FRAUD OR BREACH OF CONTRACT
By: Michael E. Stearns, Esq., Stearns, Roberts & Guttentag, LLC
Unsatisfied parties to a contract most often bring claims for breach of contact. In certain limited circumstances, a claim for fraud may also be available to the aggrieved party. There are many reasons why a dissatisfied party to a contract may wish to bring a fraud claim in addition to a breach of contract claim. For one thing, where fraud is proven a party can be entitled to “punitive” damages in addition to its breach of contract damages. Punitive damages are damages intended to punish the wrongdoer rather than just place the innocent party back in the position it would have been but for the other party’s behavior. A fraud claim may also allow a party to sue the individual that committed the fraudulent conduct in addition to the company that he works for which is a party to the contract. This would obviously be advantageous if that company were no longer a viable entity. Additionally, the contract may contain provisions limiting the parties’ damages in the event of a breach which limitations could be avoided via a fraud claim.
For public policy reasons, however, courts tend to keep fraud claims separate from contract claims and so fraud claims are generally not available in a contract setting. The exception to this general rule is where one party’s fraudulent conduct induces the other party to enter into the contract in the first place. This is called a “fraudulent inducement” claim. To state a claim for fraudulent inducement, however, one cannot merely claim that the other party promised better performance than was ultimately delivered. Where the alleged misrepresentation forming the basis of the fraud claim is said to be “interwoven” with the contract performance, a fraudulent inducement claim is not available.
In Exportaciones Textiles, S.A. v. Orange Clothing Co., 2010 WL 1257710 (S.D.Fla.), a court considered whether a fraud in the inducement claim could exist not where the conduct allegedly caused the party to enter into the contract in the first instance but, rather, where the allegation was that the misrepresentations caused a party to modify an existing contract in an unfavorable way. Specifically, a manufacturer of shirts which were sold to an importer for resale to another party claimed that the importer misrepresented that the end buy rejected much of the goods in order to induce the manufacturer to agree to discounts in the otherwise agreed pricing for the shirts. The court rejected the manufacture’s fraud claim and left it with its breach of contract claim. As the court noted, fraudulent inducement is an independent claim which requires proof separate and distinct from the breach of contract. Where the facts surrounding a breach are the same as those alleged to support the fraud claim then no fraud claim may be made and the parties are left with their contractual remedies. Here, the alleged misrepresentation regarding the rejected goods was the basis for the manufacturer’s breach of contract claim and so was not separate and distinct. This case illustrates that while a claim for fraudulent inducement may be available where one party, by its conduct, prevents the other party from making an informed decision in entering into a contract in the first instance, a fraudulent inducement claim is not available where a party’s conduct prevents the other party from making an informed decision in agreeing to modify the terms of an existing contract.
About the Author Michael E. Stearns has practiced exclusively in the area of Construction Law since 1996 and was designated as a Board Certified expert in construction law by the Florida Bar in 2005, the first year this designation was available. Mr. Stearns is “AV” rated by Martindale Hubble – the highest professional peer rating for legal ability and ethical standards. He is listed among the “Best Lawyers In America”, “Florida Super Lawyers” and “South Florida’s Top Lawyers”. Mr. Stearns got his start in the construction industry working as a carpenter while attending the University of Florida’s M.E. Rinker College of Building Construction where he earned a Bachelor’s Degree in Building Construction. He has held a Florida State Certified Building Contractor’s license since 1989 and directed multi-million dollar construction projects as a project manager before attending law school and embarking on his legal career.