In Virginia, a fraud claim must state (1) a false representation, (2) of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, (5) reliance by the party misled, and (6) resulting damage to the party misled. Fraud claims cannot be based on unfulfilled promises or statements regarding future events. Promises to perform future acts are not legal representations and failure to perform them doesn't change that fact. But if a defendant, at the time of making that promise, had no intention of carrying it out, that promise is considered a misrepresentation of present fact that can form the basis for a fraud claim. As demonstrated by the recent case of Cyberlock Consulting v. Information Experts, however, mere failure to perform is not evidence of the defendant's lack of intent at the time the contract was formed.
Information Experts (IE) and Cyberlock Consulting had a history of working together. As they were completing the work on a contract with OPM, they learned the agency would be seeking bids for a similar new project. So they entered into a teaming arrangement to land the new prime contract. The teaming agreement called for IE to give Cyberlock 49% of the work under a fixed price subcontracting agreement. Cyberlock would submit cost and price data to support IE's pricing strategy planning and the parties would use reasonable efforts to negotiate a subcontract. Ultimately, IE was awarded the prime contract but the parties were unable to reach agreement on the terms of a subcontract. Cyberlock sued IE, alleging breach of contract, fraud, and unjust enrichment. IE moved to dismiss the fraud claim.
Cyberlock claimed that, when they formed the teaming arrangement, IE had no intention of executing a subcontract. Instead, it claimed, IE planned to push Cyberlock out and hire its employees so it could perform the contract itself.
The court found that Cyberlock had failed to plead sufficient facts that made fraud plausible, rather than merely conceivable. When alleging fraud, a plaintiff must plead specific circumstances that constituted the fraud including time, place, contents of the false representations, identities of those making the misrepresentations, and what they obtained from them. A court must be able to draw the reasonable inference that the defendant is liable for fraud. Legal conclusions and bare assertions, unsupported by the specific required factual allegations, are not enough. The court found that Cyberlock failed to plead sufficient facts about the formation of the teaming agreement or IE's alleged intent and plan at that time.
Cyberlock claimed IE's lack of enough personnel with the appropriate security clearances to perform the prime contract was sufficient evidence to show IE's fraudulent intent. The Court recognized that this fact showed the alleged plan to push Cyberlock out was possible. But IE may have intended, instead, to solve the personnel problem by executing the subcontract with Cyberlock, a possibility the Court found bolstered by the recent joint work history the companies had doing the same type of work for the same government agency. Without more, the Court could not draw a reasonable inference that IE entered the teaming agreement with the intent to not perform later. Given the insufficient pleading, the Court dismissed the fraud claim.
Lexis.com subscribers can access the Lexis enhanced version of the Cyberlock Consulting, Inc. v. Info. Experts, Inc., 2012 U.S. Dist. LEXIS 126211 (E.D. Va. Sept. 4, 2012) decision with summary, headnotes, and Shepard's.
Read the rest of the article at the Virginia Business Litigation Lawyer blog.
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