Fraud in the inducement is a common cause of action in business litigation. It typically involves a plaintiff alleging a contract he or she entered into with a defendant is not enforceable due to some misrepresentation or omission made by the defendant, which the plaintiff relied upon, inducing him or her to enter into the contract to the plaintiff’s detriment. In such cases, the main remedy sought is to have the contract rescinded, effectively voiding the contract and returning the parties to the position they were in prior to entering into the contract. Common examples of fraud in the inducement are when a business seller misrepresents the company’s financial state to induce a potential buyer into purchasing the business or when a seller of real property fails to disclose a construction defect to a potential buyer. While these types of fraud claims are legitimate, it is not unusual for a party to a contract to allege fraud in the inducement against the other contractual party merely because the first party is unhappy with the result of the binding contract he or she legally entered into. In these situations, it is important to know how to defend against these meritless fraud claims.
One way to defend against such claims is by applying the principle first stated by the Florida Supreme Court in Canell v. Arcola Housing Corp., 65 So.2d 849 (Fla. 1953) that a party cannot reasonably rely to its detriment on an unenforceable promise. In Canell, a plaintiff brought suit against a seller of subdivision lots who allegedly promised purchasers that they would have the right to use a bathing beach that the developer promised to build. However, the Court held that the plaintiff’s fraud in the inducement claim failed as a matter of law because it relied on an unenforceable promise that violated the statute of frauds. The statute of frauds, § 725.01, Florida Statutes, requires certain contracts to be in a writing signed by the party to be charged to be enforceable, such as inter alia contracts for the sale of real property. The Florida Supreme Court explained in pertinent part that:
The plaintiffs are relying upon a mere oral promise to create the easement, which is clearly within the terms of the statute of frauds and thus cannot be enforced directly or indirectly…While it is contended by plaintiffs that they are suing for damages for fraud and deceit, such an action under the circumstances of this case is simply an attempt in an indirect manner to obtain damages for breach of the contract. Since the provision in the statute prohibiting any action to be brought on an oral contract within the statute includes actions based indirectly on the contract, an action for damages cannot be maintained on the ground of fraud in refusing to perform the contract, even though the defendant at the time of the making of the oral contract may have had no intention of performing it.
Over 50 years later in Puff’n Stuff of Winter Park v. Bell, 683 So. 2d 1176 (Fla. 5th DCA 2007), the Fifth District Court of Appeal reinforced Canell, affirming a trial court’s summary dismissal of a fraud in the inducement claim against a lender bank based on oral promises to extend credit to appellant borrowers. The court found that the promises relied upon were unenforceable because the statute governing credit agreements requires a written agreement signed by both the creditor and debtor. The concept that a party cannot reasonably rely to its detriment on an unenforceable promise was best explained in Judge Griffin’s dissent (restating the majority opinion):
It certainly is true, as the majority says, that a promise or agreement unenforceable for failure to comply with the statute of frauds, cannot be sustained by recasting it as fraud. In other words, a false promise to do “x,” which induces a party to enter into a contract for “y,” cannot be actionable fraud where the “x” promise requires compliance with the statute of frauds. One cannot reasonably rely to his detriment on an unenforceable promise.
In addition to the examples in the cases supra, there are various promises that are required to be in a signed writing under Florida law, including inter alia promises to pay another person’s debt, agreements not to be performed within the space of one year, and non-competition covenants under § 542.335, Florida Statutes. These cases provide a very useful avenue for defendants to dismiss meritless claims for fraud in the inducement based on alleged representations that were required to be in writing under Florida law.
The Mavrick Law Firm has successfully defended businesses against fraud claims and in non-competition covenant litigation. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311.