Court Opinion

ID: 9554102
Source: CourtListenerOpinion
Date Created: 2023-08-07 19:41:38.239928+00
Date Added: 2024-06-11T15:33:00.281888
License: Public Domain

Judge DAVIDSON
dissenting.
During the discovery phase of this lawsuit, defendant learned that plaintiff had been terminated as Dean of the Oklahoma College of Pharmacy for his dishonest and unprofessional conduct in surreptitiously negotiating transfer of an important university program to a private corporation in exchange for a personal fee of $250,000. *761In procuring his contract with defendant, plaintiff allegedly represented that he had left the university because of political differences. Defendant asserted that it would not have hired plaintiff if it had known about his employment history, and neither party suggests, nor did the trial court determine, that plaintiffs purportedly honorable employment history was not material to the transaction. However, on the sole ground that defendant could not show proof of any specific damages resulting from the misrepresentation, the trial court precluded admission of any evidence on this defense.
Contrary to the majority’s characterization thereof, the critical issue here is whether a defendant in a breach of contract action may defend on the basis of plaintiffs fraudulent inducement although no special damages resulted from the fraud. By holding that fraudulent inducement may not be raised as a defense in a breach of contract action without a showing of tangible damages therefrom, both the trial court and the majority have mis-perceived the fraudulent inducement defense as a counterclaim in tort. Instead, the defense is equivalent to rescission. Therefore, I respectfully dissent.
A party that has been fraudulently induced to enter into a contract may affirm the contract and seek damages in an action at law, Gerbaz v. Hulsey, 132 Colo. 359, 288 P.2d 357 (1955), or such party may rescind the contract to restore the status quo. Restatement (Second) of Contracts § 164 (1981); see Trimble v. City & County of Denver, 697 P.2d 716 (Colo.1985); Davies v. Bradley, 676 P.2d 1242 (Colo.App.1983).
“When one uses fraud in the inducement as a defense to a breach of contract action he is in effect claiming a right to rescind the contract and consider himself discharged. The elements of proof of his defense are therefore the same as [in] action for rescission and restitution.” CJI-Civ.Sd 30:14 (1980) (Notes on Use). Thus, as is the case in a rescission action, proof of special damages is not required to establish the defense of fraudulent inducement. 12 S. Williston, Contracts § 1525 (3rd ed. 1970); see also D. Dobbs, Remedies § 9.4 (1973).
The effect of the successful fraud defense, therefore, is to void the contract and to require the defrauding party to recover, if at all, in quantum meruit. See Restatement (Second) of Contracts § 164 comment c (1981); see also Restatement of Restitution § 66 illustration 10 (1937) (if employment contract rescinded for fraud or mistake, B is entitled to restitution from A subject to a deduction for the reasonable value of A’s services already rendered).
Here, the record indicates that defendant did not dispute that plaintiff should be compensated for the services he actually performed, but it sought for such compensation to be at the fair market value of those services determined in quantum meruit, rather than at the contract salary. The absence of tangible damages was irrelevant to the assertion of this defense.
In rejecting this reasoning, the majority refers to Greenleaf, Inc. v. Manco Chemical Co., 30 Colo.App. 367, 492 P.2d 889 (1971) and to the majority rule. The majority’s reliance is misplaced.
Insofar as Greenleaf is precedent, I would decline to follow it. The Greenleaf court did state that: “[T]he necessity of proof of damages in a fraud action is the same whether fraud is asserted as a claim for damages or as an affirmative defense to a counterclaim.” However, the court gave no reasons for so concluding and cited as authority only C.J.S. and an Arizona ease, Wilson v. Byrd, 79 Ariz. 302, 288 P.2d 1079 (1955), which did not address the element of damages but only that of reliance.
Likewise, the “majority rule” is hardly clear cut. Practically no court has stated in precise terms that it is necessary for a defendant to show damages in order to establish fraud in the inducement as a defense to an action on a contract. 37 Am. Jur.2d Fraud § 291 (1968).
