Hypotheticals

Fraud Cannot Be Contracted Away

By 
Douglas Robbins
June 25, 2021

In defense of a fraud involving a contract, some parties try to argue that the victim really should have known better. In this context defendants sometimes try to argue that the contract itself put the victim on notice of the fraud, that a careful reading of the contract would have revealed that the property sold or the services rendered were being provided "as-is" with no warranty, that the plaintiff/victim had an obligation to perform her own due diligence, and by the terms of the agreement itself, the risk of deception that occurred while negotiating the contract was borne by the plaintiff/victim who should have done a more thorough investigation. In short, it was the victim's fault for getting tricked in the first place. She really should have known better. But this argument betrays a fundamental misunderstanding of the law.

In general, fraud in the inducement of a contract cannot be contracted away, no matter what the terms of the contract may read. This legal principle applies to low-value transactions, like for purchases of older Alfa Romeos, as well as for high-value transactions, where millions of dollars may be at stake.

The California Civil Code provides that “[a]ll contract[s] which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud. . . whether willful or negligent, are against the policy of the law.” Cal. Civ. Code § 1668. “It is well-established in California that a party to a contract is precluded under section 1668 from contracting away his or her liability for fraud or deceit based on intentional misrepresentation.” Manderville v. PCG & S Group, Inc., 146 Cal. App. 4th 1486, 1500 (2007); see also, McClain v. Octagon Plaza, LLC, 159 Cal. App. 4th 784, 794 (2008) (“A party to a contract who has been guilty of fraud in its inducement cannot absolve himself or herself from the effects of his or her fraud by any stipulation in the contract, either that no representations have been made, or that any right that might be grounded upon them is waived.”). The Courts have explained the rationale as follows:

A provision of a contract that unreasonably exempts a party from the legal consequences of a fraudulent . . . misrepresentation is unenforceable on grounds of public policy. Therefore . . . a party who has induced the other party to enter into the contract based on . . . an intentional . . .misrepresentation cannot be relieved of liability by any . . . exculpatory clause, or other clause waiving liability, contained in the contract. Because the fraud renders the entire contract voidable, the clause intended to absolve the seller from liability is also voidable.

Manderville, 146 Cal. App. 4th at 1501; see also Lingsch v. Savage, 213 Cal. App. 2d 729, 742 (1963) (“Where the seller actively misrepresents the then condition of the property or fails to disclose the true facts of its condition not within the buyer’s reach and affecting the value or desirability of the property, an ‘as is’ provision is ineffective to relieve the seller of either his affirmative or negative fraud.”).  

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