Back to Basics, Continued—A Primer on Fraud

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“Fraud” is a term that is kicked around a lot in the world of consumer transactions. But, what are we really talking about when a consumer claims that he or she has been “defrauded”? Let’s step back in history for a moment.

In both English and French law, the doctrine of caveat emptor – “buyer beware” – ruled the day. That is, the risk that a buyer might not get a fair shake in a transaction was put firmly on the buyer’s plate. The law gave no help.

Then came the Industrial Revolution. As a result of mass-produced goods, some products sold in the ordinary course of business resulted in physical, personal injury to buyers or those around the buyers—and judges began to adopt doctrines countering the effect of caveat emptor and offering recourse to consumers. Lawmakers were not far behind.

Remedies to protect consumers for either personal injury or property damage began to split along two different tracts—tort claims based in negligence and contract claims based in fraud.

The tort of “negligence” has long been a part of law, but it only protects one who is injured, when there is a duty either explicit or implied in law that has been breached. So, one approach that lawmakers developed over time was to extend the concept of “duty” to expand the protection of tort law to those suffering injury. Eventually, duties that were created in court decisions, became embodied in statutes—such as the Uniform Commercial Code (UCC) and the Extended Manufacturers Liability Doctrine (EMLD).

But, what about injuries absent duty? Well, the common law was also developing a “non-negligence” tract sounding in contract principles—including the doctrine of fraud. Very basically, four elements have emerged over the many years to state a cause of action for fraud:

(i) misrepresentation
(ii) of a material fact
(iii) relied upon by the person
(iv) causing injury.

And, fraud itself is sometimes described as “deceit,” “active, true or intentional” fraud, “silent, innocent, or constructive” fraud, “concealment” and “fraud in the inducement.” These various concepts have been developed over centuries, each having unique elements of proof, and subject to varying defenses.

Now, jump ahead to the latter half of the 20th Century. With the abandonment of the tort/contract law distinction, when persons or property are damaged the old rules protecting those who place dangerous products and services into commerce—whether causing personal injury or property damages—have been eliminated. The newer doctrines of law including the UCC, the EMLD, and the Dodd-Frank Act prohibition against Unfair, Deceptive or Abusive Acts or Practices (UDAAP) have now taken their place.

So, in most jurisdictions, there is little but lip service placed on the tort of negligence/contract law of fraud distinction, in favor of laws and court precedent protecting innocent consumers from dangerous products and services being placed into commerce.

And that is today’s history lesson.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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