Martin Silver is a practicing attorney with offices in Hauppauge, N.Y. He was a flooring installer before and during the time he went to law school and has since represented numerous industry people and companies. To contact him, call 631-435-0700.
Breech of contract or fraud?
A buyer of goods who fails to pay, as he agreed to after delivery, may generally not be sued on the claim he has committed a "fraud" against the seller. Instead, the seller is usually limited to a lawsuit based upon the claim that by not making timely payment, the buyer has breeched the contract of sale.
The differences between a simple breech of contract claim and an alleged fraud are often substantial. In a breech of contract lawsuit, the seller would only be entitled to recover the actual selling price of the goods plus, depending upon the terms of the contract and what state he is suing in, interest and/or legal fees. In a lawsuit based upon fraud, however, the seller may also be awarded "punitive" damages in addition to the actual selling price.
The difference between a fraud and a simple breech of contract usually involves the term "intent." A fraud is usually defined as a misrepresentation made with the intent to deceive and with the knowledge that the other party (the seller) will rely upon it. These elements are usually not present, or at least not provable, in the typical failure to pay case.
The usual contract for the sale of goods generally consists of the seller's promise to deliver, and possibly install certain goods in return for the buyer's promise to pay an agreed upon price upon delivery. A failure by the buyer to pay as agreed is therefore considered only a broken promise. The mere fact that by the time the goods were delivered he was unable to pay does not mean he committed a fraud. As some judges have put it, "A representation that something will be done in the future, or a promise to do it, from its nature cannot be true or false at the time it is made. The failure to make it good is merely a breech of contract which must be enforced, if at all, by an action in contract."
Despite the above language, most jurisdictions will also follow the rule that a "fraud may be predicted upon a promise made with a present intention not to perform it. If the promise to pay is made with the undisclosed intention of not performing, it constitutes a misrepresentation of a material existing fact upon which an action in fraud may be based."
Although this last rule appears to make a lot of sense, the difficulty lies in the burden of proof. It is obviously no simple matter to prove the one who made the promise to pay did in fact make that promise when he had no intent to fulfill it. But, a seller in this situation is often heard asking, "Can't the intent not to pay be simply inferred from the undisputed fact that he did not pay." The answer is no.
However, in a recent case a fraud claim was made by a seller of goods against a non-paying buyer, and the judge, based upon proof, did in fact find the mere fact of nonpayment to create the presumption the buyer never intended to pay. The "proof" relied upon by the judge consisted of documentation that the retailer buyer had failed to keep over 20 other such promises, to pay for delivered goods, and he had forced almost all his vendors to take him to court for payment. Since he hadn't paid for the 20 previous shipments of goods, the judge found a presumption that he also never intended to pay or the 21st.
Another way a fraud may be proven is through a substantial and knowing misrepresentation by the buyer as to his financial situation, business status or ability to pay.