State Fraud

Jupiter, Florida — Commercial Litigation Lawyer, Russell L. Forkey, Esq.

Common Law Fraud

The purpose of this post is to provide the reader with a general discussion concerning the concept of fraud and fraud in the inducement and is not designed to be complete in all material respects. Thus, this post does not focus on the law of any particular jurisdiction. However, in order to demonstrate certain factors relating to the issue of fraud, references are made to the Florida Rules of Civil Procedure. Please keep in mind that this information is being provided for educational purposes only and should not be considered or relied upon as legal advice.

Generally, in order to state a cause of action for fraud or fraud in the inducement, the complaining party must allege: (1) a false statement of fact; (2) known by the defendant to be false at the time it was made; (3) made for the purpose of inducing the plaintiff to act in reliance thereon; (4) action by the plaintiff in reliance on the correctness of the representation; and (5) resulting damage to the plaintiff.

Because of the serious nature of the allegations that are required and because many times the allegations of fraud are based upon oral representations the Florida Rules of Civil Procedure set forth specific requirements that must be alleged relating to allegations of fraud.

Rule 1.120(b) of the Florida Rules of Civil Procedure require that in alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. What does this mean? Courts have generally construed this to mean that Rule 1.120(b) standards require specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation as to why they were fraudulent. Experience has shown that it is very difficult for an individual to properly comply with these pleading requirements. Moreover, there are a number of legal impediments that come into play when dealing with the issue of attempting to state a claim for fraud such as a legal concept called the economic loss doctrine.

For example, one court has stated the concept as follows: to determine whether the economic loss rule bars recovery under fraud, the question is simply this: Is the fraud alleged in an act of performance or in a term of the bargain? Where the representation is simply made and relied upon in inducing the completion of the transaction, then clearly it is a term of the bargain. If, however, the misrepresentation was in connection with the seller’s performance such as the ability to provide increased reservations and better hotel management services, which required continuing action on the part of the seller, then the fraud is in the performance and the economic loss rule bars recovery sounding in tort. Stated another way, the economic loss rule does not bar a cause of action for fraud in the inducement, where the fraud alleged pertains to a term of the contract and is relied upon in inducing the completion of the agreement. However, a cause of action for fraud is barred where the fraud alleged pertains to the performance of the contract.

With an appropriate factual basis, a claim for fraud in the inducement can relate to any number of personal or business transactions such as:

• Entering into a contract to purchase a business
• Entering into a franchise agreement
• Entering into a contract to purchase a commercial building or residential real estate
• Entering into a lease agreement
• Entering into a stockholder or membership agreement
• Entering into a partnership agreement

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