A Fraudulent Inducement May Cause Your 'Ironclad' Contract to Rust

Here is an interesting twist to the idea of a merged contract.

Assume that you enter into a services contract based on what you believe, in good faith, will be significant cost savings if the vendor’s services are used. Your belief is based on more than just sales talk. You have the vendor’s report showing projected savings based on your own data. While the accuracy of the report cannot actually be tested because to do so would have require access to the vendor’s confidential business information, the report purportedly was prepared by a third-party which gives you some confidence in its accuracy. 

Based on the vendor’s projections you see value in its services. Accordingly, you carefully draft a contract, including in it a merger clause so that prior or collateral agreements cannot be used to alter the contract once it is signed. You have your lawyer review the contract to make sure your ducks are all in a row and you sign. 

Later, when the costs savings do not materialize you come to believe that the vendor may have lied to you about some of the economic factors that supported the cost savings and, ultimately, the entire contract. You think you want to sue for fraud, but you are not sure you have a case because of the merger language in the contract. What do you do?

Your lawyer should tell you that, generally, a fraud claim must be based on a statement relating to a past or existing fact, and that a promise relating to a future action is usually considered contractual and cannot constitute fraud. Put differently, a representation that relates to a party's contractual performance cannot typically be the basis of a tort claim, such as intentional fraud. 

Accordingly, your lawyer might say, you either have a claim for breach of contract or you don’t. However, your lawyer also should tell you that when a party materially misrepresents future conduct, and the circumstances suggest that one could reasonably be expected to rely upon the misrepresentation, a claim for fraud in the inducement of a contract may be possible.  

Under Michigan law, a claim of fraud in the inducement requires the plaintiff to prove that:  (1) the defendant made a material representation; (2) it was false; (3) the defendant either knew it was false or made it recklessly without knowledge of its truth; (4) the representation was made with the intent that the plaintiff would act upon it; and (5) the plaintiff did act, which caused the plaintiff to suffer damages. Hi-Way Motor Co v Intl Harvester Co, 398 Mich 330, 336; 247 NW2d 813 (1976).  Of course, the plaintiff's reliance on the false representation must have been reasonable. Nieves v Bell Indus, Inc, 204 Mich App 459, 464; 517 NW2d 235 (1994).

In the example above, the purchaser might be able to show that the vendor’s representations about cost savings were statements of fact, not promises about future conduct if the parties entered into the contract. In other words, misrepresentations about the cost savings, if proven, could amount to an intentional deception which could support a claim of fraud in the inducement. 

In such a case the contractual merger clause may not be available to show that your reliance was unreasonable. While a merger clause would prevent you from presenting evidence of a prior or collateral agreement to change the deal, such a clause should not prevent you from proving pre-contractual misrepresentations of material facts because those bear upon whether the contract was procured by fraud. 

Indeed, "[t]he mere fact that statements relate to the future will not preclude liability for fraud if the statements were intended to be, and were accepted as, representations of fact, and involved matters peculiarly within the knowledge of the speaker." Foreman v Foreman, 266 Mich App 132, 143; 701 NW2d 167 (2005).

In many circumstances, particularly when dealing with contracts, there are rules and very often one or more exceptions to those same rules. It is never enough to just know the basic law; you must also know and understand how that law is likely to be applied to the facts of your case. This requires more than just a citation to a book. This requires skill and, oftentimes, some very creative thinking. This is where your lawyer not only can help, he or she may be your only hope.

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