A valid contract requires that both sides have the same understanding of and mutual assent to the terms of the agreement at the time the contract is formed. This is called the “meeting of the minds”. When a party to a contract was induced to enter into the contract because of some fraud, coercion, or deception committed by the other party, then the “meeting of the minds” is negated, potentially giving rise to a claim for fraudulent inducement whereby the defrauded party may seek to avoid the contract or pursue money damages. Levy Goldenberg LLP, a leading commercial litigation firm in Manhattan, represents businesses and individuals in fraudulent inducement cases and is well-versed in this complex area of the law.
Proving a Fraudulent Inducement Claim in New York
Fraudulent inducement occurs when a party to a contract was induced to enter into that contract because of the fraud of the other party. In order to prevail on a fraudulent inducement claim, the plaintiff must come forward with clear and convincing evidence of:
- The existence of a material misrepresentation,
- That was known by the defendant to be false,
- Made with the intention of inducing the plaintiff’s reliance,
- Upon which the plaintiff actually relies,
- Resulting in a detriment or damages to the plaintiff.
A fraudulent inducement claim can arise in any situation that involves a contract. For example, fraudulent inducement may occur in connection with:
- Employment agreements
- Services contracts
- Insurance contracts
- Real estate transactions
- Asset purchase agreements
- The purchase and sale of securities
The duty to refrain from using fraud to obtain a contract is separate and distinct from the duty to perform a contract that was already made. Unlike a breach of contract claim, where one party has failed to perform its duties under the contract, fraudulent inducement relates to the accuracy and truthfulness of the parties’ discussions and negotiations prior to the inception of the contract.
However, it is not uncommon in commercial litigation matters to see a fraudulent inducement claim overlap with a breach of contract claim, such as when the aggrieved party alleges that the other party not only failed to perform a duty under the contract but also falsely stated or misrepresented its intent to perform that duty when the contract was being negotiated. In other words, if a promise is made with a preconceived and undisclosed intention of never fulfilling that promise, it constitutes a misrepresentation of a material existing fact upon which a tort action for fraudulent inducement may be predicated.
Fraudulent inducement may also be asserted as a defense tactic in cases where the plaintiff has alleged a breach of contract on the part of the defendant. If the defendant can show that the contract upon which the plaintiff based the breach of contract claim was actually procured by the plaintiff’s fraudulent inducement, the defendant will have the right to void, or rescind, the contract and thereby defeat the plaintiff’s claim for breach of contract.
Defenses to Fraudulent Inducement
One of the most common ways that a defendant can defeat a fraudulent inducement claim is by showing that the alleged misrepresentation during the contract negotiations did not actually involve an untrue statement of fact. Generally, a party’s statements about the future are not considered matters of fact. The same holds true for misstatements of the law in most circumstances, as well as misrepresentations made by a third party unless the third party was an employee or agent of the defendant.
Likewise, a statement of a mere opinion is not a statement of fact upon which a claim of fraudulent inducement can be based. Negotiating parties often try to present the prospects of a proposed deal in the most favorable light. Such “puffing” or “trade talk” are viewed as meaningless superlatives that no reasonable person would take seriously, and is therefore not actionable.
Defendants also frequently challenge the materiality of the alleged misstated fact. Most courts require that a misrepresentation of fact must relate to a substantial fact which, in the context of the negotiations, was important in the decision of the deceived party to enter into the contract. A plaintiff that seeks damages for fraudulent inducement may not rely on false statements about facts which are unimportant, peripheral, or tangential.
Remedies for Fraudulent Inducement
A party that succeeds in proving fraudulent inducement of a contract is entitled to various forms of relief depending on the circumstances of the individual case and the election of the deceived party. The remedies include rescission of the contract and recoupment or benefit-of-the-bargain damages or out-of-pocket damages. New York law provides that a claim for damages sustained as a result of a fraudulent inducement of a contract shall not be deemed inconsistent with a rescission claim. The claiming party can obtain rescission, restitution of benefits it conferred upon the other party, and damages caused by the fraud, providing that complete relief does not involve any duplicate recovery.
Choose Levy Goldenberg LLP
Fraudulent inducement cases involve complex issues and evidentiary hurdles and often overlap with other claims including breach of contract. These cases require experienced and knowledgeable legal representation. The New York commercial litigation attorneys at Levy Goldenberg LLP represent clients throughout Manhattan and the five boroughs in fraudulent inducement cases and similar business fraud disputes. Do not delay. Contact Levy Goldenberg LLP today to discuss your case.