Fraud in the Inducement as a defense to breach of contract claim.

Fraud in the Inducement as a defense to breach of contract claim.

Business litigation attorney Gregory G. Brown recently represented a multi-state mortgage lender in a high six-figure contract dispute over the development and performance of an online marketing software engine and lead development campaign. The binding commercial arbitration occurred at JAMS Orange County. The lender was a direct Fannie Mae, Freddie Mac and Ginnie Mae seller, servicer and issuer (less than 1% of lenders nationwide have these three key investor approvals). The lender client entered into the contract based upon false representations. After the software program was deployed nationwide, the results were not what had been represented. Because of the poor results, the lead provider volunteered extensive discounts to accommodate the lender client.

At the arbitration, the lender client alleged fraud in the inducement as a result of the false representations. Had the lead provider given the lender the accurate information about the historical performance of the product, the lender would not have entered into the contract.

Fraud in the inducement occurs when:

1. A party represents a material fact is true;
2. The party knew that the representation was not true;
3. The representation made to persuade the lender to agree to contract;
4. The lender reasonably relied on this representation; and
5. The lender would not have entered into contract if known info was false.

When the above is proven, then no contract was created.

Fraud may be asserted as an affirmative defense to a breach of contract action. Bowmer v. H.C. Louis, Inc. (1966) 243 Cal.App.2d 501, 503; Grady v. Easley (1941) 45 Cal.App.2d 632, 642. Proof of the existence of a valid and enforceable contract between the parties is an essential element of any breach of contract cause of action. Careau & Co. v. Security Pacific Bus. Credit, Inc. (1990) 222 Cal.App.3d 1371, 1388. The parties’ free consent is essential to the existence of a valid and enforceable contract, and a party’s consent cannot be real or free when it is obtained through fraud. Civ. Code §§ 1550, 1567.

Fraud may take the form of any of the following acts, committed by a party to the contract, 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 (intentional misrepresentation), (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 (negligent misrepresentation), (3) the suppression of that which is true, by one having knowledge or belief of that fact (concealment), (4) a promise made without any intention of performing it, or (4) any other act fitted to deceive.

Fraud may be proved by direct evidence or it may be inferred from all of the circumstances of the case. Ach v. Finkelstein (1968) 264 Cal.App.2d 667. Fraud may be proved by inference and circumstantial evidence because it is often impossible to prove directly. Vogelsang v. Wolpert (1964) 227 Cal.App.2d 102, 111; Balfour, Guthrie Co. v. Hansen (1964) 227 Cal.App.2d 173, 192 [the circumstances surrounding the transaction and the relationship of the parties will often be facts from which fraud may be inferred].

For a consultation with our expert Southern California Fraud and Contract Attorneys, please call: 714-505-3000 or schedule an appointment online.