How to prove fraud in the inducement of sale-purchase agreement

ELEMENTS OF FRAUD 

CAUSE OF ACTION FOR FRAUD, FRAUDULENT INDUCEMENT OF CONTRACT - 
WHAT DOES THE PLAINTIFF HAVE TO PROVE? 
 
A party commits fraud by (1) making a false, material representation (2) that the party either knows to be false or asserts recklessly without knowledge of its truth (3) with the intent that the misrepresentation be acted upon, (4) and the person to whom the misrepresentation is made acts in reliance upon it and (5) is injured as a result. Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001); All Am. Tel., Inc. v. USLD Commc’ns, Inc., 291 S.W.3d 518, 527 (Tex. App.—Fort Worth 2009, pet. denied).
 
MATERIALITY OF THE FRAUDULENT REPRESENTATION 
 
A fact is material if it would likely affect the conduct of a reasonable person concerning the transaction in question. Miller v. Kennedy & Minshew, Prof’l Corp., 142 S.W.3d 325, 345 (Tex. App.—Fort Worth 2003, pet. denied). Materiality thus centers on whether a reasonable person would attach importance to and would be induced to act on the information in determining his choice of actions in the transaction in question. Burleson State Bank v. Plunkett, 27 S.W.3d 605, 613 (Tex. App.—Waco 2000, pet. denied).

Proof that a defendant made a statement knowing of its falsity or without knowledge of its truth may be proved by either direct or circumstantial evidence. Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 526 (Tex. 1998). Intent may be inferred from a party’s actions before and after the fraudulent conduct and may also be established by either direct or circumstantial evidence. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434–35 (Tex. 1986). A defendant who acts with knowledge that a result will follow is considered to intend the result. Ernst & Young, L.L.P., 51 S.W.3d at 579.
 
DETRIMENTAL RELIANCE BY DECEIVED PARTY

The plaintiff must show actual and justifiable reliance on the misrepresentation. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010). To determine justifiability, courts inquire whether, “given a fraud plaintiff’s individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud[,] it is extremely unlikely that there is actual reliance on the plaintiff’s part.” Id. (quoting Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014, 1026 (5th Cir. 1990)). In other words, a person may not justifiably rely on a representation if there are “red flags” indicating such reliance is unwarranted. Id. (quoting Lewis v. Bank of Am. NA, 343 F.3d 540, 546 (5th Cir. 2003)); see Gen. Motors Corp., Pontiac Motor Div. v. Courtesy Pontiac, Inc., 538 S.W.2d 3, 6 (Tex. Civ. App.—Tyler 1976, no writ) (citing Prosser on Torts for the contention that a person of ordinary intelligence may not “put faith in representations which any such normal person would recognize at once as preposterous . . . or which are shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth”).
   
REMEDIES FOR FRAUDULENT INDUCEMENT OF CONTRACT 
 
“[I]t is well settled that one who is induced by fraud to enter into a contract has his choice of remedies. ‘He may stand to the bargain and recover damages for the fraud, or he may rescind the contract, and return the thing bought, and receive back what he paid.’” Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 10, 307 S.W.2d 233, 238–39 (Tex. 1957). We agree with Hannon’s observation that “rescission was the remedy sought to be crafted by the court in this case.” Rescission is an equitable remedy that extinguishes legally valid contracts that must be set aside because of, among other things, fraud. City of The Colony v. N. Tex. Mun. Water Dist., 272 S.W.3d 699, 732 (Tex. App.—Fort Worth 2008, pet. dism’d).

Upon rescission, the rights and liabilities of the parties are extinguished; any consideration paid is returned, together with such further special damage or expense as may have been reasonably incurred by the party wronged; and the parties are restored to their respective positions as if no contract had ever existed. Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 855 (Tex. App.—Houston [14th Dist.] 2001, pet. denied); see Johnson v. Cherry, 726 S.W.2d 4, 8 (Tex. 1987); Smith v. Nat’l Resort Cmtys. Inc., 585 S.W.2d 655, 660 (Tex. 1979); Holt v. Robertson, No. 07-06-00220-CV, 2008 WL 2130420, at *6 (Tex. App.—Amarillo May 21, 2008, pet. denied) (mem. op.).

While a trial court may not grant relief to a party in the absence of pleadings to support that relief, Texas courts have traditionally construed pleadings liberally, and in the case of rescission, at least one court has held that “factual allegations in the petition, coupled with a prayer for general relief, are sufficient to support a decree granting rescission.” Green Tree Acceptance, Inc. v. Pierce, 768 S.W.2d 416, 421 (Tex. App.—Tyler 1989, no writ); see Tex. R. Civ. P. 301. Moreover, when the claims and defenses are those which contemplate a particular remedy, a party may be entitled to that remedy despite a failure to specifically plead for such relief. See Perez v. Briercroft Serv. Corp., 809 S.W.2d 216, 218 (Tex. 1991).

