Many business transactions result in losses to one of the parties. If you, a small business owner, have a contract with another party and you suffer a loss due to the other party's breaching or violating a contract, you may have a lawsuit based on contract law against the other party.

However, if you suffer a loss after entering into a business relationship on the basis of the other party's false statements, you may have a lawsuit based on personal injury law (tort law) for fraudulent misrepresentation. Also, if you suffer a loss due to the other party's violation of the implied duties of good faith and fair dealing in a contract, you may have a lawsuit based on personal injury law for bad faith breach of contract.

Fraudulent Misrepresentation

Fraudulent misrepresentation, also called common-law fraud or deceit, is done on purpose by the offending party (the defendant). In order to prove fraudulent misrepresentation, you must show the following:

  • The defendant made a false representation or statement
  • The false representation was of a material or important fact
  • The defendant either knew that the statement was false or recklessly disregarded the truth
  • The defendant intended the representation to reach you
  • The defendant intended the representation to induce you to act upon it
  • You acted in justifiable reliance on the misrepresentation
  • You suffered losses as a result

Fraudulent misrepresentation requires the defendant to have made a representation about a fact that was untrue when made. The fact misrepresented must have been material, which means that a reasonable person would attach importance to that fact in determining a future course of conduct.

You also must prove that the defendant made the misrepresentation knowingly or recklessly. The knowledge requirement may be satisfied if the person making the representation ought to have known of its falsity, even if he or she did not actually know.

Your reliance on a defendant's material misrepresentation must have been a substantial factor in determining the course of conduct that resulted in your financial loss. Moreover, it is not sufficient for you to show mere reliance; the reliance must have been reasonable to be considered justified.

Also, you must have suffered a financial loss while acting in reliance on the defendant's misrepresentation.

Tortious Breach of Contract

Generally, a breach of contract cannot constitute a tort or personal injury. However, a "tortious breach of contract" is a tort or personal injury. Since the law implies into every contract obligations of good faith and fair dealing, breaches of these obligations may amount to a tort under certain circumstances.

This is true when the contract includes certain financially dependent relationships or when one party is in a superior bargaining position and is able to impose unfair contracts on the other party, such as in the case of a contract of insurance.

In fact, most lawsuits for tortious breach of contract involve insurance contracts. However, they can involve other contracts as well. In order to prove a breach of the implied covenant of good faith and fair dealing, you, as the plaintiff, must show that the defendant acted in bad faith.

The tort of bad faith breach of contract requires that:

  • A contract existed between the parties (usually an insurance contract)
  • The defendant breached the contract
  • The defendant breached the contract through an intentional act (such as the refusal to pay your claim)
  • The defendant did not have a debatable reason for the refusal
  • The defendant had actual knowledge of the absence of a debatable reason for refusing, or
  • The defendant was recklessly negligent in failing to determine whether or not there existed a debatable reason for the refusal

If you have questions about possible lawsuits for fraudulent misrepresentation or bad faith breach of contract, contact a small business lawyer in your area.

Questions for Your Attorney

  • If I bought a piece of equipment for my business because the seller assured me that it was the most technologically advanced equipment available and then I found a more advanced piece of equipment, can I sue the seller for fraudulent misrepresentation?
  • If I bought a computer program because the salesman said that it would make my company successful and my company did not make a profit this year, can I sue the salesman for fraudulent misrepresentation?
  • Do I have a lawsuit against my insurance company for bad faith breach of contract if the company failed to pay my insurance claim?