ISSUES OF FRAUD IN BUSINESS CONTRACTS

Contracts are the foundation that businesses, small or large, depend on daily to carry out their mission.  Most businesses exist by virtue of contracts, agreements of mutually dependent promises and obligations such as partnership agreements, articles of incorporation and shareholder agreements, limited liability operating agreements, service agreements, licensing agreements, and many others.  Businesses hire their employees by contract, or quasi contract, either in writing or orally.  And, of course, business suppliers and customers supply and purchase in conjunction with purchase and sales orders/contracts.  So, it is not surprising that business litigation, for the most part, is centered on the interpretation and enforcement of these agreements, and the recovery of damages for alleged breaches of contract, issues of their formation, or execution of the duties under these agreements. 

As a major subset of contract law are cases where fraud is alleged, either in the formation of a contract or later in the delivery and execution of the terms of the contract–or, in some cases, where an agreement doesn’t rise to the level of a contract, but fraud in the inducement is present. In essence, “fraud” is present when there is dishonesty or deception at some point in the business relationship which is material to the terms of the contract or transaction. Experienced business litigation lawyers know that, when suing for compensation for breach of contract, the addition of legitimate fraud claims can make their client’s case much stronger, especially from a damages perspective. 

In California, for example, to prove a fraudulent inducement claim, a plaintiff must prove the following elements:

  • At least one misrepresentation — false statement — was made or at least one important (material) fact was concealed by the defendant, or their agent;
  • The falsity/concealment was known to the defendant, or their agent, at the time it was made;
  • The party making the false statement made the false statement in order to induce the other party to enter into the contract;
  • There was justifiable or reasonable reliance by the other party; and,
  • No contract would have been entered into had the truth been known.

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

Breach of Contract:

When contract disputes cannot be resolved by negotiation, our San Diego business lawyers often find themselves having to file or defend lawsuits for breach of contract.  California Civil Jury Instruction 350, which is used by California courts to instruct juries in such cases, 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 our contract lawyers or business attorneys can tell you, contract damages are limited to compensating for harm which the parties knew or could reasonably have foreseen.

Damages in Fraud Claims Cases:

There are various types of fraud in law, however the principal statute that applies to business contracts is set California Civil Code section 1572, which provides:  

Actual fraud, within the meaning of this Chapter, consists in any of the following acts, committed by a party to the contract, or with his connivance, with intent to deceive another party thereto, or to induce him to enter into the contract:

1. The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

2. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

3. The suppression of that which is true, by one having knowledge or belief of the fact;

4. A promise made without any intention of performing it; or,

5. Any other act fitted to deceive.

Fraud is also considered a Tort (a civil wrong that can be found even if a “contract” is not found to exist), 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.

The difference between alleging a breach of contract or the tort of fraud is significant under California law since punitive damages are allowed under tort law whereas they are not under contract law and, in addition, the damages do not have to have been foreseeable.

See 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 revenue or profits, and meant to punish the defendant, can provide significant leverage for a business litigation lawyer to negotiate a larger settlement on behalf of their client.

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

By | 2019-05-22T12:08:03-08:00 April 26th, 2019|Business Contracts, Business Law, Business Litigation, Civil Litigation, Contract law, Contracts, Corporate Law|Comments Off on ISSUES OF FRAUD IN BUSINESS CONTRACTS