Claimant Is Not Required to Conduct an Investigation Into the Veracity of the Representation to Prove Justifiable Reliance When Asserting a Fraudulent Inducement Claim Under the Miller Act

Fisk Elec. Co. v. DQSI, L.L.C., 2018 U.S. App. LEXIS 17914 (5th Cir., June 29, 2018)

 DQSI, L.L.C., (“DQSI”) a general contractor, was hired by the Army Corps of Engineers (“Corps”) for a pump station construction project.  Western Surety Company (“Western”) issued a Miller Act payment bond on DQSI’s behalf.  DQSI hired Fisk Electric Company (“Fisk”) as subcontractor to perform electrical work on the project.

The project was delayed 464 days due, in part, to adverse weather conditions.  Fisk asserted expenses due to the delay of over $400,000 against DQSI and submitted a Request for Equitable Adjustment (“REA”) to DQSI for the 464 days of delay.

Fisk sued DQSI and Western pursuant to the Miller Act.  The parties then entered into a settlement agreement wherein Fisk would release DQSI for payment of approximately $55,000 and for DQSI’s agreement that it would submit the REA to the Corps and pursue it. 

A few months later, the Corps informed DQSI that it would not entertain the REA because DQSI had previously settled all aspects of the modifications related to it.  Fisk contended that this was the first time it learned the Corps had a final settlement with DQSI.  Fisk then filed another lawsuit against DQSI and Western under the Miller Act in order to rescind the release in the settlement agreement on the basis of fraud in the inducement.  The district court granted DQSI summary judgment based on the conclusion that Fisk could not demonstrate justifiable reliance – an essential element of fraud.  Fisk appealed.  On appeal, the Court of Appeals first determined that because Fisk’s fraud claim arose from the Miller Act, federal law applied.  Next, the Court of Appeals had to decide whether Fisk was required to engage in an active investigation in order to satisfy the element of justifiable reliance.

DQSI argued that there was no genuine issue of material fact on the element of justifiable reliance because Fisk was a sophisticated party and did not actively investigate whether DQSI was engaged in fraud.  The Court of Appeals rejected this argument, noting that Supreme Court precedent relating to fraudulent inducement does not require active investigation to demonstrate that the reliance was justified.  Instead, the Court found there was a genuine issue of material fact as to justifiable reliance based on the evidence of Fisk having no direct relationship with the Corps, Fisk’s contention that it reasonably believed, at settlement, that negotiations with the Corps were ongoing and thus the delay claim was still viable, and DQSI’s representations during settlement negotiations that the REA was still viable.  Based upon these facts, the Court reversed the decision of the district court and remanded the case.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Michelle Beth Rosenberg

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