Subcontractor Not Required to Conduct Active Investigation to Show Justifiable Reliance in Miller Act Fraudulent Inducement Case

Subcontractor Not Required to Conduct Active Investigation to Show Justifiable Reliance in Miller Act Fraudulent Inducement Case

July 26, 2018

The United States Court of Appeals for the Fifth Circuit recently held that federal contract law does not require active investigation by a subcontractor to demonstrate justifiable reliance relating to a fraudulent inducement claim asserted against a general contractor.  See Fisk Elec. Co. v. DQSI, L.L.C., No. 17-30091, 2018 WL 3188304, at *1 (5th Cir. June 29, 2018).

General contractor DQSI LLC ("DQSI") contracted with the US Army Corps of Engineers ("Corps") to perform work on a post–Hurricane Katrina pump station construction project.  DQSI subcontracted with Fisk Electric Company ("Fisk") to perform electrical work on the project.  The Project was delayed by 464 days, and Fisk submitted a Request for Equitable Adjustment ("REA") seeking damages for this delay.  Fisk also requested from DQSI a copy of the bilateral modification issued by the Corps for the 464-day delay.  When DQSI failed to respond to this request, Fisk obtained the bilateral modification through a FOIA request.  None of the bilateral modifications obtained through the FOIA request were signed by DQSI.  The parties then mediated the dispute, following which DQSI agreed to submit Fisk’s REA to the Corps, "if it is certifiable and is fully supported by Fisk."  Fisk contended that it "was specifically told by representatives of DQSI that DQSI had not received payment for the work done by Fisk or for its delay damages," and hence Fisk could submit an REA.  Corps rejected the REA and stated that "DQSI had settled all aspects of the modifications related to Fisk’s REA."

Fisk filed a Complaint alleging fraud, and that it was entitled under the Miller Act to an action and judgment against DQSI for approximately $410,000, plus interest, costs and attorney fees.  DQSI moved to dismiss the lawsuit and filed a motion for summary judgment. It contended that Fisk could have contacted the Corps directly to determine whether the unsigned contract modifications it had obtained constituted final binding documents.  The district court determined that federal law applied because the claims were premised on the Miller Act.  Further, it granted DQSI’s summary judgment motion, concluding that Fisk could not demonstrate justifiable reliance, an element of its fraudulent inducement claim.

On appeal, the Fifth Circuit agreed that federal law governs both the validity of the Agreement and any fraud claims that might invalidate them, because the claims are premised on Miller Act.  The Court noted that the rights and liabilities of the parties, allowing Fisk to sue DQSI for delay damages incurred in a federal construction project, derive from the Miller Act. However, it held that federal contract law relating to fraudulent inducement does not require active investigation to demonstrate justifiable reliance.  Quoting the Restatement (Second) of Torts, it stated that "a person is justified in relying on a representation of fact although he might have ascertained the falsity of the representation, had he made an investigation."  "[A] defendant who has been guilty of conscious misrepresentation cannot offer as a defense the plaintiff’s failure to make the investigation or examination to verify the same."  Finding that there is a genuine issue of material fact as to whether Fisk justifiably relied on DQSI’s representations about Fisk's REA, the court reversed the district court’s granting of summary judgment.

Lack of investigation by the Plaintiff is not a valid defense against a claim of fraudulent misrepresentation.