Q. I often hear about "fraud" of some kind or another being committed in the business world. What are the basic legal principles concerning fraud in the business environment and what kind of remedies are available for someone who has been the victim of fraudulent conduct?
A. While fraudulent conduct can result in criminal prosecution (Bernie Madoff the most notorious example), fraud plays a huge role in the civil law as well. There are special rules and powerful remedies relating to fraud.
What is Fraud?
Fraud essentially involves the making of false statements or concealing information to mislead or dupe another person into taking action or refraining from acting. The basic elements of a claim for fraud are (1) making a known false statement of an important or material nature to another, (2) with the intent to cause that person to rely on the false statement, (3) the person does reasonably rely upon the false statement, and (4) the person who relies is damaged in some way as a result of the false statement.
In the business context, fraud arises in countless ways. For example, in transactions of any kind or nature, where a person or company is convinced to enter into a transaction based upon false statements given by the other party to that transaction, it is called "fraud in the inducement." There is, however, a difference between a simple promise to do something in the future -- which is just part of the mutual exchange of promises in the contract -- and the kind of false statement of some fact that is relied upon. Fraud generally involves a falsity that goes beyond the promises that are part of the contract itself.
What Remedies are Available For Those Defrauded?
The law provides powerful remedies for the party so defrauded. Among the remedies is the ability to cancel or "rescind' the contract or other transaction that resulted from the fraud. In addition to cancelling the deal that was struck based upon the fraud, the defrauded party can recover out-of-pocket costs or related damages that resulted from the fraud. On the other hand, the defrauded party can also elect to keep the contract in place, but recover monetary damages that arise directly from the fraud.