Fraud can take all shapes and forms nowadays, especially in legal matters. Famous examples include check frauds, fake banks, credit card fraud and many others. But there is one type of fraud which can take place even if one party isn’t aware of what they are doing: constructive fraud.
If you intend to go into a business and/or legal relationship with another party, be it an ordinary person or a company, you must learn there are important details which must not be missed out. In this post, we’ll explain what constructive fraud is, when it takes place and how to distinguish it from other types of fraud.
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What is Constructive Fraud?
Constructive fraud is a type of fraud where one party takes advantage of a trusted relationship or position of responsibility, even if they didn’t mean to take advantage of anyone. Constructive fraud is more about the misuse of trust or failure to fulfill a duty.
This type of fraud often takes place in situations where there’s a special relationship, such as between family members, business partners, or even close friends.
- Example: Imagine a corporate officer who is supposed to make decisions that benefit the company and its shareholders. If this officer has a personal connection with another business and fails to report this conflict of interest, their actions could harm the company or its shareholders, even if they didn’t mean to cause it in the first place.
Constructive Fraud vs. Actual Fraud: What’s the Difference?
Actual fraud is quite different from constructive fraud. For the first one, its definition will change depending on the country’s legal code. According to the California’s Civil Code, actual fraud can be any of these actions:
- Stating something as true while knowing it’s false.
- Claiming something is true without enough information.
- Concealing the truth when aware of it.
- Making a promise with no plan to follow through.
- Engaging in any other action intended to mislead.
Example: A car dealership knowingly sells a used car with a faulty transmission. The salesperson tells the buyer that the car is in perfect condition, even though they know it’s not true. The buyer purchases the car, trusting on the salesperson’s words, only to discover the transmission issue later. Learn more about car dealership fraud.
What is the Difference between Fiduciary Fraud and Constructive Fraud?
Fiduciary fraud is commonly mentioned while talking about constructive fraud and, while they have similarities, have many differences. First, we must define what a “fiduciary” is: any individual or corporation to whom property or power is entrusted for the benefit of another.
A fiduciary fraud happens when the superior party (the one who took advantage of the other) fails to support the other party’s best interests, ignoring their duties of impartiality and loyalty, as per the relationship established.
Here are the most common differences between both cases:
- Benefit of One Party Over the Other: Cases of constructive fraud need one party to gain an advantage over the other, caused by the breach of duty. For a case of fiduciary fraud, the superior party doesn’t necessarily gain an advantage.
- The Length of the Statute of Limitations: For a case of fiduciary fraud to be made, it must be within the first three years. In the case of constructive fraud, it can last up to ten years, beginning when one party begins to suspect the fraudulence.
Lawyers and attorneys will use one of the two (or both) accusations in a legal case if there was a fiduciary relationship between both parties. In such cases, constructive fraud is defined as a form of fiduciary breach of duty, but not all cases of fiduciary fraud are constructive frauds.
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[A wooden gavel and sound block on a marble surface, symbolizing justice and law in a minimalistic courtroom setting]
What Are The Requirements for a Case of Constructive Fraud?
In courtrooms, fraud cases are relatively common. Unfortunately, we don’t have statistics available on the number of constructive cases per year, but there have been enough to build precedents that the California Civil Jury has published the next requirements:
- Confidential or Fiduciary Relationship: There must be a legal relationship between the two parties.
Example: Relationships which include business partners, financial advisors, or close family members. One person must have trusted the other to act in their best interest.
- Breach of Trust: Trust was betrayed—either by failing to share important information, giving incorrect advice, or taking actions that weren’t in the other people best interest.
Example: Failing to reveal important information the superior party should have known while making the deal, such as the property’s infrastructure or the conditions of a loan agreement.
- Actions Based on Misleading Information: As it implies, the plaintiff (the harmed party) must have acted based on the wrong information given by the superior party.
Example: A loan agreement was made between two parties, but only because the superior party failed to reveal the conditions on the interest rate and the time window necessary to pay all the loan.
Common Examples of Constructive Fraud
Constructive frauds can take place in most forms of legal relationships, regardless of the nature of the business or even if it is involving family members. As long as there was a breach of trust and harm was done based on it, it can be classified as such. Here are some examples:
- Real Estate Purchase: A homeowner sells a house but doesn’t tell the buyer about past flooding issues they know about. By hiding this, the buyer might go through with the purchase without knowing the risks.
- Investment Contract: A financial advisor might suggest an investment without telling the client they’ll earn a commission or have a personal stake in it. This hidden conflict of interest could lead the client to make a bad decision.
- Employment Contract: An employer might offer a job without mentioning that it’s high-stress or requires lots of overtime. If the candidate takes the job thinking it’s less demanding, this could be constructive fraud because the employer didn’t share important details.
- Loan Agreement: A lender might not explain all the fees and penalties tied to a loan, leaving the borrower in the dark about the true costs. If the borrower agrees to the loan based on this incomplete information, it’s another case of constructive fraud.
- Insurance Policy: An insurance agent fails to clearly explain the policy’s limitations and exclusions, causing the policyholder to think they have more coverage than they really do. This is an example of constructive fraud.
- Business Partnership Agreement: A partner doesn’t talk about their past business failures or bankruptcies when setting up the partnership. The lack of transparency, even if unintentional, could be the basis for a case of constructive fraud.
Be Prepared To Protect Yourself from Constructive Fraud with CDN
Fiduciary relationships require for both parties to comply with legal conditions, no matter of how small or large the agreement and/or transaction was. By learning about constructive fraud, you will reduce the possibilities of being harmed by the other party or accidentally committing constructive fraud for giving the wrong information.
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Frequently Asked Questions (FAQ) about Constructive Fraud
What is Constructive Fraud?
Constructive fraud is a legal concept where one party deceives the other, even if they did it without knowing it. For example, selling a property to another and claiming the structure is intact. If the property is bought and the other party finds there are water leaks or infrastructure damage, the party that sold the property may have committed constructive fraud.
How is Constructive Fraud Different From Actual Fraud?
The main difference between constructive fraud and actual fraud is the intention. For example, if a seller knows about house damage and hides it during a sale, it’s considered actual fraud if proven in court. On the other hand, if there was no deliberate intention to defraud, it would be classified as constructive fraud.
Who Can Be Charged For Constructive Fraud?
Any particular person and/or business can be criminally responsible for committing constructive fraud. This legal concept can be applied to many type of situations, such as:
- Business transactions.
- Real estate deals.
- Professional relationships.
- Even transactions among family members.
In simple terms, anyone who makes statements or takes actions that end up causing harm, or benefitted from the transaction and/or agreement, even by accident, can be charged for doing constructive fraud. Learn more about the legal consequences for fraud.
