Search for Fraud in Contracts. Few things are more important to a business, small or large, than its contracts.  Most businesses exist by virtue of “contracts”, agreements of mutually dependent promises and obligations, as in partnership agreements, articles of incorporation and shareholder agreements, limited liability operating agreements, and the like.  Businesses hire their employees by contract, written or oral.  Business suppliers and customers supply and purchase according to purchase and sales contracts.  So it is not surprising that business litigation, for the most part, is centered on the interpretation and enforcement of contracts, and the recovery of damages for alleged breaches of contract.  Business law, to a large extent, IS contract law.  But in business litigation, when parties are often fighting over failed contracts, contract law has a handmaiden, and her name is “Fraud”.  Experienced business litigation lawyers know that, when suing for compensation for breach of contract, the addition of fraud claims can make their client’s case much stronger.  The following fact scenario, of a typical business contract dispute, will help illustrate:

THE WEBSITE DEVELOPER WHO DIDN’T DEVELOP

Frank S. had 25 years of experience operating “Fred S Landscaping”, a small landscaping company, when he decided to use his savings to refocus and rebrand his business to handle landscape design only.  He formed a new corporation with the help of his corporate lawyer, named “Custom HomeScapes, Inc.” and wrote a detailed business plan.  His business plan contemplated marketing landscape design services nationally, and working personally with remote homeowners on-line, with proprietary CAD design software.  His biggest expense was to be a fully integrated website and office computer system that would not only accommodate billing and calendaring, but would allow his customers to easily and reliably work with him, in real time and on delayed schedules, using his design software.

After searching the Internet for a website developer/computer programmer, Frank met with Django T., whose own business website and résumé touted impressive credentials.  During their in-person negotiations, Django was convincing in describing his abilities and experience.  Frank even met with Django at his home on one occasion, and was impressed by the exclusive neighborhood where Django lived and his expensive car collection. He seemed very successful.

The written contract by which Frank hired Django, drafted by Frank’s business lawyer, did not include any description of Francisco’s experience or abilities.  Rather, it focused on the necessary capabilities of the website and an integrated computer system, a 3 month timeline for completion of the development, all budgeted for a total payment of $100,000, to be paid in monthly increments. Frank’s business plan called for the website and computer system to be operational within 3 months.

Frank started getting nervous after the first month when he saw little evidence that Django was doing anything.  When he tried to speak with Django, he claimed to be busy, and said the progress was just not yet apparent, and that Frank. did not understand the process like Django did.  Django was evasive, and it never got better.  By the end of two months, Frank was absolutely frantic.  Django had already collected $60,000 under the contract, but had accomplished little that Frank could see. The project was way behind the timeline benchmarks for setting up the website and computer system.  Frank continued to chase and badger Django, but to no avail. He finally admitted to himself that his $60,000 was mostly wasted and possibly lost for good, and that the work Django had performed was a disaster.  In desperation, Frank went to his business litigation lawyer, who sent a letter advising Django that he was in breach of the agreement, and demanding immediate repayment of all monies.  Frank, sleepless and desperate, also began looking for a replacement who could take over the project.

Before he could hire someone new, however, Frank suffered a serious, debilitating heart attack.  His doctor, who had been monitoring him, was convinced that stress was a major contributing cause of the attack. Frank’s business litigation attorney, in his investigation to prepare a lawsuit, discovered that Django’s website and resume included gross falsehoods and exaggerations of his abilities, experience and education. Frank, from his hospital bed, also confirmed that Django had in blatantly lied to induce Frank to hire him.  The only good news Frank’s litigation lawyer discovered was that Django was, in fact, wealthy, by inheritance, and there were assets to pursue in satisfaction of a judgment.

