Can’t Have Your Cake and Eat It, Too

Sometimes, a person wants to keep a bad deal while fighting to undo it because the bad deal is better than nothing. If the person loses a lawsuit to terminate the deal, they could be left with worse than nothing. A good example is effort to void a contract. 

If someone wants to terminate a contract in its entirety, the person is attempting to rescind the agreement. Rescission can be granted based on fraud, accident, and in some cases for failure to comply with statutory requirements. Perhaps the most common claim attempting to rescind a contract is fraud.  

A contract procured by fraud is not void but is voidable. Fraud can be waived. Even if someone was induced to enter a contract by fraud, that person can ratify the contract and even enforce it. 

Nevertheless, fraud and breach of contract are often confused. Fraud in the inducement means someone misrepresented facts and the misrepresentationinduced another person to enter a contract. Breach of contract means one party failed to do what was required by contract. The distinction can be blurred when a fraudulent representation is also breach of contract, as when a contract specifies criteria to be met by a product and the person providing the product claims it meets the criteria, even though the person knows the claim is false. 

Courts do not allow fraud claims to be pursued based on the same facts that are breach of contract. Part of the reasons are because the damages and relief available differ. For fraud, one might be able to void the contract andif particularly heinous maybe even get punitive damages. Punitive damages are intended to serve as an example to deter others from similar action or punish a wrongdoer. For breach of contract, one is entitled to the benefit of the bargain which means the party gets what the party is entitled to. In other words, the non-breaching party is placed in the position he or she would have occupied if the contract was properly performed. 

If someone wants to terminate a contract for fraud, it is better not to accept the benefits of the contract after the fraud is discovered. Accepting the benefits with the knowledge of fraud is known as ratification. That means, after a person found out about fraud the person acted as if there was no fraud and the contract still bound both parties. 

A good example of wanting to have one’s cake and eat it too is the recent case of Buyer’s Choice Auto Sales, LLC v. Palm Beach Motors, LLC. In that case, Palm Beach Motors was a tenant leasing a used-car lot from Buyer’s Choice. The tenant had operated its used-car business on the landlord’s property for years. The tenant suffered vandalism and theft issues and when the lease came up for renewal, the tenant demanded, and the landlord agreed to build a fence around the property. 

The new lease included requirement that the landlord install a fence. The landlord failed to install a fence, and it was not long before the landlord and tenant began arguing. The tenant ultimately gave the landlord a notice of termination for failure to comply with the lease and stopped paying rent. More than a year after the renewal, the tenant filed suit against the landlord for misrepresentation and breach of contract. 

The trial judge determined the landlord fraudulently and negligently induced the tenant to renew the lease because the landlord had no intent of installing a fence. The trial court also found the landlord breached the lease by failing to timely install the fence. The trial judge permitted the tenant to terminate the lease without penalty, ordered the landlord to refund the rent paid by the tenant before the tenant gave notice of termination, and excused tenant’s non-payment of rent during the post terminationperiod, even though the tenant continued operating its business on the property after it claimed to terminate the lease. 

The landlord wasnot too happy and filed an appeal. The landlord conceded the lease provided the tenant could terminate for landlord’s failure to install a fence (there was a specific clause that said so). But the landlord argued the judge was wrong about everything else. The landlord won! 

The Appeals Court dove into the facts. It pointed out that the tenant never claimed the premises were wholly untenantable, never gave notice that the landlord had 20 days to install the fence and/or expressed tenant’s intent to withhold future rent until the fencing was in place, all of which are requirements to withhold rent under the pertinent statute on commercial leases. When the tenant filed suit, the tenant was current in rent payments and had paid the landlord a total of $87,862.50 from beginning of the renewal lease until termination.  

The court explained that fraud in the inducement does not void a contract but renders the contract voidable. Because the tenant sued the landlord for damages and not merely to rescind the lease, the tenant ratified the lease and was thereby precluded from rescission. The tenant had accepted the benefits of the contract by continuing to operate its business on the property and therefore was bound by its terms. It could no longer rescind based on fraud. 

To get out of the lease, the tenant was stuck with the lease terms. If the lease did not provide the tenant right to terminate for landlord’s failure to install fence, the tenant might still be there today. Fortunately for the tenant, the lease provided the tenant could terminate if the landlord failed to install a fence. 

The Appeals Court ordered the tenant to pay rent for the entire time of occupancy. The court also ordered the case back to the trial judge to address the issues of property taxes (which the tenant was supposed to but did not pay under the lease) clean-up expenses and disposition of the tenant’s security deposit. 

The tenant wanted the benefits of the lease without having to pay. The court ruled otherwise.