The Danger of Fraud

In today's world, contracts (express or implied) are ubiquitous - from the formation of business relationships, to the sale of homes or automobiles, to the purchase of items on websites such as Craigslist - all of these events necessarily involve the acquiescence of each side to the transaction and the exchange of one good or service for another good or service. Despite the frequency with which people and companies enter into contracts, there is an often overlooked "ghoul-behind-the-gravestone" - and that is the method by which persons unhappy with contracts will seek to invalidate them, or otherwise avoid the obligations that the contracts require them to perform. The common mechanism of avoidance is "fraud."

Fraud is a pet claim utilized by the opportunistic and/or savvy attorney, who seeks to relieve his client of contractual obligations that are no longer beneficial or convenient to the client. How they do this will turn on one of three fraud theories:

1) Fraudulent Misrepresentation

Under the "fraudulent misrepresentation" theory, the plaintiff - or the party seeking to avoid performance under the contract - will claim that the defendant - or the other contracting party - misrepresented, or lied, about some material term of the contract in order to induce, or persuade, the plaintiff to enter into the contract. For example, talent might allege that a business partnership agreement was represented by the defendant to be a business management agreement. A purchaser of a home might claim that the seller misrepresented the condition of the home at or before the time of purchase. The party seeking avoidance of the contract will claim that he or she relied to their detriment, or damage, on this misrepresentation and that "injustice" can be avoided only by relieving him of his obligations under the contract.

2) Fraud by Omission

An apparent opposite of "fraudulent misrepresentation," the theory of "fraud by omission" relies upon some failure to disclose material facts which would influence a person's decision to enter, or not enter, into a contract. For example, in a transaction involving the purchase of an automobile, this could mean a seller's failure to disclose accidents in which the automobile had been involved.

3) Promissory Fraud

"Promissory fraud" is, in many ways, a subset of "fraudulent misrepresentation." Under this theory, one party will claim that her contractual partner "promised" that he had the right to do, or would do, something that he knew he did not have the right to do, and/or had no intention of doing, at the time the promise was made. Such "promises" include anything from a "right" to collect and account for royalties to an intent to share one's income and life (a la palimony).

For the party opposing a fraud claim, the potential liability greatly exceeds a mere invalidation of the contract. A finding of fraud at trial carries with it the possibility of a punitive damages award - a sum that could amount to as much as ten times the value of actual damages. For example, a determination of $10,000.00 in actual damages at trial could turn into a $100,000.00 judgment after a punitive damages award. A $100,000 judgment could turn into a $1,000,000.00 judgment. Additionally, a judgment for fraud is not dischargeable by way of a bankruptcy proceeding. A judgment for fraud will follow the unsuccessful defendant for the rest of her life or until the judgment is paid in full.

All of this underscores the importance of protecting oneself by legal representation when entering into a contract - especially when the person with whom you are entering into a contract is not represented by an attorney. The most potent weapon that a person seeking to invalidate a contract has is a claim of undue influence or inequality of bargaining power as a result of being without counsel.