Typically, a fraud claim is easy to understand. One partner lied, and the other relied on the lie to her detriment. Yet, sometimes, the parties still have a business relationship after learning of the fraud. Losing or waiving your fraud claim can occur without your realizing it. For example, signing an amendment to the contract granting new benefits may constitute a waiver.
Imagine you purchased interests through an installments in a limited liability company based upon certain financials shown to you by the managing member. You will receive regular distributions and bonus distributions based on the company's sales. However, you now discovered that those financials were artificially increased to justify a higher purchase price. You still have a few more installments to pay. Further, while deciding what to do, you received the regular distributions. Does asking for more time to consider paying the other installments, or does the receipt of the distributions, constitute waiving or losing your fraud claim?
The California Supreme Court analyzed this subject in Bagdasarian v. Gragnon (1948) 31 Cal.2d 744. The case arose from a sale of a farm. The sellers falsely represented the farm's sales in the prior year. The purchasers acquired a note to pay for the farm, yet defaulted. The purchasers sued for fraud. The sellers argued that the purchasers lost the fraud claim because the purchasers "made payments on the notes, sought and received [the seller's] advice and assistance in the operation of the farm, [and] requested an extension of time for payment on the notes."
The Supreme Court rejected the argument. The court explained that "[w]hen a party learns that he has been defrauded, he may, instead of rescinding, elect to stand on the contract and sue for damages, and in such case his continued performance of the agreement does not constitute a waiver of his action for damages." If a party learned of fraud and decided to continue with the contract, the party "must not make any new agreement or engagement respecting it; otherwise, he waived the alleged fraud."
So, did the purchasers lose their fraud claim by asking for more time to pay and for help with the farm? The court answered no: "We think it unjust and unreasonable to hold as a matter of law that the mere asking of a favor should deprive an innocent person of rights arising from an unquestionably fraudulent act." The court also doubted that granting an extension of time would "constitute a waiver in the absence of estoppel or the making of a new agreement supported by consideration."
So, back to our hypothetical. Just receiving regular distributions or asking for more time to pay would likely not waive a fraud claim.
Let's create a new wrinkle--the managing member approaches you with an addendum that gives you a greater bonus distribution, but not a regular distribution. And you accept because you believe in your ability to increase sales. Will you be waiving or losing your fraud claim with respect to the regular distributions, the part of the original contract that was not amended?
In Oakland Raiders v. Oakland-Alameda County Coliseum, Inc. (2006) 144 Cal.App.4th 1175, in the 1990s, the professional football team Raiders sought to return to Oakland. The arena where the Raiders would play, the Coliseum, promoted Personal Seat Licenses (PSL's) and club and luxury suites. The Coliseum informed the Raiders that the upcoming games for 1995 sold out in the first phase, and that included 44,700 PSLs. However, while some 45,000 PSL applications were received, only 37,000 PSL seats were assigned. Subsequently, the Raiders signed an agreement with the Coliseum to play in Oakland for 16 seasons. The Raiders learned the true facts afterwards.
So, the Raiders signed a new agreement, which incorporated and supplemented the original agreement. The Raiders received certain benefits as a result. Also, the new agreement stated that "except as otherwise specifically supplemented, interpreted or modified by this Supplement, all terms and provisions of the [original agreement] shall remain unmodified and in full force and effect."
Afterwards, the Raiders sued for fraud and sought rescission of the agreements. The jury held that the Coliseum failed to prove that the Raiders had waived the fraud claim.
Yet on appeal, the Oakland Raiders court, relying in part on Bagdasarian, held that the new agreement constituted an implied waiver of the fraud. The court explained that the core holding of prior California Supreme Court cases was that "one who, after discovery of an alleged fraud, ratifies the original contract by entering into a new agreement granting him substantial benefits with respect to the same subject matter, is deemed to have waived his right to claim damages for fraudulent inducement." Importantly, the court explained the waiver doctrine as "an application of the doctrine of equitable estoppel."
As a quick aside, the theories of waiver and equitable estoppel constitute defenses to certain torts. In short, waiver focuses on the intent of the party to relinquish its tort claim. Equitable estoppel focuses on the harmed party's conduct.
With that in mind, the court held that the Raiders committed an implied waiver of its fraud claim. The Raiders negotiated a new agreement that concerned the same subject matter, modified the parties' rights, granted the Raiders significant benefits, and reaffirmed the original agreement's validity. Hence, as a matter of law, the Raiders could not sue.
The dissenting opinion criticized the majority for eviscerating the waiver standard. The dissent stated that the jury may have determined that the amendment "was simply an agreement sought by both [Coliseum] and the Raiders for their mutual benefit, rather than agreement through which the Raiders, knowing of the fraud, affirmed the validity of the original contract and accepted substantial benefits not found therein, thereby demonstrating an intent to waive any fraud claim regarding the original contract." The dissent argued the court took away the jury's ability to consider intent by changing the analysis to estoppel, which focuses on conduct. And, the dissent explained "[t]here may be all sorts of reasons why a defrauded party would try to cut its losses and seek at least half a loaf through a subsequent agreement, without giving up its rights to be fully compensated for the fraud arising from the original agreement."
So, back to our hypothetical. The Oakland Raiders case indicates that signing an addendum that provided you with greater benefits would likely mean you cannot sue for fraud. Yet, remember, the Bagdasarian court concerned purchasers who requested assistance with the farm and an extension of time to pay. The purchasers would have received a benefit by those amendments. The court though ruled that the purchasers had not lost their fraud claim. So, why the different results? The Oakland Raiders case emphasized that "ratifying the earlier contract sets this case apart." With the ratification, the Raiders had induced the Coliseum to change its position to its detriment. So, following Oakland Raiders, if the addendum has language essentially stating that the original agreement is in full force and effect, then you will likely lose the ability to sue for fraud.
This is a difficult area of the law. A lawyer experienced in this arena will help guide you through this to assist you from losing or waiving your fraud claim. Steven McLellan is a senior attorney at GED with experience litigating fraud cases. Contact him for any assistance on your case involving business litigation.