Fraudulent inducement is a defense to a breach-of-contract action. Enforceable contracts require a meeting of the minds as to the subject matter. If one of the contracting parties agreed to the contract terms only because of the other party’s trickery and deceit, there hasn’t really been a true meeting of the minds and the defrauded party can sometimes get out of the deal. For the defense to work, there must be a showing of fraud. One party must make an intentional misrepresentation of fact, material to the purpose of the agreement, which causes the defrauded party to agree to the terms of the contract in reliance on the false statement (believing it to be true). Although a contract induced by fraud is voidable and may be rescinded, there are limits to the defense. A recent case from Fairfax County explains that a forum-selection clause contained within a contract allegedly procured by fraud will still be enforced unless the alleged fraud relates specifically to the forum-selection clause itself.
The case is Boxer Advisors, LLC v. Success Business, Inc. As presented in the opinion, Boxer Advisors was a prime contractor on a government contract and had entered into a subcontract with Success Business (“SBI”). The subcontract contained a forum-selection clause specifying Maryland as the sole venue for any litigation between the parties arising under the agreement. A dispute arose and Boxer sued SBI for fraud, misappropriation of trade secrets, and tortious interference. It filed the lawsuit in Virginia rather than Maryland. SBI objected, pointing to the forum-selection clause. Boxer argued that it wasn’t required to honor the terms of the forum-selection clause because, as alleged in its complaint, the subcontract with SBI had been fraudulently induced.
The court sided with SBI and dismissed the claim, finding that it should have been filed in Maryland pursuant to the forum-selection clause.
The general rule in Virginia is that forum-selection clauses are presumed valid and enforceable unless they are shown to be unreasonable, unfair, or affected by fraud or unequal bargaining power. (See Paul Bus. Sys., Inc. v. Canon U.S.A., Inc., 240 Va. 337, 342 (1990)). The question before the Fairfax Circuit Court was whether “affected by fraud” includes any misrepresentation that induced a party to enter into a contract, or only those misrepresentations that specifically induced a party to agree to the forum-selection clause. The court noted that there have been some inconsistent rulings among Virginia circuit courts on this particular issue, but the weight of federal and state authority indicates a trend towards requiring that the fraud relate specifically to the forum-selection clause itself. The court decided to follow the modern trend:
This Court holds that an otherwise valid forum selection clause is not rendered invalid by an allegation of fraud when the alleged misrepresentation is not directed at the forum selection clause itself. In the instant case, Plaintiff does not argue there was fraud pertaining to the inclusion of the forum selection clause. … As such, [the] forum selection clause facially is valid and enforceable.