What is the Difference Between Statutory Fraud and Common Law Fraud in Texas?

Section 27.01 of the Texas Business and Commerce Code is titled “Fraud in Real Estate and Stock Transactions.” The statutory private cause of action referenced therein is commonly referred to as “Statutory Fraud,” as opposed to regular common law fraud. The elements of the common law tort of fraud or negligent misrepresentation are extremely similar to the elements of Statutory Fraud. Getting the two causes of action mixed up is extremely easy.

The Texas Pattern Jury Charges for Business, Consumer, Insurance & Employment (2020) recommend, in PJC 105.7, First Comment, “[O]btaining independent findings even when there are allegations of both common-law and statutory fraud because of the different remedies available.” Regardless of the differences in remedies, at least two key differences in the elements of proof between common law fraud (or the very similar common law tort of negligent misrepresentation) and statutory fraud exist. The obvious difference between common law fraud and statutory fraud is that statutory fraud must related to real estate or stock transactions, but besides the obvious difference, what other differences exist?

The First Difference. The first major difference is that “Statutory fraud does not require a declarant to know the misrepresentation to be false in order to be liable for actual damages.” Ritchey v. Pinnell, 324 S.W.3d 815, 821 (Tex. App.—Texarkana 2010, no pet.). “Sec. 27.01 is generally less demanding than common law fraud, imposing liability upon the maker of a misrepresentation without proof that he intended to deceive or knew that the representation was false.” Diversified, Inc. v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.). “The elements of statutory fraud are essentially the same [as common law fraud] except that Holland was not required to prove evidence of knowledge or recklessness.” Holland v. Thompson, 338 S.W.3d 586, 596 (Tex. App.—El Paso 2010, pet. denied). Please note, however, that a major exception to this lesser scienter burden exists in Section 27.01(d), which provides that exemplary damages are only awardable in the event that “actual awareness of the falsity of a representation or promise” is proven. As a result, PJC 105.11 should be used to ask the jury whether actual awareness existed if the plaintiff seeks to recover punitive damages. Also see PJC 105.10 (to be liable for punitive (exemplary) damages, the defendant must not only have had actual awareness, but also must “benefit” from the false representation or promise.).

The Second Difference. “Unlike common-law causes of action, and those based on the Texas Securities Act discussed earlier in this chapter, Section 27.01, by its terms, does not encompass omissions.” 3A West’s Tex. Forms, Business Litigation Ch. 10 10.8 Introduction (2d ed.). Fraud-by-omission does not appear to be actionable under Statutory Fraud. Section 27.01 requires a “false representation of a past or existing material fact” and the representation must be “made to a person for the purpose of inducing that person to enter into a contract.” Tex. Bus. & Com. Code § 27.01(a). As a result, Stautory Fraud does not exist where some fraud relates to real estate, but rather only where there is “evidence of false representations made by the [defendants] for the purpose of inducing [the plaintiff(s)] to enter into a contract.” Casstevens v. Smith, 269 S.W.3d 222, 233 (Tex. App.—Texarkana 2008, pet. denied). While Section 27.01 contains a separate definition for false promises, those promises also do not appear to include omissions in the face of a duty to speak and still require inducement to enter into a contract. But see In re Enron Corp. Sec., Derivative & “ ‘ERISA’ ” Litig., 490 F.Supp.2d 784, 822 (S.D. Tex. 2007) and Burback v. Oblon, No. 4:20-CV-946-SDJ, 2021 WL 4477607, at *10 (E.D. Tex. Sept. 30, 2021) (these two cases imply in dicta that fraud-by-omission may be possible under 27.01, but were decided on other grounds and do not appear to have addressed the issue).

The Difference in Remedies. On a Statutory Fraud claim, the plaintiff may recover attorney’s fees and expert witness fees, which are not typically recoverable on a common law tort. Tex. Bus. & Com. Code § 27.01(e). “'[A]ctual damages’ recoverable for statutory fraud are those damages available for fraud at common law.” Scott v. Sebree, 986 S.W.2d 364, 368 (Tex. App.—Austin 1999, pet. denied).

The Texas Pattern Jury Charges (2020 edition) contains a fraud instruction (PJC 105.4) on the failure to disclose when there is a duty to disclose, whereas, no such instruction exists for Statutory Fraud. The common law fraud pattern charge also contains available instructions such as “Promise of Future Action,” “Opinion Mixed with Fact,” “False Statement of Opinion,” and “Opinion Made with Special Knowledge,” none of which appear to be available instructions on a Statutory Fraud claim. In the right case, the courts of appeals may decide whether one or more of these common law fraud instructions are includable in a Statutory Fraud charge.