A. Breach of Contract Accompanied by a Fraudulent Act

• Library: South Carolina Business Torts (SCBar) (2021 Ed.)

A. BREACH OF CONTRACT ACCOMPANIED BY A FRAUDULENT ACT

Like most jurisdictions, South Carolina distinguishes between claims arising ex contractu "from contract" and ex delicto "from tort." While at times opaque, this distinction is an important one — plaintiffs may recover punitive damages on tort claims alone. Thus, plaintiffs normally desire claims sounding in tort rather than contract.

In the business context, however, tort claims seldom arise in the complete absence of contract claims. Indeed, plaintiffs commonly bring both tort and contract claims over the same set of facts — especially those involving deceitful acts. Accordingly, South Carolina appears to have developed a unified claim for such scenarios: a breach of contract accompanied by a fraudulent act.

Under South Carolina law, the cause of action for breach of contract accompanied by a fraudulent act is considered an action sounding in contract.¹ However, while technically the same as an ordinary breach of contract action,² an accompanying fraudulent act claim entitles plaintiffs to punitive damages;³ though strictly ex contractu, it "partakes of elements of both contract and tort."⁴

Over its century-long existence, numerous business plaintiffs have invoked this claim. For example, in Edens v. Goodyear Tire & Rubber Co., a franchisee brought a breach of contract claim after its franchisor cancelled its contract due to alleged delays in construction.⁵ During discovery, however, internal memoranda of the franchisor surfaced revealing the true reason for its breach — loss of interest in the area.⁶ Discovery further revealed that, despite internally approving an earlier extension request by the franchisee, the franchisor acted to withhold its approval from the franchisee after losing interest in the area.⁷ Thus, the franchisee amended its complaint to allege a breach of contract accompanied by a fraudulent act claim upon which it ultimately prevailed.⁸

Importantly, while incorporating elements of breach of contract and fraud, breach of contract accompanied by a fraudulent act is "not simply a combination of a claim of breach of contract and a claim for fraud."⁹ Rather, fraud claims relate "to the making of the contract" while breach of contract accompanied by a fraudulent act claims relate "to the breaching of the contract."¹⁰

The fraudulent act may occur prior to, contemporaneous with, or subsequent to the breach of contract.¹¹ A fraudulent act has been described by South Carolina courts as "dishonesty in fact, unfair dealing, or the unlawful appropriation of another's property by design."¹²

Indeed, an accompanying fraudulent act claim "differs from an ordinary common law fraud action based on false statements because punitive damages have been awarded even though the conduct complained of occurred after the parties entered into the contract."¹³

1. Origin and Development

Although the distinction between contract and tort remedies is ancient, South Carolina courts have long been willing to blend the two.¹⁴ By 1820, for example, South Carolina judges denied the claim "that (even) vindictive damages may not be given in action of assumpsit" — an archaic form of contract claim.¹⁵

Importantly, the South Carolina Supreme Court formally recognized grounds upon which contract claims could prompt punitive damages in 1904. In Welborn v. Dixon, the court endorsed the "well settled" rule that, when "the breach of the contract is accompanied with a fraudulent act . . . the defendant may be made to respond in punitive as well as a compensatory damages."¹⁶

2. Elements

After the court's formal recognition of the claim, plaintiffs statewide began bringing it in state and federal courts.¹⁷ In 1985, the South Carolina Court of Appeals articulated a comprehensive and now standard formulation of the claim.¹⁸ "To recover punitive damages for breach of contract accompanied by a fraudulent act, the plaintiff must prove three elements:

A breach of contract. In the absence of a breach of contract, the plaintiff's proper cause of action will generally be for fraud in the inducement.

Fraudulent intent relating to the breaching of the contract and not merely to its making. Fraudulent intent is normally proved by circumstances surrounding the breach.

A fraudulent act accompanying the breach. The fraudulent act may be prior to, contemporaneous with, or subsequent to the breach of contract, but it must be connected with the breach itself and cannot be too remote in either time or character."¹⁹

Plaintiffs must prove each of the above elements to succeed on an accompanying fraudulent act claim.²⁰

3. Practical Observations - Substantive

Each of the three elements of an accompanying fraudulent act claims gives rise to unique complications for plaintiffs and defendants.

a. Breach of Contract

As with a standard breach of contract claim, a plaintiff alleging breach of contract accompanied by a fraudulent act must in fact prove the existence of a contract and a breach of the same. Even in the face of clearly fraudulent activity, failure to prove a breach is fatal to an accompanying fraudulent act claim.

For example, in Bailey v. North Carolina Mutual Life Insurance Company, the South Carolina Supreme Court dismissed a plaintiff's claim for failure to prove a breach of her insurance contract.²¹ Upon contracting a debilitating disease, an insured claimed disability benefits pursuant to her disability insurance policy.²² For two weeks, she received benefits as expected.²³ For the third week, however, her agent provided her a form "which the company claimed to be a release and settlement in full of her policy" and which, "by false and fraudulent representations, she was induced to sign."²⁴ However, the evidence revealed that the insurance company never in fact cancelled her policy — despite her agent's likely intention to fraudulently do so.²⁵ The court even noted that "[i]f the insured had patiently waited for a few days, in all probability she would have had a good cause of action on account of the fraudulent conduct of [her agent]."²⁶ It ultimately held that, "since there was no cancellation and no release, it follows, of course, there could not have been any fraudulent cancellation, or any release executed on account of the fraudulent conduct of the agent of the company."²⁷

Accordingly, attendant to any accompanying fraudulent act claim lies the burden of proving a breach. Notwithstanding clearly fraudulent intent and actions on the defendant's behalf, the absence of a contract — or the defendant's satisfaction of a contract — vitiates any claim for breach of contract accompanied by a fraudulent act.

b. Fraudulent Intent Regarding the Breach

In addition to proving the existence of a contract and its breach, plaintiffs must also prove the breaching party's fraudulent intent in the breach. Importantly, fraudulent intent relating to the making of the contract is insufficient; the fraudulent intent must relate to the breach itself.²⁸ The Fourth Circuit Court of Appeals has summarized this second element as follows:

In an ordinary breach of contract case, the motive of the breaching party is irrelevant to a determination of damages. However, in a claim for breach of contract accompanied by a fraudulent act, motive is relevant to the requisite element of fraudulent intent. Normally, this element is proven by circumstances surrounding the breach.²⁹

As in other claims involving fraud, "[f]raudulent intent is normally proved by circumstances surrounding the breach" in claims of breach of contract accompanied by a fraudulent act.³⁰ However, "[w]hen considering fraudulent intent as it relates to the breaching of a contract . . . courts are given fairly wide discretion in determining its existence."³¹

Importantly, while at times an accompanying fraudulent act may be evidence of fraudulent intent, the two are not necessarily linked. For example, in Minter v. GOCT, a real estate developer that had contracted with an oil-change company for a right of first refusal on future oil-change facilities sued the company for its creation of another facility without notice.³² In opening the new facility, the oil company breached its contract with the real estate developer.³³ Moreover, its opening of the new facility was found to be evidence of fraudulent intent because it gave no notice despite agreeing to do so.³⁴ However, this evidence of fraudulent intent was "not evidence of an independent fraudulent act which accompanied the breach."³⁵ Thus, plaintiffs must not conflate evidence of fraudulent intent with evidence of an accompanying fraudulent act.

c. Accompanying Fraudulent Act

Perhaps the most common complication for proving these claims lies in the third element: an accompanying fraudulent act...