Three Common Types of Fraud
We use the word fraud all the time, but the law generally recognizes three common types of fraud:
- Deceit or Affirmative Misrepresentation occurs when one party knowingly misrepresents a material fact (or asserts it with reckless disregard for whether it’s true) with the intent to induce reliance, and the alleged victim actually and justifiably relies on it, causing harm.
- Concealment or Nondisclosure occurs when one party who has a duty to disclose knowingly suppresses a material fact intending to induce reliance that, if disclosed, would have caused the alleged victim to act differently, causing harm.
- False Promise or Promissory Fraud occurs when one party knowingly promises to do something without intending to do it, and the alleged victim actually and justifiably relies on it, causing harm.
To illustrate, suppose that a seller of a business represents to the buying business that the seller is debt-free, presents “cooked books” to the buyer, and promises to indemnify the buyer for claims involving pre-existing debts. If the buyer (after exercising due diligence) never discovers the hidden debts and pays a pre-existing creditor after getting rebuffed by the seller, the law could find that the seller committed all three common types of fraud—(1) Deceit (misrepresenting that the business was debt-free); (2) Concealment (hiding the debts by presenting cooked books); and (3) False Promise (promising but never intending to indemnify).
Some facts may support more than one type of fraud. If you find yourself in a situation where an alleged fraud has occurred, analyze your situation strategically in light of these three common types of fraud.