When Negotiating Contract, Trying to Slip in Changes Undetected Can Lead to Fraudulent Inducement Claim

One common problem when negotiating contracts is keeping track of all the revisions the other side makes without having to re-read the entire contract again and again. Microsoft Word’s “track changes” feature is helpful but can still lead to confusion when not used properly. Even when the other contracting party tells you that the only changes are to the language on a particular page, can you really trust that person? A recent opinion from the Western District of Virginia suggests that you can, to a certain extent, because if the other party tries to slip in a material change without alerting you to it, the other party may be liable for fraudulent inducement.

A party can be fraudulently induced to enter a contract when a false representation or omission of a material fact is made knowingly with the intent to mislead and the party signs the contract in reliance on the representation. Concealment of a material fact can constitute a false representation where evidence shows a knowing and deliberate decision not to disclose a material fact.

In Whalen v. Rutherford, Jacqueline Whalen and James Rutherford maintained a romantic and business relationship for over twenty years. In 1985, they formed W&R Partnership to manage a horse farm and breeding operation. According to the editing.jpgPartnership Agreement, Whalen was the managing partner and would receive a salary to be determined by both parties commensurate with her time and effort. Rutherford agreed to move in with Whalen and finance the construction of a new house on the property, so Whalen granted Rutherford a joint tenancy interest in the property.

Whalen and Rutherford signed a deed of trust on the property, securing a mortgage loan of $1.4 million. Rutherford asked his employee to draft an agreement governing the use of the property. The first draft of the agreement provided that Rutherford would pay the mortgage, insurance and taxes on the property. Whalen approved the first agreement subject to the deletion of a paragraph requiring her to maintain property and casualty insurance on the property. Rutherford revised the agreement, but did not confine his changes to those requested by Whalen. Instead, he changed the language to require Whalen to make the mortgage, insurance and tax payments, and to provide that Rutherford would reimburse her. Rutherford’s agent called Whalen and told her that “the changes were made” and instructed her to sign the last page of the agreement before the attorney’s office closed.

Whalen assumed that the only change was the deletion of the paragraph requiring her to maintain property and casualty insurance on the property. She was not told that the actual changes required her to make the mortgage, insurance and tax payments. Whalen arrived at the attorney’s office five minutes before closing time. She was shown only the last page of the revised agreement, and she signed it.

Whalen argued that Rutherford fraudulently induced her to sign the agreement by concealing the fact that Rutherford’s revisions shifted responsibility for mortgage payments to Whalen. Whalen contended that she would not have signed the agreement had she known of this material change. Rutherford moved for summary judgment.

To successfully claim fraudulent inducement, a plaintiff must prove by clear and convincing evidence that a defendant made (1) a false representation (2) of a material fact (3) intentionally and knowingly (4) with intent to mislead, and that the plaintiff (5) relied on the representation and (6) suffered damage. Concealment or fraud by omission can also qualify as false representation, but to prevail on a fraud claim based on concealment, a plaintiff must show evidence of a knowing and deliberate decision not to disclose a material fact. Claims for damages due to fraud are subject to a two year statute of limitations.

The court found that genuine issues of material fact existed which precluded the entry of summary judgment on the fraudulent inducement claim. Based on the facts viewed in the light most favorable to Whalen, the court held that a reasonable jury could find that: the changes to the agreement were material; Rutherford had a duty to disclose these material changes; his decision not to disclose was made knowingly and deliberately; his nondisclosure was the equivalent of a fraudulent assertion of a material fact made in order to mislead; and Rutherford’s agent induced Whalen to sign the agreement.

The court rejected Rutherford’s argument that Whalen should be bound by the contract because she chose not to read the entire agreement before signing it. The court reasoned that while failure to read a contract generally does not relieve a party of her obligations, this rule does not apply where one is induced not to read a contract.

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