was to have sex with an anonymous donor costing the victim only
$1,000. The victim had intercourse with the defendant believing
at the time that her life was threatened and that was the only choice
she had to cure the disease. The victim, upon learning the truth,
brought charges against the defendant for rape. The court held
this was fraud in the inducement and therefore, there was no
rape. It was fraud in the inducement because the deception
related not to the thing done - the sexual intercourse - but merely to
some collateral matter (cure from a life-threatening disease).