One of the elements of a fraud claim is reliance upon a misrepresentation made by the Defendant. This means that a Plaintiff must not only prove that the Defendant knowingly made a false representation of material fact, but also demonstrate that the Plaintiff in some way reasonably relied upon a deceitful representation.
But not all reliance is actionable, To be actionable, reliance must be justified.
The Supreme Court of Texas has identified circumstances in which a plaintiff’s purported reliance upon an oral misrepresentation is unjustifiable: when “red flags” preclude such reliance. One may not justifiably rely on a representation when red flags indicate that reliance is unwarranted. Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010).
In the context of a contractual relationship, this rule speaks to circumstances surrounding an oral representation that would warn a person of the plaintiff’s experience and sophistication that he ought not to place confidence in that representation. The inquiry is whether red flags would have sufficiently warned someone in the Plaintiff’s position that reliance on the Defendant’s representations could not be justified.(“[W]orld-savvy participants entering into a complicated, multi-million-dollar transaction should be expected to recognize ‘red flags’ that the less experienced may overlook.”).
In the absence of justifiable reliance, a Plaintiff’s fraud claim fails.
