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

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 Partnership 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.

Read the rest of the article at the Virginia Business Litigation Lawyer blog.

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