ConstructionRisk.com Report, Mar 2008, Vol. 10, No. 2
by Kent Holland | Mar 16, 2008 | Archive Newsletter | 0 comments
Fighting Back: Contractors Can Use Tort Law to Challenge Claims of Fraud, Deceit, and Dishonesty
Fraud Count Dismissed for Failure to State a Claim & Plaintiff Can't Avoid Contract Terms by Claiming it was Unaware of the Term
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By: Steven J. Koprince, Esq.
Akerman Senterfitt Wickwire Gavin
It seems to happen to honest contractors all the time: a straightforward contract dispute takes a wrong turn, and suddenly the contractor is facing claims such as fraud, deceit, and dishonesty. A contractor's litigation opponent might assert such claims in the heat of the moment, allowing emotion to sway its decisions. Or the opponent might have a more strategic motive in making such claims: often, limitations on contract claims (such as contractual limits or caps on damages) can be avoided by re-characterizing a breach of contract claim as a claim for fraud or deceit.
Whatever the opponent's motives, the fact is that claims such as fraud, deceit, and dishonesty have the potential to do serious harm to a contractor's business reputation. So what can an honest contractor do when its opponent has falsely accused it of such things? Of course, the contractor will aggressively oppose its opponent's claims by seeking summary judgment or dismissal, and perhaps even sanctions. But the contractor need not stop there. The contractor can also use tort law to go on the offensive against its opponent. By taking the offensive, the contractor might force its opponent to withdraw its false claims or come to the bargaining table for a more favorable settlement. And if the action goes through to trial, the contractor could even win an award of damages.
Depending on the jurisdiction, a variety of tort actions may be available to a contractor who has been falsely accused of fraud, deceit, or dishonesty. These potential actions include:
Defamation/Slander/Libel
Perhaps the most obvious claim against someone who has falsely accused a contractor of fraud is a claim for defamation. A statement is defamatory if it tends to "harm one's reputation so as to lower him or her in the estimation of the community." Restatement (Second) of Torts § 558. Defamation can be either spoken (slander) or written (libel).
Although a plaintiff must typically demonstrate that it was damaged by a slanderous statement, in many jurisdictions, an allegation of fraud or deceit is considered "defamation per se." A statement that is per se defamatory constitutes defamation regardless of whether the plaintiff was damaged by the statement. In these jurisdictions, a contractor may be able to prevail on a defamation claim merely by demonstrating that the plaintiff falsely accused it of fraud, and made such a statement to a third party.
Commercial Disparagement
In those jurisdictions that recognize the tort of "commercial disparagement," the plaintiff can recover on a showing that the defendant "made false and demeaning statements about the quality of plaintiff's good or services." Appraisers Coalition v. Appraisal Inst., 845 F.Supp. 592, 610 (N.D. Ill. 1994). Commercial disparagement is not the same thing as defamation—no damages need be shown, and a contractor can sue for both defamation and commercial disparagement if it so wishes.
Tortious Interference with Contract/Tortious Interference with Business Relationships
Many states allow tort actions for tortious interference with a contract, a business relationship, or a business expectancy. To prevail in such an action, a contractor must typically demonstrate (1) the existence of a contract, business relationship, or business expectancy; (2) the defendant's knowledge of the same; (3) the defendant's purposeful interference to hinder the contract, relationship, or expectancy; and (4) damage to the contractor. DSC Logistics, Inc. v. Innovative Movements, Inc., 2004 WL 421977 (N.D. Ill. 2004).
The DSC Logistics case shows how one contractor used tort claims to fight back when it was accused of fraud, deceit, and dishonesty. The case arose out of a contract between DSC Logisitics, Inc. ("DSC") and Solo Cup Company ("Solo"), under which DSC was to oversee Solo's logistics and transportation operations. A third company, Innovative Movements, Inc. ("IMI") also performed similar work for Solo under a separate contract.