SOURCE: Fort Worth Court of Appeals - 02-10-00012-CV

Suing for misrepresentation, fraud, failure to perform a promise made

DIFFERENTIATING NEGLIGENT MISREPRESENTATION, FRAUD, INTENT NOT TO PERFORM PROMISE

To prevail on a negligent misrepresentation claim, a plaintiff must show (1) the representation in question was made by the defendant in the course of his business or in a transaction in which he had a pecuniary interest, (2) the defendant supplied false information for the guidance of others in their business, (3) the defendant did not exercise reasonable care or competence in obtaining or communicating the information, and (4) the plaintiff suffered pecuniary loss by justifiably relying on the representation. Fed. Land Bank Ass'n of Tyler v. Shane, 825 S.W.2d 439, 442 (Tex. 1991); see also Roof Sys., Inc. v. Johns Manville Corp., 130 S.W.3d 430, 439 (Tex. App.-Houston [14th Dist.] 2004, no pet.) (“The 'false information' contemplated in a negligent misrepresentation case is a misstatement of existing fact, not a promise of future conduct.”).

Elements of Fraud under Texas Law

To prevail in a cause of action for fraud, one must provide sufficient evidence of the elements of fraud, which are (1) a material misrepresentation was made; (2) it was false; (3) when the representation was made, the speaker knew it was false or the statement was recklessly asserted without any knowledge of its truth; (4) the speaker made the false representation with the intent that it be acted on by the other party; (5) the other party acted in reliance on the misrepresentation; and (6) the party suffered injury as a result. Taylor Elec. Servs., Inc. v. Armstrong Elec. Supply Co., 167 S.W.3d 522, 526 (Tex. App.-Fort Worth 2005, no pet.) (citing DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 688 (Tex. 1990)); see Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 921 (Tex. 2010).

Failure to perform contractual promise vs. fraud

A promise to do an act in the future is actionable fraud when made with the intention, design and purpose of deceiving, and with no intention of performing the act. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986). While a party's intent is determined at the time the party made the representation, it may be inferred from the party's subsequent acts after the representation is made. Id. Failure to perform, standing alone, is no evidence of the promissor's intent not to perform when the promise was made. Id. at 435. However, that fact is a circumstance to be considered with other facts to establish intent. Id. Since intent to defraud is not susceptible to direct proof, it invariably must be proven by circumstantial evidence. Id. “'Slight circumstantial evidence of fraud,' when considered with the breach of promise to perform, is sufficient to support a finding of fraudulent intent.” Id. (quoting Maulding v. Niemeyer, 241 S.W.2d 733, 738 (Tex. Civ. App.-El Paso 1951, orig. proceeding)).

SOURCE: Dallas Court of Appeals 05-09-01397-CV 4/22/11

LEGAL CONCEPTS AND TERMS: fraud, fraudulent intent, fraudulent mis-representation, non-performance of promise, fraud vs. breach of contract claim 

When Is Fraudulent Misrepresentation Actionable in Texas? - Essential Elements of Fraudulent Misrepresentation as a Tort

FRAUDULENT MISREPRESENTATION AS A CAUSE OF ACTION UNDER TEXAS LAW 

The elements of a fraudulent misrepresentation claim include proof by the plaintiff that (1) the defendant made a material misrepresentation; (2) the representation was false; (3) the defendant knew the representation was false when made or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the defendant made the representation with the intention that it should be acted upon; (5) the representation was in fact justifiably relied upon; and (6) damage to the plaintiff resulted. See Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010); see also Ernst & Young, L.L.P. v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 575 (Tex. 2001).
 
Fraudulent inducement of contract 
 
As a general rule, a party is not bound by a contract procured by fraud. Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 46 (Tex. 1998); see also Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex. 1997).
 
Detrimental reliance on false representations
 
A false representation made indirectly to a third party and later relied on by the defrauded party may constitute fraud under certain circumstances. See BP Am. Prod. Co. v. Marshall, 288 S.W.3d 430, 444–45 (Tex. App.—San Antonio 2008, pet. granted) (holding misrepresentations made to one sibling acting as agent for all siblings constituted misrepresentations to all siblings). “[A] person who makes a misrepresentation is liable to the person or class of persons the maker intends or ‘has reason to expect’ will act in reliance upon the misrepresentation.” Ernst & Young, 51 S.W.3d at 578. “Even an obvious risk that a misrepresentation might be repeated to a third party is not enough to satisfy the reason-to-expect standard; rather, the alleged fraudfeasor must ‘have information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct.’” Id. at 580 (quoting Restatement (Second) of Torts § 531 cmt. d (1977)) (emphasis added).
 
Deliberate misrepresentation vs. mistake, misunderstanding 
 
Fraud requires proof of an affirmative misrepresentation, not simply a misunderstanding by a party. See Orion Ref. Corp. v. UOP, 259 S.W.3d 749, 771–72 (Tex. App.—Houston [1st Dist.] 2007, pet. denied) (stating misunderstanding and other evidence do not amount to actionable misrepresentations).

SOURCE: Houston Court of Appeals 01-10-00104-CV 4/28/11