Legal Definitions - legal fraud

Legal Fraud

Legal fraud, also known as constructive fraud, is a legal concept where a court finds that a fraudulent act has occurred, even without proof of a deliberate intent to deceive. Unlike traditional fraud, which requires a dishonest state of mind, legal fraud arises from a breach of a legal or equitable duty. This breach, regardless of the party's actual intention, results in an unfair advantage for the person committing the breach or causes harm and prejudice to another party. It often occurs in relationships where one party owes a special duty of care, trust, or disclosure to another, such as in fiduciary relationships.

• Example 1: Financial Advisor's Undisclosed Conflict of Interest

  A financial advisor recommends a specific investment fund to a client, genuinely believing it to be a suitable option. However, the advisor fails to disclose that they receive a substantial commission from the particular fund company for every client they enroll. The client invests, and the fund later underperforms significantly. Even if the advisor did not intend to harm the client, their failure to disclose the conflict of interest—a breach of their fiduciary duty to act solely in the client's best interest—constitutes legal fraud because it created an undisclosed advantage for the advisor at the client's potential detriment.

• Example 2: Real Estate Developer's Building Code Violation

  A real estate developer constructs a new residential complex. Due to an oversight in project management and quality control, a critical structural component in several units is not built according to local building codes, compromising the long-term safety and value of the properties. The developer did not intentionally set out to defraud buyers; rather, the failure stemmed from negligence in upholding their legal duty to construct safe and compliant homes. This breach of duty, which resulted in defective properties and an unfair advantage (potentially lower construction costs) for the developer, while causing prejudice to the buyers, could be considered legal fraud.

• Example 3: Attorney's Omission in a Business Contract

  An attorney represents a client in negotiating a complex business acquisition. During the drafting of the final contract, the attorney, through an inadvertent error or oversight, omits a crucial protective clause that was specifically requested by the client and agreed upon by both parties. Later, this omission leads to significant financial losses for the client when a foreseen contingency occurs. While the attorney had no malicious intent to harm their client, their professional negligence and breach of their legal duty to accurately represent the client's interests and ensure the contract's completeness could be deemed legal fraud, as it caused substantial prejudice to the client.