Defining Fraud

Defining Fraud>
Most people think of fraud as a evil practice.  But “fraud” as used in law means simply action or lack of action that is punishable by law. Defining fraud is a task for the courts.


 Fraud is defined by the legislature and the courts.  It includes outright deception, and sometimes almost “accidental” misrepresentation.  In some circumstances (like investments) fraud includes failure to disclose or to tell the whole truth.  Sometimes the law makes people like officers and directors and those who assist in furthering the fraud liable even if they did not know about the fraud.

The definition of fraud has undergone change throughout the centuries.  The courts have always been careful to avoid defining fraud through a too rigid definition that would allow fraudulent practices to be without a remedy.  In the 19th century juries were often given the authority to determine fraud without the assistance of defining jury instruction.  The court was determining fraud on ad hoc based on the standard of the community (or the particular jury). Now fraud has come to be defined by courts generally to require an intentional misrepresentation that was properly relied upon by the plaintiff and caused the plaintiff damages.

State law is influenced by the Restatement of Law published by nationally renown legal scholars.  Sometimes the states follow the Restatement position completely and sometimes they chose a state-specific variation.  The Restatement (Second) of Torts (1965) organizes the topic under Misrepresentation in four divisions: 1) Fraudulent Misrepresentation (Deceit); 2) Concealment and Non Disclosure; 3) Negligent Misrepresentation; and 4) Innocent Misrepresentation.  This represents a progression of mental culpability from intentional or knowing, then active concealment, then negligently misrepresenting and finally harming some through an unknowing falsehood.

The law becomes very complex when the other factors comprising actionable fraud are added. However limiting our discussion to the mental state, the Restatement defines fraud as: § 526 Conditions Under Which Misrepresentation Is Fraudulent (Scienter)   A misrepresentation is fraudulent if the maker (a)  knows or believes that the matter is not as he represents it to be, (b) does not have the confidence in the accuracy of his representation that he states or implies, or (c)  knows that he does not have the basis for his representation that he states or implies.

In Oregon and Washington, the term “fraud” has come to have a definite meaning through case law.  Oregon law provides 9 elements that must be proved by “clear and convincing” evidence, a standard that is higher than the normal civil case standard of “preponderance of the evidence” and lower that the criminal standard of “beyond a reasonable doubt.”

Defining Fraud in Oregon State

The 9 elements of Oregon fraud are: 1)  A representation; 2) Its falsity; 3) Its materiality; 4) The speaker’s knowledge of the representation’s falsity or ignorance of its truth; 5) Intent that the representation be acted on in a manner reasonably contemplated; 6) The hearer’s ignorance of the falsity of the representation; 7) The hearer’s reliance on its truth; 8) The hearer’s right to rely on the representation; and 9) Damage caused by the representation. Musgrave v. Lucas, 193 Or 401, 410, 238 P2d 780 (1951); Webb v Clark, 274 Or 387, 391, 546 P2d 1078 (1976).

Defining Fraud in Washington State

Washington also has identified 9 almost identical elements of the cause of action for fraud.   As the court in Pedersen v. Bibioff, 64 Wn. App. 710, 828 P.2d 1113 (1992) wrote at page 723,

To sustain a finding of common law fraud, the trial court in most cases must make findings of fact as to each of the nine elements of fraud.  Howell v. Kraft, 10 Wash. App. 266, 517 P.2d 203 (1973). Those elements generally are: (1) a representation of an existing fact, (2) its materiality, (3) its falsity, (4) the speaker’s knowledge of its falsity or ignorance of its truth, (5) his intent that it should be acted on by the person to whom it is made, (6) ignorance of its falsity on the part of the person to whom it is made, (7) the latter’s reliance on the truth of the representation, (8) his right to rely upon it, and (9) his consequent damage.  See Turner v. Enders, 15 Wash .App. 875, 878, 552 P.2d 694 (1976).

Washington has adopted the Restatement but the appellate courts have not ruled on all issues so there are numerous Washington cases that have been implicitly overruled.  See e.g. Janda v Brier Realty, 97 Wn App 45, 984 P2d 412 (1999).  The Restatement may have changed the nine elements of fraud to something like this:  1)  Representation of an existing fact, opinion, intention, or law; 2) Its materiality (defined); 3) Its falsity; 4) The speaker’s knowledge of its falsity or ignorance of the truth of the representation; 5) The speaker intention that it be acted on or that a person refrain from acting; 6) The good faith of the person to whom it is made; 7) The hearer’s reliance on the truth of the representation; 8) The hearer’s reliance is justifiable; and 9) The hearer’s damage is caused by the reliance.

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