Constructive fraud in the field of contract law refers to a breach of a duty through material misrepresentations upon which a third party relies. Unlike standard fraud, intent to deceive is not a requirement of constructive fraud. Nonetheless, like standard fraud, constructive fraud functions as an excuse for nonperformance and can support an unjust enrichment claim.
Under contract law, a defendant is liable to a plaintiff for constructive fraud if there was:
- a false misrepresentation
- in reference to a material fact
- for the purpose of inducing the other party to rely on such representation
- on which the other party did justifiably rely
- which resulted in damages or injury, and
- a fiduciary relationship between the parties
The elements for actual and constructive fraud are the same with two exceptions: constructive fraud drops knowledge on the part of the injurer of the representation’s falsity and adds the element of a fiduciary relationship. Similarly, like actual fraud, the misrepresentation supporting constructive fraud can be an omission. An omission of material information functions as a misrepresentation when the omitting party breaches a duty to disclose that information.
For example, in Sutton v. David Staley Chevrolet, a car dealer’s failure to disclose a mandatory arbitration clause within the buyer’s car purchase contract constituted constructive fraud because he breached his duty, which was obtained when he discussed the contract with the buyer, to tell the whole truth or tell nothing at all.
[Last updated in July of 2022 by the Wex Definitions Team]