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Fraud claim in Absence of Justifiable reliance

Is the plaintiff’s fraud claim barred in Absence of Justifiable reliance?

Is reliance element in fraud the same considering the principle of Bounded rationality relating to

Cognitive psychology?

Can there be any relation of cognitive psychology to tort of fraud?


Gruning, David. Pure economic loss in American tort law: an unstable consensus. 54 AM. J. COMP. L. SUPP. 187-208 (2006).

Sheth, Darpana M. Better off unborn? An analysis of wrongful birth and wrongful life claims under the Americans with Disabilities Act. 73 TENN. L. REV. 641-667 (2006).

Sienkiewicz, Alex. Toward a legal land

Anzivino, Ralph C. The fraud in the inducement exception to the economic loss doctrine. 90 MARQ. L. REV. 921-970 (2007).

1.Fraud, Dishonest Conduct and the Tort of Deceit

The tort of deceit is founded on the notion that a falsehood is made with the intention that it should be acted on by the party receiving it. The tort requires the claimant to prove a fraudulent intention.

The modern law of the tort is based on the decision of Lord Hershell in Deek v Peek (1889). In that case, the elements of the tort were determined to be as follows:

“In order to sustain an action of deceit, there must be proof of fraud, and nothing short of that shall suffice. Secondly, fraud is shown that a false representation has been made:

1) Knowingly, or

2) Without belief in its truth, or

3) Recklessly, careless whether it be true or false.

Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or to injure the person to whom the statement was made."

A reasonable ground for the belief will avoid a successful claim for deceit, although this is not the ultimate test. The reasonableness of the belief in the light of the factual matrix of the case is material to the likelihood of the belief in its truth; that is not to say that an unreasonable belief in the truth of the statement would properly found a claim for fraud, but rather merely go to the likelihood that a person would hold the belief. A conscious indifference to the truth, in that the person making the misrepresentation knew the statement to be false, or was sufficiently reckless or careless as to the truth, does not have any honest belief in the truth of the statement which would found an allegation of fraud as much as the knowledge that the statement was false.

2.Importance Of Reliance [1] 

Reliance is a distinctive element of the common law tort of fraud. For a fraud to occur, the defendant must succeed in inducing the plaintiff to believe his misrepresentation. Reliance is a distinct element of the tort action of fraud or deceit. The injury must come about by virtue of the plaintiff justifiably relying on the apparent truth of the misrepresentation .Absence of reliance thus provides a ground for rejecting the plaintiff’s claim even where there

is a causal connection between the defendant’s misrepresentation and the

plaintiff’s injury.

RESTATEMENT (SECOND) OF TORTS § 537 (1977); DOBBS, supra note 3, § 474,

at 1358–59; see also Brackett v. Griswold, 20 N.E. 376, 378 (N.Y. 1889) (defining fraud or

deceit as “false representation, known to be such, made by the defendant, calculated and

intended to influence the plaintiff, and which came to his knowledge, and in reliance upon

which he in good faith parted with property, or incurred the obligation which occasioned the

injury of which he complains").

It is not enough that the defendant make a material, factual misrepresentation that causes injury to the plaintiff. And this is not merely because she must show a cause-effect relationship between the defendant’s misconduct and her injury. Nor does reliance function as the sort of excessive-liability filter that proximate cause is sometimes said to provide in negligence law. Rather, there are independent conceptual and structural reasons for the requirement of reliance.

Conceptually, the wrong that is defined by the tort of fraud is not an interference with the victim’s interest in being free from certain types of harm, but instead an interference with her interest in being able to make certain kinds of decisions in certain settings free of misinformation generated by others. This interest simply cannot be interfered with unless the defendant’s misrepresentations are relied upon by the victim. In this sense, the tort of fraud cannot be or to refrain from action in reliance upon it, is subject to liability to the other in deceit for pecuniary loss caused to him by his justifiable reliance upon the misrepresentation.

Structurally, the requirement of reliance is linked to a more general feature of tort law, namely, the relational structure of tort duties. To commit a tort is to breach a duty that is owed by an actor to a class of potential victims. Thus to prevail, a tort plaintiff must establish not merely that wrongful conduct has resulted in harm to her, but that conduct wrongful as to a person in her position has harmed her. When it comes to fraud, the plaintiff’s reliance is essential to

establishing that the defendant’s conduct was wrongful as to her, and hence essential to establishing her right to recover. This is true, we argue, even for instances of common law fraud that have expanded the orbit of liability by recognizing, for example, forms of indirect or implicit reliance.

