Friday, July 16, 2010

Fighting business to business fraud (Part III): Fraudulent inducement

In prior posts I considered some causes of business to business fraud common in business litigation and one remedy: breach of fiduciary duty. In this post, I consider another remedy: fraudulent inducement or sue for money damages.

Fraudulent Inducement

If one person made a representation to another to induce them to sign an agreement and if that representation were false, the victim might be able to get out of (rescind) the agreement.

Germane factors

First, was the representation an opinion or a fact? “This is the greatest gas station in the world” is an opinion and sales puffing, whereas “this gas station had revenues of $xxx,xxx per month” is a fact. So, if you buy a gas station and then discover that the representation of past or existing revenues was false, you might be able to return the gas station to the seller and get your money back or sue for the difference between the revenues as represented versus the actual.

Second, what do the actual documents say about the representation, if anything? Standard language in a securities offering or private placement memorandum precludes any investor from relying on any statement in the document, and makes it much more difficult to sue for securities fraud based on the fraudulent inducement theory.

Third, when the victim discovered the fraud, what did he or she do? If after discovery the victim proceeded as if nothing were wrong, the fraud lawsuit might be waived. I recommend aggressive pursuit of your rights if you are a victim of business fraud.

Punitive Damages

If you meet the elements of fraudulent inducement, substantial damages can be recovered, and punitive damages are possible.