REASONABLE RELIANCE IN CONNECTION WITH FRAUD IN THE INDUCEMENT

David Allen

PARTNER, JAYBURG WILK

If you ask most people what it means to be “fraudulently induced” to enter into a contract, they will likely respond that it means that they were lied to.  But while it true that being told something that is not true is one of the elements of fraud, each of the four following elements must be present, for the non-truthful party to be legally liable for “fraud in the inducement”: (1) a false representation of a material fact communicated to the party during negotiations leading up to the agreement; (2) that the false representations was knowingly and intentionally made by deceiving party; (3) that the aggrieved party reasonably relied upon the false representation in agreeing to enter into the contract; and (4) that the aggrieved party has been damaged as the result of the false representation.

The third requirement, being “reasonable reliance,” is not always easily established in connection with claims of fraud in the inducement.  For example, say that Seller is selling his house to Buyer. During the course of the negotiations that resulted in the parties entering into a contract, Buyer advised Seller that because his daughter is on her high school diving team, he plans to install a diving board on the pool following the close of escrow.  Seller responds by telling Buyer that installing a diving board should not be a problem because the deep end of the pool is eight feet deep.   It turns out that it was known to Seller that the deep end of the pool is actually only five feet deep. Buyer closes escrow relying upon Seller’s representation as to the depth of the pool, and only discovers after the close of escrow that a diving board cannot be installed because of the shallow depth of the deep end of the pool, and then files a lawsuit against Seller for fraud in the inducement.

If Buyer sues Seller claiming that he had been “fraudulently induced” into entering in the contract to purchase the home, Buyer will have little difficulty in establishing three of the necessary four elements.  The representation made was clearly both material and false, and was knowingly and intentionally made by Seller.  Buyer has clearly been damaged by not being able to install a diving board for use by his daughter.  But although Buyer can establish that he relied upon Seller’s false representation, can Buyer successfully argue that he acted “reasonably” in doing so?  Put another way, did Buyer act as any “reasonable person” would have acted in simply taking Seller at his word that the pool was eight feet deep, when it would have been a very easy matter to measure the deep end of the pool himself, which would have readily disclosed that it was nowhere near that deep?

The ultimate question is whether a person who claims to have “reasonable relied” upon a false representation was justified in doing so because most other people in the same situation would act as he acted. This is not always an easy question to answer, especially as in any particular situation, what may seem “reasonable” to one person is not at all “reasonable” to another.

David Allen is a real estate attorney at the Phoenix law firm of Jaburg Wilk. David has been representing clients in both transactional and litigation real estate and business related matters for over 30 years. He is licensed as an attorney in both Arizona and California, and is also a licensed Arizona real estate broker. David can be reached at dla@jaburgwilk. com or at 602-248-1082.