Fraud in the Inducement: Compete Defense to Payment?

The news is filled with stories of individuals and businesses permitted to walk away from monies owed without repaying the debts. Debts legitimately owed to creditors who render services or sell goods. Why is this happening and, more importantly, could this happen to your business?

A “contract” is based on a few elements, one of which is an “offer”. The “offer” is based on a promise.  The promise that is at the heart of the cases publicized in the media is that if the “buyer” agrees to buy the services, they will receive a benefit in the future. A person may be lured into buying services from a creditor who has made false promises.

Take for example someone enrolling in specific programs because of a school’s promise of a thriving job market in a particular industry. The student enrolls, goes through the program and upon successful completion finds the opposite to be true. The job market isn’t promising at all; enrollment was conditioned upon a false or misleading promise.

When a creditor then attempts to enforce their rights to get paid, the student raises the defense of fraud in the inducement. Illustrating the reality of the job market, the underlying promise made in exchange for enrollment, attendance and participation in the program may be sufficient to bar the creditor from getting repaid. The student borrower may be able to walk away from all or part of the debt.

The defense of fraud in the inducement can have commercial application as well. Take for example the landscaper selling to developers. The “lure” or sale might be that the landscaping will draw an increase of 15% of traffic to the commercial real estate development as compared to the development down the street.

However, the outcome may be different. When measuring foot traffic the numbers fall way short of the promised increase of 15 %. Would the defense of fraud in the inducement result in a complete defense to payment? The Court would need to decide whether the defense is applicable. If it is, relying upon testimony and evidence of the increase and/or decrease in foot traffic would enable the Court to decide whether there would be a complete or partial bar to repayment for the services rendered.

Are you owed money from a customer in New York? Contact FFGN for a free consultation on your debt collection claim(s).