CONTRACT LAW

Contract Law

Contract Law

Legal Elements

Depending on the context, the law of fraud can be criminal or civil, state or federal, common law or statutory. Hence, there is not one law of fraud but many. Historically, the law of fraud, criminal and civil, developed in the state courts through common law interpretation. Today, most states have enacted criminal codes that replace the various common-law crimes, including criminal fraud, with specific statutory provisions. Congress also has enacted several antifraud statutes, many of which provide for both criminal penalties and civil remedies. The common law of fraud retains its relevance, however, supplementing the various federal and state statutes by providing a civil action for fraud when no statute applies.

The elements of criminal fraud are specified by statute. Some criminal statutes address the means through which fraud is perpetrated; others are limited by the substantive context in which the fraud occurs. For example, the federal Wire Fraud Act addresses means, making it a crime to engage in fraud over the radio or television. The Sarbanes-Oxley Act and Lanham Act differ by substantive context, with the former pertaining to managerial fraud and the latter defining fraudulent advertising. State statutes also differ by substantive context, with one statute addressing nursing home fraud, a second statute covering bank forgery, and yet another statute addressing insurance frauds.

Criminal fraud at both the state and federal levels typically constitutes a felony, and sanctions generally include significant fines and imprisonment. As in any criminal case, the prosecutor must prove each element of criminal fraud beyond a reasonable doubt. The common law specifies the elements of civil fraud. The Restatement (Second) of Contract defines civil fraud as (1) an intentional (2) misrepresentation (3) of material fact (4) that is reasonably relied on, causing an injury. Pursuant to the common law, whenever one party fraudulently induces another party to enter a contract, the defrauded party can rescind that contract and get a full refund. The defrauded party can also sue for civil damages in tort law, receiving both compensatory damages and often a punitive damage as well. A punitive damage goes beyond compensation, seeking to punish the wrongdoer rather than simply compensate the victim.

The Restatement provides a good working definition of fraud. Although the Restatement addresses civil law, not criminal, the statutory elements of most criminal frauds mirror those of common law. Hence, the elements of criminal and civil fraud are essentially similar. On first look, the four elements enumerated in the Restatement may seem deceptively simple; yet, each is open to interpretation and has its own vagaries and dynamics. To get a fuller understanding of the social, ethical, and legal issues associated with fraud, it is useful to look at each of these four elements in more depth.

Intent to Deceive

The common law distinguishes between fraudulent misrepresentations and innocent misrepresentations. The former arises when an assertion of fact is consciously false and the falsity is intended to mislead the other party. An innocent misrepresentation, in contrast, arises when the ...