The jurisdictions that require proof of special damages as a condition to pursuing the defense tend, like the Greenleaf court, to carry over the requirements of action*762able fraud without making the distinction between the affirmative tort remedy and the contractual defense. See Johnson v. Eagle, 355 P.2d 868 (Okla.1960); Imperial Assurance Co. v. Joseph Supornick & Son, 184 F.2d 930 (8th Cir.1950).
Many that have recognized the distinction have nullified the damage requirement of the defense by holding that damage is inherent in particular instances of fraud, see Gonderman v. State Exchange Bank, 166 Ind.App. 181, 334 N.E.2d 724 (1975); Schoen v. Lange, 256 S.W.2d 277 (Mo.App.1953); Petty v. Pacific, 210 N.C. 500, 187 S.E. 816 (1936); Nipper v. Griffin Mercantile Co., 37 Ga.App. 211, 120 S.E. 439 (1923), or by implying injury whenever the misrepresentation is material. See Franklin Enterprises Corp. v. Moore, 34 Misc.2d 594, 226 N.Y.S.2d 527 (1962); Metropolitan Life Insurance Co. v. James, 231 Ala. 295, 164 So. 377 (1935); California Credit & Collection Corp. v. Goodin, 76 Cal.App. 785, 246 P. 121 (1926); Parker v. Naylor, 151 S.W. 1096 (Tex.Civ.App.1912); Fox v. Label, 66 Conn. 397, 34 A. 101 (1895); Stuart v. Lester, 49 Hun. 58, 1 N.Y.S. 699 (1888).
The latter approach is consistent with the requirements for rescission. See Restatement of Restitution § 9 (1937); CJI-Civ.M 30:33 (1980); Kavarco v. T.J.E., Inc., 2 Conn.App. 294, 478 A.2d 257 (1984); Wood v. Jonathan Bixby Co., 29 Cal.App.2d 294, 84 P.2d 204 (1938).
The key for rescission and, accordingly, for the defense of fraudulent inducement, is not ascertainable damages, but rather materiality. And, contrary to the majority’s implication, the determination of materiality depends not on whether damages have in fact resulted at some time subsequent to the transaction, but rather on whether the representation affected the transaction at the time it was made. See Denberg v. Loretto Heights College, 694 P.2d 375 (Colo.App.1984) (college teacher’s misrepresentations as to his academic credentials were material to his being hired even though his subsequent performance as a teacher was satisfactory).
The majority also concludes that defendant’s defense of fraudulent inducement may not be treated as rescission because defendant did not properly plead it, failed to give prompt notice of its intent to rely on the defense, and failed to make an offer of proof on the quantum meruit recovery to which he believed himself entitled. The record reveals, however, that defendant did, on different facts, counterclaim for unjust enrichment, request that plaintiff receive only quantum meruit compensation, and plead the defense of inducement, and also that defendant raised the circumstances of this defense after it was able to discover them.
In addition, with respect to defendant’s “failure” to offer evidence that the value of plaintiff's services was less in quantum meruit than under the contract, the court made it clear that it would not allow the defense of fraudulent inducement unless defendant could show tangible damages resulting from the specific misrepresentation in question. This ruling, thus, indicated that any difference between the quantum meruit and contract values of plaintiff’s services not engendered by that specific misrepresentation was irrelevant. Therefore, any proffer of evidence by defendant concerning the difference would have been unavailing. In such circumstances, an offer of proof is unnecessary. Miller v. Colorado Discount Corp., 80 Colo. 355, 251 P. 1049 (1926).
It may be that equitable relief is not appropriate here for other reasons. But that is a question for the trial court to resolve after considering all the evidence. Because of the trial court’s ruling that a showing of damages was required, defendant was not allowed to put on the evidence to be weighed. I do not believe we can say as a matter of law that equitable relief is unwarranted.
For these reasons, I would reverse the damages award for plaintiff and remand the case for further proceedings.