One of IMI's managers sent an email to Solo about DSC, making a number of negative statements about DSC's business. Among those statements were accusations that DSC's business procedures were costly and error-prone, that DSC's practice was not to timely pay its invoices, and that DSC had acted in "utter bad faith" in its dealings with Solo and IMI. DSC, believing IMI's allegations to be completely false, decided to fight back in court. It brought suit against IMI for defamation, commercial disparagement, and interference with contractual and business relations. IMI moved to dismiss the claims, arguing that DSC had not stated valid causes of action against it.
The court first held that DSC had validly stated a cause of action for defamation. Calling IMI's statements "obviously and naturally hurtful," and noting that the email was send to one of DSC's "largest and most important clients," the court found that DSC had met the damages element, stating "Injury to DSC's reputation in this instance can be assumed."
The court also allowed the defamation count to proceed on the basis that it met the elements of a cause of action for defamation per se. In Illinois , as in many states, a statement accusing a corporation of fraud is considered defamatory per se. See Geske & Sons v. NLRB, 103 F.3d 1366, 1373 (7th Cir. 1997). But Illinois goes even further than most jurisdictions, holding that a statement about a corporation is defamatory per se if it involves false statements about the corporation's financial position, business methods, or management. Id. Here, IMI's statements about DSC's business clearly fit into Illinois' broad definition of per se defamation.
The court then made short work of IMI's attempt to dismiss the commercial disparagement claim, ruling that DSC had properly pled that the statements in IMI's email were "false and demeaning" and were directed at DSC's business operations. The court denied IMI's motion to dismiss these claims.
Before proceeding with tort claims like slander, defamation, and commercial disparagement, a contractor should be aware of one important potential roadblock. The longstanding rule in most jurisdictions is that "statements made in the course of judicial proceeds, in pleadings or in argument, as long as they are relevant, material, or pertinent to the issue, are absolutely privileged regardless of falsity or malice on the party of the author." Slomka v. City of Hamtramck Housing Comm'n, 2007 WL 3409359 (Mich. App. 2007). In other words, if the only place the contractor has ever been accused of fraud, deceit, or dishonesty is in the court pleadings themselves, or in related matters such as depositions or at trial, a counterclaim for slander, defamation or disparagement is unlikely to be successful.
But how likely is it that the opponent has been disciplined enough to confine its allegations against the contractor to the courtroom? A contractor can use discovery to obtain the opponent's email messages, letters, and other correspondence, and use depositions to ask the opponent whether it has ever told anyone that the contractor was dishonest or deceitful. In many cases, the contractor will be able to prove that the opponent made the accusation outside of court. See, e.g., Campbell v. Triad Fin. Corp., 2007 WL 2973598 (N.D. Ohio 2007) (motion to dismiss defamation claim denied when evidence showed that opponent told one person outside of court that fraud had been committed).
Of course, other defenses exist to claims of slander, defamation and disparagement. For example, the opponent may attempt to rely upon a First Amendment defense or argue that the statement should be taken as opinion, not fact. A contractor considering making a slander, defamation, or disparagement claim should work with its attorneys to determine whether any potential defenses the opponent may offer have merit.
A contractor falsely accused of fraud, deceit, and dishonesty can do more than play defense. The contractor can take the offensive, fighting back with tort claims such as slander, defamation, commercial disparagement, and interference with contract/business expectancy. These claims offer contractors a powerful weapon, and it is a weapon they may wish to consider using the next time an opponent makes false accusations about the contractor's business.
About the Author: Steven J. Koprince, Esq. is a construction lawyer with firm of Akerman Senterfitt Wickwire Gavin located at 8100 Boone Blvd., Suite 700; Vienna, VA 22182. In his practice, he represents design professionals, contractors and project owners. He has successfully defended consulting firms accused of fraud. He may be contacted at (703-790-8750) or via e-mail at steven.koprince@akerman.com. This article is published in ConstructionRisk.com Report, Vol. 10, No. 2 (March 2008).
