FORT LAUDERDALE BUSINESS LITIGATION: CLAIMS ALLEGING FRAUDULENT INDUCEMENT TO BUY A BUSINESS

In some business sales, buyers later discover material misrepresentations made by the seller to induce purchase of the business. However, there also are cases of “buyer’s remorse,” where some buyers look for an illegitimate excuse to get out of a business deal they wish they did not make where there was no fault on the part of the seller. Florida courts carefully examine the wording of the parties’ written contract when assessing claims of fraud concerning purchase of a business. The wording of the purchase/sale agreement can provide strong protections for both buyer and seller. Peter Mavrick is a Fort Lauderdale business litigation attorney, and represents clients in business litigation in Miami, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

As explained by Florida’s Fourth District Court of Appeal in Lou Bachrodt Chevrolet, Inc. v. Savage, 570 So.2d 306 (Fla. 4th DCA 1990), to establish a claim of fraud in the inducement, the buyer of a business must prove the following:

(1) the seller misrepresented a material fact;

(2) the seller knew or should have known of the statement’s falsity;

(3) the seller intended that the buyer rely on the misrepresentation by buying the business; and

(4) the buyer justifiably relied on the misrepresentation and was thereby injured.

One of the most important ways a buyer or a seller can protect itself is ensuring that the key terms are expressly included in the agreement for purchase of the business. In business litigation over claims of fraud in the inducement, where the alleged misrepresentation contradicts an express term of the written agreement, the fraud claim will fail. The United States District Court for the Southern District of Florida in Eclipse Medical, Inc. v. American Hydro-Surgical Instruments, Inc., 262 F.Supp.2d 1334 (S.D. Fla. 1999), held in pertinent part that “reliance on fraudulent misrepresentations is unreasonable as a matter of law where the alleged misrepresentations contradict the express terms of the ensuing written agreement.” The federal court added that, “fraudulent inducement claims will fail even where the subsequent contract simply says nothing about the allegedly false promise.”

It is therefore essential that a purchaser of a business include all terms critical to the business purchase in a written contract signed by the seller. Likewise, it is essential that the seller protect itself by including an integration clause, i.e., a written provision stating the sale/purchase contract constitutes the entire agreement between the parties regarding the subject matter of the business sale and purchase. The important interplay between a fraudulent inducement claim and the written contract signed by buyer and seller is illustrated by the federal court case Cibran Enterprises, Inc. v. BP Products of North America, Inc., 365 F.Supp. 1241 (S.D. Fla. 2005). In that case, the purchaser of the assets of a business alleged that the seller made false statements that induced him to go forward with the purchase, and as a result he invested and lost $550,000. The purchaser alleged that the false promise occurred during a meeting with the seller in October 2000. However, a month later, in November 2000, the parties signed their written contract stating in pertinent part that, “[t]his Agreement, the attachments hereto and to documents referred to herein, constitute the entire agreement among the parties with respect to the subject matter hereof. No amendment shall be binding unless in writing and signed by the party against whom enforcement is sought.”

During the lawsuit, the seller questioned the purchaser at a deposition. The buyer testified that the “promise that BP would sell him the BP Assets and assign him BP’s option to purchase the Land was a condition of his purchasing Mr. Weinstock’s interest in the Jacaranda Station.” The buyer, however, critically admitted “there was no writing evidencing the promise.” In other words, the alleged fraudulent inducement contradicted the express terms of the signed contract, which specified that the written contract was the “entire agreement” between the parties and any amendment shall not be binding unless it is in writing and “signed by the against whom enforcement is sought.” Based on this, the federal court Judge entered judgment against the purchaser of the business assets. The federal court determined that, “[a] material condition of Mr. Cibran’s purchase from Mr. Weinstock, which purports to bind BP, was not reduced to writing and signed by BP as required by the Commission Marketer Transfer Agreement. It was unreasonable as a matter of law for Mr. Cibran to rely on Ms. Bennet’s alleged oral promise when the subsequent writing, representing the “entire agreement among the parties,” expressly required any such promise to be in writing.”

Peter Mavrick is a Fort Lauderdale business litigation lawyer, and represents business litigation clients in Miami, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.