3.Meaning of Bounded Rationality

In game theory, bounded rationality is a concept based on the fact that rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions. This contrasts with the concept of rationality as optimization.[1] Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisficer, one seeking a satisfactory solution rather than the optimal one.[2] [2] 

4.Cognitive psychology

Uleric neisser coined the term 'cognitive psychology' in his book published in 1967 (Cognitive Psychology)[1], wherein Neisser provides a definition of cognitive psychology characterizing people as dynamic information-processing systems whose mental operations might be described in computational terms. Also emphasising that it is a point of view which postulates the mind as having a certain conceptual structure. Neisser's point of view endows the discipline with a scope which expands beyond high-level concepts such as "reasoning", often espoused in other works as a definition of cognitive psychology. Neisser's definition of cognition illustrates this well:

The term "cognition" refers to all processes by which the sensory input is transformed, reduced, elaborated, stored, recovered, and used. It is concerned with these processes even when they operate in the absence of relevant stimulation, as in images and hallucinations... Given such a sweeping definition, it is apparent that cognition is involved in everything a human being might possibly do; that every [2] psychological phenomenon is a cognitive phenomenon. But although cognitive psychology is concerned with all human activity rather than some fraction of it, the concern is from a particular point of view. Other viewpoints are equally legitimate and necessary. Dynamic psychology, which begins with motives rather than with sensory input, is a case in point. Instead of asking how a man's actions and experiences result from what he saw, remembered, or believed, the dynamic psychologist asks how they follow from the subject's goals, needs, or instincts.

Cognitive psychology is radically different from previous psychological approaches in two key ways.

It accepts the use of the scientific method, and generally rejects introspection [3] as a valid method of investigation, unlike symbol-driven approaches such as Freudian psychology.[neutrality disputed]

It explicitly acknowledges the existence of internal mental states (such as belief, desire and motivation) unlike behaviorist psychology. Critics hold that the empiricism of cognitive psychology combined with the acceptance of internal mental states by cognitive psychology is contradictory.

The school of thought arising from this approach is known as cognitivism.

An infant is protected against his contracts, but not against his frauds or other torts. (s) But only for those committed by himself, and not for those of persons representing him, as he cannot have an agent, in the legal sense of the word. (ss) His promissory note given as a compensation for his torts is not binding. (t) If such tort or fraud consists in the breach of his contract, then he is not liable therefor in an action sounding in tort, because this would make him liable for his contract merely by a change in the form of the action, which the law does not permit. (u)1 But where the tort, though connected by circumstances with the contract, is still distinguishable from it, there he is liable. As if he hires a horse for an unnecessary ride he is not liable for the hire, but if in the course of the ride he wilfully abuses and injures the * horse, he is liable for the tort. (v)2 And if he should sell the horse, trover would lie, nor would his infancy be a good defence. Nor need this tort or fraud be subsequent to the contract. Thus, in the case of a bond given by an infant and received by the obligee in reliance upon his false and fraudulent representations of his being of full age, the bond cannot be enforced against him. (w) But as soon as the infant makes and delivers it, he is guilty of a fraud, for which an action may at once be maintained for any loss sustained. (x) As long as the bond

if goods were sold to an infant in reliance upon his fraudulent representations that he was of full age, the seller may reclaim them, certainly on his refusal to pay, if not before, on the ground that he had never parted with his property.(y)1 was adjourned; but in a note, referring to 1 Keb. 905, 913, it is stated that judgment was arrested. If this case be sound, the present action cannot he sustained on the first count. From a reference in the margin, it seems that the same case is reported, 1 Sid. 258. Chief Baron Comyns, however, who is himself regarded as high authority, seems to have taken no notice of this case in his Digest, ' Action on the case for Deceit,' but lays down the rule that ' if a man affirms himself of full age when he is an infant, and thereby procures money, to be lent to him upon mortgage,' he is liable for the deceit, for which he cites 1 Sid. 183; Com. Dig. Action, &C. A. 10. We are of opinion that this is the true principle. If infancy is not permitted to protect fraudulent acts, and infants are liable in actions ex delicto, whether founded on positive wrongs, or constructive torts, or frauds (2 Kent. Com. 197), as for slander (Hods-man V. Grissel, Nov, 129), and goods converted (auth. ante), there is no sound reason that occurs to us why an infant should not be chargeable in damages for a fraudulent misrepresentation whereby another has received damage." But it is believed that the true ground of the decision in Fitts v. Hall was mistaken in the Am. Lead. Cases, the learned authors being misled perhaps by the marginal note, in which it is said that " An infant is answerable for a fraudulent representation and deceit, which is not connected with the subject-matter of a contract, but by which the other party is induced to enter into one with him, if he afterwards avoids the contract by reason of his infancy."



