By: Barry Dorans

In construction disputes, it is not uncommon that one of the parties wants to sue for fraud. A fraud claim has significant advantages over a contract claim in that there is a longer statute of limitations to bring the claim and the damages that can be recovered are higher. However, courts are very reluctant to allow fraud claims when there is an underlying contract.

The Virginia Supreme Court recently decided a case which involved a contract for the sale of a government contracting firm. The same principles would apply in a construction dispute. In that case, the seller agreed to sell their company to buyer with a provision that the seller would continue to operate their portion as a separate division and would get additional payments based on how well their division performed after the sale. As part of the agreement, the buyer was required to represent to the seller that it was not under any government investigation. Immediately prior to the closing, the buyer found out that the government was investigating potential misconduct on behalf of the buyer, but did not disclose that to the seller. The sale closed and the seller continued to run its division. As a result of the government investigation, the government suspended the company’s right to do business several times and the seller’s division suffered. The seller sued claiming the buyer committed fraud when it said it was not being investigated. The trial court awarded nearly $12,000,000 on the breach of contract and fraud claims.

On appeal, the Supreme Court found that there was no fraud. That is, while the buyer made a representation at closing that it was not aware of any investigation, and that representation was untrue, the representation was made under the contract between the parties. The Court said fraud only would apply if the representation is made completely unrelated to any contractual relationship.

This recent decision reaffirms that while it may be attractive to bring a claim for fraud where parties have entered into a contract, for the most part, the claims against one another will be bound by that contract, not by separate tort duties. Thus, it is important for the parties to draft the agreement to properly protect their interests since general tort law will usually not apply.