Fraud Claims Under Texas Law

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Fraud Claims Under Texas Law

Under Texas law, a plaintiff can recover damages that result from another party’s fraud.  A cause of action for fraud may arise when one party knowingly makes a false, material representation with the intent to induce someone else to act on that representation.  If the other party justifiably relies on that false representation and incurs damages, he may be entitled to recover in court, unless there is a valid legal defense.

The Elements of a Fraud Claim

In order to establish a fraud claim under Texas law, a plaintiff must demonstrate the following elements:

(1) the defendant made a material representation;

(2) the representation was false;

(3) the defendant knew the representation was false or made it recklessly without any knowledge of its truth;

(4) the defendant intended to induce the plaintiff to act upon the representation; and

(5) the plaintiff justifiably relied on the representation, which caused the plaintiff injury.

Fraud-Related Claims Recognized under Texas Law

Texas recognizes several fraud-related claims, which include the following:

  • Fraudulent misrepresentation (actual fraud).
  • Constructive fraud.
  • Fraudulent nondisclosure.
  • Fraudulent inducement.
  • Statutory fraud.
  • Negligent misrepresentation.
  • Fraudulent transfer.

Fraudulent inducement, for example, is a particular type of fraud that arises only in the context of a contract.  It requires the existence of a contract. That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties.

A Material Representation

A representation is “material” if the representation was important to the plaintiff in making a decision—that is, it would it have induced a reasonable person to act on and attach importance to the representation?  The representation may be material even if it was not the only factor that induced the plaintiff to make the decision or enter into the transaction at issue.

Fraud can also occur through non-disclosure of material facts when the non-disclosing party had a duty to disclose.

A False Representation

A plaintiff must demonstrate that the defendant’s representation was not only material, but that it was also false.  A representation is false if it consists of words or other conduct that suggest to the plaintiff that a fact is true when it is not.

A defendant may make a false representation in a number of ways, including by making a false statement of fact; a false statement of opinion; a false promise of future performance; or a false representation by conduct.

A false representation may consist of a deceptive answer or any other indirect but misleading language.  Statements that are literally true but that leave a false impression in the context that they are made may give rise to a fraud action.  Finally, a representation may be fraudulent if it is made with the intention that it be understood in the sense that it was false, without any belief or expectation as to how it will be understood, or with reckless indifference as to how it will be understood.

Generally, pure expressions of opinion will not support a fraud claim. There are, however, exceptions to this general rule.  For example, an opinion may constitute fraud if the speaker has knowledge of its falsity.  An expression of an opinion as to the happening of a future event may also constitute fraud where the speaker purports to have special knowledge of facts that will occur or exist in the future.

Fraud can also occur by silence or non-disclosure.  Under Texas law, where a party has a duty to disclose, the non-disclosure may be as misleading as a positive misrepresentation of facts.

Justifiable Reliance

Reliance is an element of fraud.  To prevail on a fraud claim, a plaintiff must show actual and justifiable reliance. That is, in order to establish this element, the plaintiff must show that it actually relied on the defendant’s representation and, also, that such reliance was justifiable.  Whether a party’s actual reliance is also justifiable is ordinarily a fact question.  But courts have recognized some circumstances under which reliance cannot be justified as a matter of law.

Texas courts recognize a long-standing principle that a party claiming fraud has a duty to use reasonable diligence in protecting his own affairs.  That is, in an arm’s-length transaction the defrauded party must exercise ordinary care for the protection of his own interests and is charged with knowledge of all facts which would have been discovered by a reasonably prudent person similarly situated.

As such, a person may not justifiably rely on a representation if there are red flags indicating such reliance is unwarranted.  Moreover, a plaintiff may not blindly rely on a representation by a defendant when the plaintiff’s knowledge, experience, and background alert it to investigate the defendant’s representations before acting in reliance on those representations.

Texas courts have also repeatedly held that a party to a written contract cannot justifiably rely on oral misrepresentations regarding the contract’s unambiguous terms.

As mentioned above, Texas courts have held that reliance is not justified as a matter of law under some circumstances.  For example, in a case decided by the Texas Supreme Court, Orca Assets, a company formed by an experienced oil-and-gas businessman to acquire unleased acreage, signed an oil-and-gas lease for land that turned out to be already leased.  Orca claimed it justifiably relied on statements by JPMorgan, the lessor’s agent, that the land was open. But the parties negotiated a written letter of intent that assigned Orca the risk of failure of title, directly contradicting those earlier representations. The court thus concluded that multiple “red flags,” plus Orca’s sophistication in the oil-and-gas industry, negated any justifiable reliance Orca had on any alleged misrepresentations.

Fraud Damages

A successful plaintiff may be entitled to recover various types of damages based on a claim of fraud.  Texas recognizes the following types of fraud damages:

  • economic damages, including direct and special damages—which may include lost profits;
  • statutory fraud damages;
  • exemplary damages;
  • mental anguish damages;
  • attorneys’ fees, when the terms of the parties’ contract or other authority so provides;
  • equitable relief where appropriate;
  • a declaratory judgment