Fraud Count Dismissed for Failure to State a Claim &
Plaintiff Can't Avoid Contract Terms by Claiming it was Unaware of the Term
By: J. Kent Holland, Esq.
Construction Risk Counsel, PLLC
Fraud allegations against a contractor by a homeowner were dismissed pursuant to a motion for partial summary judgment because the complaint failed to state a claim upon which relief could be granted. The homeowner (Lamarque) contracted with contractor (BEI) for almost $3 million in renovations to its house. The contract was a standard form American Institute of Architects (AIA) agreement that established as the dispute resolution process, mediation to be followed by arbitration. When Homeowner became dissatisfied with the progress and quality of the work, it filed suit alleging breach of contract, negligence, gross negligence and fraud. It alleged BEI used substandard materials, failed to properly supervise its employees and subcontractors, failed to complete the work in a workmanlike manner, failed to provide documentation showing amounts paid for materials and subcontractors, and committed fraud by requesting subcontractors submit billings for work not yet performed. Based on this, the Homeowner demanded rescission of the contract plus damages for having to repair substandard work. Contractor moved the trial court to (1) dismiss the case as premature because the plaintiff had failed to follow the arbitration procedures of the AIA contract and to (2) grant partial summary judgment on the fraud count. The trial court granted the requested relief after finding there was no issue of material fact as to fraudulent inducement.
Having decided the Homeowner was not fraudulently induced into the contract, the court next considered Homeowner's argument that it was nevertheless excused from the arbitration provision because that clause was in an attachment to the agreement which the plaintiff alleged it had not read and did not know about. The trial court rejected that argument and found the arbitration clause was binding. That naturally led the court to require arbitration proceedings be completed before the case could proceed.
On appeal, the appellate court affirmed both aspects of the trial court decision. The court considered the statements of the contractor that were contained in its proposal, correspondence and contract, and concluded that there was no material misrepresentation or fraudulent inducement. The plaintiff also argued that the arbitration clause should not be enforced because it was not contained in the actual contract it signed but was only incorporated by reference. The plaintiff, therefore, asserted that he did not agree to the arbitration provision as a term of the contract. In rejecting this argument, the court explained that there is no legal requirement that an arbitration clause be contained in a single contract document instead of incorporating it be reference.
In any event, said the court, "a party is deemed to know the contents of a written instrument he signed and cannot avoid his or her obligations by claiming he or she did not read it or was not aware of its contents." The court also stated that "if a part is not aware of the contents of the instrument he or she signed, he or she must establish 'with reasonable certainty that [he or she has] been deceived.'" Since the plaintiff in this case did not put forth sufficient evidence to show he was deceived by the contract language or that fraud was committed, the trail court decision was affirmed. Lamarque v. Barbara Enterprises, Inc., 958 So.2d 708 ( La. App. 4 Cir).
Comment: This decision reiterates important legal principles. First, if you sign a contract you are presumed to know what is in it, and can rarely argue that you are excused from one or more of its terms just because you didn't read it or that term was buried deep in some appendix or perhaps incorporated by reference. Second, plaintiffs that assert a fraud count as part of a routine breach of contract case are doing a disservice to themselves and the court. I am becoming more convinced that when plaintiffs sue contractors for fraud, contractors should look at every possible defense – including possible actions against plaintiffs and their counsel for abuse of legal process and for libel and slander. With regard to the potential for libel suits see the article in this newsletter by Steve Koprince on this subject.
About the author: J. Kent Holland is a construction lawyer located in Tysons Corner , Virginia , with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects – including assistance with contract drafting, review and negotiation; change order and claims analysis (preparation or defense); risk management advice concerning insurance coverage – including assistance with negotiating and drafting the terms and conditions of policies and endorsements; advice to insurance underwriters; guidance to those procuring insurance; change order and claim preparation, analysis and defense; contract preparation; contract review and contract negotiation. Mr. Holland is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 10, No. 2 (March 2008).
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