Decoding Horse Sales Fraud

The scenario is repeated all-too-often in the equine industry. A private individual or entity purchases one or more horses, only to find later the horse has some sort of veterinary or behavioral defect that was not disclosed, but known, by the seller.

The question left for the purchaser, if the matter is not worked out amicably, is how to proceed. Do you sue for breach of contract, for fraud in the inducement, for negligent misrepresentation or other non-contract theory of recovery? Do you sue the seller’s agent, and if so, under what theory of recovery?

That question then turns to further analysis as to whether the tortious conduct, such as deceptive representations or misrepresentations, occurred prior to entering into the contract for the purchase and sale of the horse, or as part of the breach of the contract.

If there was bad conduct by the seller, or seller’s agent, prior to the contract, to induce the buyer to enter into the contract to purchase the animals or upon which the buyer justifiably relied to enter into the contract, then the buyer may proceed in both contract and tort concurrently.

If the complaint is only that the horse’s defect was a breach of seller’s performance of the contract, such as the horse could not jump as high or run as long as represented, then a principle of law called the Economic Loss Doctrine may mean that you only can proceed with breach of contract against the party with whom you made the contract.

That Rule holds that if your only damages arise from the breach of the contract and the conduct surrounding the breach is the same as would support other tort claims, then you can only proceed for breach of contract against a party with whom you contracted.  However, if the conduct complained-of predated the formation of the contract, then you might also be able to proceed in tort against that party.

An example might be a breach of contract and fraud action against a seller who represented they had the right to sell a horse when that person did not have the legal right to do so. As well, the seller’s agent, while not being exposed to a breach of contract claim, because the agent is not the one entering into the contract, is still exposed the tort claims such as fraudulent inducement or negligent misrepresentation.

As one esteemed jurist put it: “When one party to the contract sits at the bargaining table with deceit in his heart, all bets are off.”

Economic Loss Rule

To appreciate the consideration to be given to choosing theories of recovery in horse purchase cases, first note that in 2013, the Economic Loss Rule was significantly contracted by the Florida Supreme Court and expressly limited only to products liability cases

Since 2013, state courts (Alabama, Florida, and Georgia) and federal courts of the 11th Circuit have focused on whether a tort claim alleging fraud or misrepresentation, when brought alongside a contract claim, was “independent” of that breach of contract claim.

In Georgia, for example, in a case about the ownership of two white-handed Gibbons, the Court stated “We cannot conclude that the district court erred in granting judgment as a matter of law in favor of defendants with respect to plaintiff’s tort claims…we readily conclude that there is no evidence of a pre-contractual misrepresentation.”

However, other courts have found that fraud in the inducement to form a contract occurs where a party’s ability “to negotiate or make informed decisions” is impaired by the pre-contractual fraudulent conduct of the other contracting party, then a party harmed may bring both a breach of contract and a fraud claim and not run afoul of the Economic Loss Doctrine.

If you are feeling confused you are not alone.  Many courts have the same problem discerning just what the Economic Loss Rule allows or does not allow in their state.  The good news is that courts tend to want to see claims tried on their merits.  Therefore, given the lack of clarity of the economic loss rule, many courts will defer addressing this doctrine at the early stage of court proceedings (such as in a motion to dismiss or motion for summary judgment) and will allow contract and tort claims to proceed concurrently against the breaching party.

This means the horse buyer can proceed on theories of torts of fraud and negligence tort as well as breach of contract and will survive a motion to dismiss, when the conduct complained of includes fraudulent or negligent misconduct before the breach of the contract which affects the ability of the non-breaching party to make an informed choice to contract.  That will expose the seller to multiple claims and may lead to a settlement or a verdict against the seller.

 


Avery S. Chapman, Esq., is the founding member and inaugural Chairman of the Equine Law Committee of the Florida Bar. He is the principal of Equine Law Group in Wellington, FL. Click here to learn more