By: Thomas S. Tripodianos Published: August 2012

Alleged Construction Company Misrepresentation and Fraud

Question. Owner alleges Contractor fraudulently induced him to contract with Construction Company, making misrepresentations about the company. Owner made an initial payment but Construction Company abandoned the project a month later. Owner attempted to show that Contractor could not have expected Construction Company to perform by pointing to other suits and allegations of failure to pay subcontractors. Was Owner defrauded?

Answer. NO. Owner alleges fraud based on breach of contract arising out of a written contract entered into between Owner and Construction Company. Owner and Construction Company entered into a standard AIA construction contract whereby Construction Company agreed to provide services for the project, Owner's residence. Owner alleges that Contractor, a principal of Construction Company fraudulently induced him to contract with Construction Company, and that he made misrepresentations regarding Construction Company.

Contractor states that not long after the contract was executed, he suffered illness and his partners took over control of the operations of Construction Company. Through a combination of mismanagement and the bad economy Construction Company's business failed with a number of projects unfinished, including the Owner Project.

Owner alleges that Contractor misrepresented to Owner that (1) Construction Company fully intended to perform [the Owner Project] for which it was hired, and (2) that the down payment would be used strictly for the [Owner Project] and would not be used for any other purpose. Owner further alleges that Contractor misrepresented that Construction Company was licensed to conduct the work outlined in the agreement and qualified to complete the work and furnish the materials outlined therein.

Contractor has copies of invoices and other documents purchased by Construction Company in connection with this project, and Construction Company was a licensed home improvement contractor during the relevant time periods.

Fraud in the inducement must be shown by the party asserting the fraud by clear and convincing evidence. The party asserting the fraud must show that the signer knew the terms of the contract, assented to the terms of the contract, and intended to execute the contract, but the assent itself was induced by a fraudulent representation. It requires a knowing misrepresentation of material fact, intent to deceive another party and to induce that party to act on it, causing injury. Owner alleges that Contractor, the only person with whom he dealt regarding the transaction, represented to Owner that Construction Company fully intended to perform the contract.

Owner attempts to show Contractor could not have expected Construction Company to perform by pointing to other lawsuits, and allegations of failing to pay subcontractors which originated prior to execution of this contract.

Owner also asserts there were representations about how the down payment would be applied, but such representations are alleged to have been made after the execution of the contract. The contract, which already stated the terms of how the funds would be applied, was signed before these representations were made and thus could not have induced the signing of the contract.

The elements of a cause of action for fraud require a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the Owner and damages.

The law is well settled that a cause of action for fraud does not arise when the only alleged fraud relates to a breach of contract. Owner in asserting a fraud claim in the context of a contractual relationship must establish that the alleged false representation of facts was collateral and extraneous to the contract.

Article 1 of the contract states, "the contractor shall fully execute the Work described in the Contract Documents.." Thus, the allegation that Contractor misrepresented that Construction Company fully intended to perform the project for which it was hired, is nothing more than a representation that Construction Company would perform its obligations under the contract. Moreover, Article 4 of the contract provides that the down payment would be "applied against the first progress payment(s) due to the Contractor." Owner's cause of action alleging that Contractor represented that "[the down payment] would be used strictly for contracting services at Owner's residence and would not be used for any other purpose" is unsupported since Article 4 of the contract set forth how the down payment would be used, and there was no written modification of that provision as would be required under the contract. Owner has failed to address how the allegations of fraud are collateral to the contract, and as such, Owner has not met his burden and his claim must fail.

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