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By: Steven J. Koprince, Esq.

It seems to happen to honest contractors all the time: a straightforward contract dispute takes a wrong turn, and suddenly the contractor is facing claims such as fraud, deceit, and dishonesty.  A contractor’s litigation opponent might assert such claims in the heat of the moment, allowing emotion to sway its decisions.  Or the opponent might have a more strategic motive in making such claims: often, limitations on contract claims (such as contractual limits or caps on damages) can be avoided by re-characterizing a breach of contract claim as a claim for fraud or deceit.

Whatever the opponent’s motives, the fact is that claims such as fraud, deceit, and dishonesty have the potential to do serious harm to a contractor’s business reputation.  So what can an honest contractor do when its opponent has falsely accused it of such things?  Of course, the contractor will aggressively oppose its opponent’s claims by seeking summary judgment or dismissal, and  perhaps even sanctions.  But the contractor need not stop there.  The contractor can also use tort law to go on the offensive against its opponent.  By taking the offensive, the contractor might force its opponent to withdraw its false claims or come to the bargaining table for a more favorable settlement.  And if the action goes through to trial, the contractor could even win an award of damages.

Depending on the jurisdiction, a variety of tort actions may be available to a contractor who has been falsely accused of fraud, deceit, or dishonesty.  These potential actions include:

– Defamation/Slander/Libel

Perhaps the most obvious claim against someone who has falsely accused a contractor of  fraud is a claim for defamation.  A statement is defamatory if it tends to “harm one’s reputation so as to lower him or her in the estimation of the community.”  Restatement (Second) of Torts section 558. Defamation can be either spoken (slander) or written (libel).

Although a plaintiff must typically demonstrate that it was damaged by a slanderous statement, in many jurisdictions, an allegation of fraud or deceit is considered “defamation per se.”  A statement that is per se defamatory constitutes defamation regardless of whether the plaintiff was damaged by the statement.  In these jurisdictions, a contractor may be able to prevail on a defamation claim merely by demonstrating that the plaintiff falsely accused it of fraud, and made such a statement to a third party.

– Commercial Disparagement

In those jurisdictions that recognize the tort of “commercial disparagement,” the plaintiff can recover on a showing that the defendant “made false and demeaning statements about the quality of plaintiff’s good or services.”  Appraisers Coalition v. Appraisal Inst., 845 F.Supp. 592, 610 (N.D. Ill. 1994).  Commercial disparagement is not the same thing as defamation—no damages need be shown, and a contractor can sue for both defamation and commercial disparagement if it so wishes.

– Tortious Interference with Contract/Tortious Interference with Business Relationships

Many states allow tort actions for tortious interference with a contract, a  business relationship, or a business expectancy.  To prevail in such an action, a contractor must typically demonstrate (1) the existence of a contract, business relationship, or business expectancy; (2) the defendant’s knowledge of the same; (3) the defendant’s purposeful interference to hinder the contract, relationship, or expectancy; and (4) damage to the contractor.  DSC Logistics, Inc. v. Innovative Movements, Inc., 2004 WL 421977 (N.D. Ill. 2004).

The DSC Logistics case shows how one contractor used tort claims to fight back when it was accused of fraud, deceit, and dishonesty.  The case arose out of a contract between DSC Logisitics, Inc. (“DSC”) and Solo Cup Company (“Solo”), under which DSC was to oversee Solo’s logistics and transportation operations.  A third company, Innovative Movements, Inc. (“IMI”) also performed similar work for Solo under a separate contract.

One of IMI’s managers sent an email to Solo about DSC, making a number of negative statements about DSC’s business.  Among those statements were accusations that DSC’s business procedures were costly and error-prone, that DSC’s practice was not to timely pay its invoices, and that DSC had acted in “utter bad faith” in its dealings with Solo and IMI.  DSC, believing IMI’s allegations to be completely false, decided to fight back in court.  It brought suit against IMI for defamation, commercial disparagement, and interference with contractual and business relations.  IMI moved to dismiss the claims, arguing that DSC had not stated valid causes of action against it.

The court first held that DSC had validly stated a cause of action for defamation.  Calling IMI’s statements “obviously and naturally hurtful,” and noting that the email was send to one of DSC’s “largest and most important clients,” the court found that DSC had met the damages element, stating “Injury to DSC’s reputation in this instance can be assumed.”

The court also allowed the defamation count to proceed on the basis that it met the elements of a cause of action for defamation per se.  In Illinois , as in many states, a statement accusing a corporation of fraud is considered defamatory per se.  See Geske & Sons v. NLRB, 103 F.3d 1366, 1373 (7th Cir. 1997).  But Illinois goes even further than most jurisdictions, holding that a statement about a corporation is defamatory per se if it involves false statements about the corporation’s financial position, business methods, or management.  Id. Here, IMI’s statements about DSC’s business clearly fit into Illinois’ broad definition of per se defamation.

The court then made short work of IMI’s attempt to dismiss the commercial disparagement claim, ruling that DSC had properly pled that the statements in IMI’s email were “false and demeaning” and were directed at DSC’s business operations.    The court denied IMI’s motion to dismiss these claims.

Before proceeding with tort claims like slander, defamation, and commercial disparagement, a contractor should be aware of one important potential roadblock.  The longstanding rule in most jurisdictions is that “statements made in the course of judicial proceeds, in pleadings or in argument, as long as they are relevant, material, or pertinent to the issue, are absolutely privileged regardless of falsity or malice on the party of the author.”  Slomka v. City of Hamtramck Housing Comm’n, 2007 WL 3409359 (Mich. App. 2007).  In other words, if the only place the contractor has ever been accused of fraud, deceit, or dishonesty is in the court pleadings themselves, or in related matters such as depositions or at trial, a counterclaim for slander, defamation or disparagement is unlikely to be successful.

But how likely is it that the opponent has been disciplined enough to confine its allegations against the contractor to the courtroom?   A contractor can use discovery to obtain the opponent’s email messages, letters, and other correspondence, and use depositions to ask the opponent whether it has ever told anyone that the contractor was dishonest or deceitful.  In many cases, the contractor will be able to prove that the opponent made the accusation outside of court.  See, e.g., Campbell v. Triad Fin. Corp., 2007 WL 2973598 (N.D. Ohio 2007) (motion to dismiss defamation claim denied when evidence showed that opponent told one person outside of court that fraud had been committed).

Of course, other defenses exist to claims of slander, defamation and disparagement.  For example, the opponent may attempt to rely upon a First Amendment defense or argue that the statement should be taken as opinion, not fact.  A contractor considering making a slander, defamation, or disparagement claim should work with its attorneys to determine whether any potential defenses the opponent may offer have merit.

A contractor falsely accused of fraud, deceit, and dishonesty can do more than play defense.  The contractor can take the offensive, fighting back with tort claims such as slander, defamation, commercial disparagement, and interference with contract/business expectancy.  These claims offer contractors a powerful weapon, and it is a weapon they may wish to consider using the next time an opponent makes false accusations about the contractor’s business.

About the Author: Steven J. Koprince, Esq. is a construction lawyer with firm of Akerman Senterfitt Wickwire Gavin located at 8100 Boone Blvd., Suite 700; Vienna, VA 22182.  In his practice, he represents design professionals, contractors and project owners.  He has successfully defended consulting firms accused of fraud.  He may be contacted at (703-790-8750) or via e-mail at  steven.koprince@akerman.com. This article is published in ConstructionRisk.com Report, Vol. 10, No. 2 (March 2008).