I have found only three decisions34 under American common law

involving insane persons and the tort of misrepresentation. Only

two of them are authoritatively presented and they are in conflict.

The most recent decision occurred in the Supreme Court of Kings

County, New York City, in 1954. In Becker v. Becker3" the plaintiff

sued her husband for "fraud and deceit" in representing before their

marriage that he was not suffering from any serious ailments when actually

he was then visiting a psychiatrist in treatment for "a mental

illness known as schizophrenia."36 The defendant moved for judgment

on the pleadings. Judge Brenner granted the motion and dismissed the

complaint, finding that on the basis of the complaint the defendant

was incapable of fraud and thus not responsible in tort. For the

proposition that an incompetent (which, it seems, Judge Brenner

considered the same as insanity) is incapable of deception the court

cited two cases, Chaddock v. Chaddock17 and Williams v. Hays.6

The Chaddock case is almost the same as Becker on its facts, but

the wife was seeking and received an annulment of the marriage, an

entirely different issue. The Williams case is a negligence action holding

that insane persons are responsible for their torts. It contains

dicta that such persons may not be responsible for torts in which

malice is required such as defamation and malicious prosecution.

Misrepresentation is not mentioned by the court as an exception to

the general rule of liability.

The other case in this area is Spaulding v. Harvey,39 an 1891

Indiana decision. Here, two mentally ill persons under guardianship

34 Ragan v. Cox, 210 Ark. 152, 194 S.W.2at 681 (1946); Spaulding v. Harvey, 129

Ind. 106, 28 N.E. 322 (1891); Becker v. Becker, 207 Misc. 17, 138 N.Y.S.2d 397 (1954).

35 Becker v. Becker, supra note 34.

36 Id. at 19, 138 N.Y.S.2d at 399.

37 130 Misc. 900, 226 N.Y.S. 152 (1928).

38 143 N.Y. 442, 38 N.E. 449 (1894).

39 129 Ind. 106, 28 N.E. 322 (1891).

[Vol. 21

HeinOnline -- 21 Ohio St. L.J. 58 1960


fraudulently induced the plaintiffs to execute a mortgage by telling

them that they had been discharged from the guardianship as being

mentally competent. The court held the mortgage void, since it was

made while the defendants were under guardianship, but asserted:

"One may, however, be so weak intellectually as to be incapable of

managing his estate, and thus be legally subjected to guardianship,

and still be capable of perpetrating a fraud."" ° This pronouncement

about mental capacity was not followed by citations to authority,

either legal or psychiatric.

The only other case which can be cited in this field is Ragan v.

Cox4' wherein the defendant was charged with fraudulently inducing

a 12-year-old girl to marry him. In a rather uncertain manner, it

might be said that the defendant submitted some lay testimony that

he, a fifty-two-year-old man, was of low intelligence. The Arkansas

court interpreted this as an insanity defense and dismissed it, asserting

broadly the usual proposition that insane persons are liable for their


On the basis of the above decisions we certainly cannot assert

an American common law rule of responsibility of the insane for

misrepresentation. The cases are too few, they are in conflict, and

they do not present any well-developed theory of liability or nonliability.

Any proper analysis of the responsibility of the mentally ill in

this area would require an examination of the still-developing bases

of liability for the tort as a whole. Misrepresentation first arose as

the intentional tort of deceit.4

1 It required "scienter," or, an intent to

deceive. Looked at more deeply, scienter means a lack of belief in

the truth of the representation made. At present, however, many

states impose liability for negligent misrepresentation, and some hold

strict liability without fault for certain types of false statements.43

An application of responsibility to mentally ill persons would depend,

therefore, on which basis of liability was applied. Only on a firm application

of the requirements of intentional deceit would there seem

any opportunity for avoidance of responsibility.


1 case Uniroyal vs. Georgia law

Drugs and law Pg 41 pg 66

Pg 243

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