A civil claim for “fraud” in Pennsylvania is serious business: the victim can recover a money judgment for actual damages plus punitive damages and attorney fees. Plus, a judgment for fraud or deceit cannot be discharged in bankruptcy.
As such, the burden to prove deceit is relatively high. In PA, for example, proof of fraud requires “clear and convincing evidence,” which is a higher standard than “preponderance of evidence.” A claim for fraud also requires proof of specific elements: (a) the existence of a statement, (b) that’s knowingly false, which (c) induces a person to reasonably rely on it and (d) the relying person suffers damages. Sullivan v. Chartwell Investment Partners, 2005 P.A. Super 124, 873 A.2d 710 (Pa. Super. Ct. 2005).
But what about in the breach of contract context? What if a person enters into a contract, and makes a false promise to do something in the future knowing the promise to be false? And what if the other party relies on said promise to his detriment? Isn’t that also “fraud”?
No. It’s not fraud. It’s just a garden-variety breach of contract. No punitive damages.
But why?
Types of Fraud: Let’s Start with Fraud in the “Inducement”
There are two different types of fraud when it comes to contracts. One involves fraud in the inducement. This is where a person misrepresents a basic fact underlying the agreement. So for example, if I sold you my car by saying: “you should buy my Chevy Tahoe, only 10,000 miles! It’s yours for just $50,000!!”
But it turns out, the vehicle has 295,000 miles and is only worth $20,000. That’s fraud in the inducement. It’s actionable as a claim for both breach of contract and/or fraud, meaning, the victim can recover an award for both his actual damages, plus punitive damages and attorney fees, which cannot be discharged in bankruptcy.
Fraud in the Performance
There’s another type of “fraud” that’s not actionable as fraud. Rather, it simply amounts to an ordinary claim for breach of contract. This is fraud in the performance of a contract. It relates to a promise to do something in the future.
This “fraud” is very common.
Perhaps you’ve done it yourself: let’s say you agree to lease an apartment for 18 months, but you know from the beginning you’ll likely want out after only 12 months. You’re being deceptive. You promised one thing (to stay for 18 months), but you intend to do something else — renegotiate the deal after only 12 months. This is a “fraud” of sorts, since the landlord had relied on your “promise” to let you live in the apartment.
You’re being deceitful, for sure. But this is fraud in the performance of a contract. It’s your failure to perform in the future. You’re not presently misrepresenting a basic fact underlying the deal — such as the miles on your Tahoe — rather, here, you’re just failing to live up to your end of the bargain relative to something you agree to do in the future.
As such, this amounts to nothing more than a breach of contract, which happens on a regular basis: people sign up for a mortgage they can barely afford, or they apply for a credit card knowing they’ll struggle to make the monthly payments, making a debt collection lawsuit likely. Only, such litigation would be for “breach of contract,” not fraud.
It sounds simple, when we explain it like this. But sometimes, even experienced lawyers confuse these concepts.
Enter the parties in Gettysburg Contracting, Inc. v. Atomic Dog Cidery, LLC.
Gettysburg Contracting, Inc. v. Atomic Dog Cidery, LLC, (Adams County 2022)
In Gettysburg Contracting, Plaintiffs, a construction company, brought an action against the Defendant property owner for failing to pay for its services as a contractor doing construction and renovation of the property.
Plaintiff brought claims pursuant to the Contractor Subcontractor Payment Act in Pennsylvania. Defendant, in turn, filed a counterclaim alleging fraud with respect to the contract. In particular, Defendant alleged that the “fraud” related to Plaintiff’s promise to (a) complete the project for under $1.75M and (b) treat the Defendant and a joint “CEO” on the deal. Plaintiff denies this was “fraud,” however, claiming it related to a future promise. Thus, the Plaintiff filed preliminary objections to Defendant’s counterclaim for “fraud.”
The basis for Plaintiff’s challenge?
Plaintiff alleged that the promises — to control project costs (under $1.75M) and to treat the Defendant as a co-“CEO” — related purely to future conduct alone. As such, at best, this involved fraud in the performance of a contract. And, fraud in the performance is not true “fraud,” it’s just breach of contract.
But did the court buy it?
The Trial Court’s Decision
The trial court noted: “Each of the statements concern future action that [Plaintiff] agreed to undertake if hired by [Defendant].” As such, the Defendant’s counterclaim amounted to one for fraud regarding future performance, which is not “fraud.”
Defendant’s counterclaims merely amounted to claims for “breach of contract,” at most. Accordingly, the trial court sustained the Plaintiff’s objections to the counterclaim for “fraud.”
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