The complaint, filed by Frank’s business litigation lawyer, stated a cause of action for breach of the contract for the website and computer system development, and apart from seeking recovery of the $60,000 that had been advanced, sought additional damages that would be incurred to hire someone else to do the work Django had failed to do.  The complaint also included a cause of action for fraud, on the grounds that Django had deceived Frank into entering the contract, and sought damages for the pain and suffering and financial losses associated with Frank’s heart attack.  Frank’s litigation attorney intended to introduce medical testimony that the heart attack resulted from the stress caused by Django’s deceit.  The fraud claim also supported a claim for punitive damages against Django.

The Law of Damages for Breach of Contract vs Damages for Fraud

Breach of Contract:

When contract disputes cannot be resolved by negotiation, business lawyers often find themselves having to file or defend lawsuits for breach of contract.  California Civil Jury Instruction 350 provides a good summary of the types of money damages which may be awarded for breach of contract:

350. Introduction to Contract Damages

If you decide that [name of plaintiff] has proved [his/her/its] claim against [name of defendant] for breach of contract, you also must decide how much money will reasonably compensate [name of plaintiff] for the harm caused by the breach. This compensation is called “damages.” The purpose of such damages is to put [name of plaintiff] in as good a position as [he/she/it] would have been if [name of defendant] had performed as promised.

To recover damages for any harm, [name of plaintiff] must prove that when the contract was made, both parties knew or could reasonably have foreseen that the harm was likely to occur in the ordinary course of events as result of the breach of the contract.

[Name of plaintiff] also must prove the amount of [his/her/its] damages according to the following instructions. [He/She/It] does not have to prove the exact amount of damages. You must not speculate or guess in awarding damages.

Notably, as a contract lawyer or business attorney can tell you, contract damages are limited to compensating for harm which the parties knew or could reasonably have foreseen.

Fraud:

There are numerous variations of fraud, but the principal formulation is set forth in California Civil Code section 1709, which provides:

“One who willfully deceives another with intent to induce him to alter his position to his injury or risk, is liable for any damage which he thereby suffers.”  

Fraud is a tort i.e. a civil wrong other than breach of contract, and the general “tort” measure of damages is set forth in California Code of Civil section 3333, which provides:

For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.

This is a much broader measure of damages than is typically applied in the context of a simple breach of contract, because it is not limited to foreseeable damages.  Rather, with proof of causation, however unanticipated it may have been, any resulting harm can be compensated.

Equally important, is the potential for punitive damages pursuant to California Civil Code Section 3294, which provides, in part:

Exemplary damages; when allowable, definitions

(a) In an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice, the plaintiff, in addition to the actual damages, may recover damages for the sake of example and by way of punishing the defendant.

(emphasis added).

This opportunity to plead and prove punitive damages, which are typically a percentage of the defendant’s sales or wealth, meant to punish the defendant, can provide excellent leverage for a business litigation lawyer to negotiate a larger settlement in a case. This is due, in part, because punitive damages, which are permitted in a fraud claim, can far exceed the actual damages suffered by a plaintiff, whether foreseeable or not, and can result in a 7 or 8 figure judgment against a defendant, depending on their wealth or annual revenue.

Conclusion

As our fictional case helps demonstrate, there can be very significant advantages for a plaintiff who, when suing for breach of contract, can also make a claim for fraud.  The measure of damages can be substantially greater, and can even include punitive damages.  While Frank could likely recover the $60,000 he spent, and perhaps additional money if he could prove other losses resulting from the delay in setting up his website, Frank would never succeed in recovering damages for a heart attack if he sued only for breach of contract.  A heart attack is clearly not an anticipated, foreseeable result of a failure to perform on a contract to develop a website and integrated business computer system.

Likewise, no matter how blatant and outrageous Django’s lies about his abilities and experience might have been, those lies were not included in the contract.  Rather, they were used to deceive and trick Frank into entering the contract. Such fraud can, if a jury is so persuaded, support an award of punitive damages.

If you believe you may have been a victim of fraud, or if you are being sued for fraud, contact our dedicated business litigation lawyers today to assist you. There is no charge for an initial evaluation of your case.

For additional information on how punitive damages are determined, click here.