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From Bad to Worse:
Fraud claims can carry potentially severe consequences not ordinarily associated with claims for simple breach of contract, and have increasingly found their way into situations traditionally associated with breach of contract. It is important for contractors to recognize the difference between these two distinct claims, in order to reduce risk and guard against potentially damaging claims.
Even with the best of intentions, a contractor has many opportunities to make mistakes, to become overextended, or make promises that, ultimately, go unfulfilled. As contractors and customers alike rightfully focus on the importance of “keeping one’s word,” broken promises and disappointed expectations can lead frustrated customers to confuse unintentionally defective work and bad results with dishonesty and even fraud.
What is fraud, legally?
Implications of fraud claims for corporations, individuals
Beyond reputational concerns, a fraud claim carries liability risks not generally found in a typical breach of contract case. For example, if a limited-liability company fails to meet a construction deadline or make a payment to a supplier, owners and employees of the LLC generally are not liable for breach of contract, unless they signed a personal guaranty to the contract. If an owner or employee commits fraud, however, that individual can share personal liability with the company, even though he was acting as the company’s agent at the time. This liability also may include punitive damages.
Half-remembered conversations and misunderstandings often can blur the line between breach of contract and fraud, leading to serious but, ultimately, avoidable claims. A contractor can keep broken promises and disappointed expectations from turning into fraud claims by recognizing some key traps for the unwary.
Fact, opinion and the “fraudulent promise”
Performance issues pose other opportunities for confusion. While a party’s simple failure to perform a contract is not fraud by itself, the equation changes where a party makes a promise with no intention to try to fulfill that promise in the future. While this type of claim is often difficult to prove, courts have looked to circumstantial evidence, such as failing to apply for a permit, lack of communication with the customer, and requesting advances for completion of work that the contractor never completes.
How to reduce risk
While a failed contract is never a good thing, the right precautions can help prevent unfulfilled promises from morphing into something even worse.
|Last Updated on Friday, 20 May 2011 12:33|