Fraudulent Inducement (Tex and Tex.App.-Houston cites)

THE NATURE OF FRAUDULENT INDUCEMENT AS A CAUSE OF ACTION & THE ELEMENTS THEREOF

A contract is subject to avoidance on the ground that it was induced by fraud. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 331 (Tex. 2011); see also Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 46 (Tex. 1998) (“As a rule, a party is not bound by a contract procured by fraud.”). Even a written contract containing a merger clause can be avoided for fraud in the inducement, and the parol evidence rule does not stand in the way of proof of such fraud. Italian Cowboy, 341 S.W.3d at 331. Indeed, “the law long ago abandoned the position that a contract must be held sacred regardless of the fraud of one of the parties in procuring it.” Dallas Farm Mach. Co. v. Reeves, 307 S.W.2d 233, 239 (Tex. 1957).

ELEMENTS OF FRAUD

The elements of fraud are: (1) that the speaker made a material misrepresentation (2) that he knew was false when he made it or that he made recklessly without any knowledge of its truth and as a positive assertion (3) with the intent that the other party act upon it and (4) that the other party acted in reliance on the misrepresentation and (5) suffered injury thereby. Italian Cowboy, 341 S.W.3d at 337. A representation is material if “a reasonable person would attach importance to [it] and would be induced to act on the information in determining his choice of actions in the transaction in question.” Italian Cowboy, 341 S.W.3d at 337.

ESSENTIAL ELEMENTS OF FRAUDULENT INDUCEMENT ADDITIONALLY INCLUDE PROOF OF CONTRACT TO WHICH ASSENT WAS PROCURED BY FRAUD

Fraudulent inducement is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001); Clark v. Power Mktg. Direct, Inc., 192 S.W.3d 796, 799 (Tex. App.—Houston [1st Dist.] 2006, no pet.). That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Haase, 62 S.W.3d at 798–99.

THE RELIANCE ELEMENT 

Fraud requires a showing of actual and justifiable reliance. Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010). In evaluating justification, the court considers whether, “given a fraud plaintiff’s individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud[,] it is extremely unlikely that there is actual reliance on the plaintiff’s part.” Id. (quoting Haralson v. E.F. Hutton Grp., Inc., 919 F.2d 1014, 1026 (5th Cir. 1990)). In the commercial context, the Texas Supreme Court has emphasized that “commercial tenants are entitled to rely on the fact that a landlord will not actively conceal material information.” Italian Cowboy, 341 S.W.3d at 339.

  

SOURCE: HOUSTON COURT OF APPEALS - NO. 01-09-00728-CV - 1/19/12