Nevada Supreme Court Rejects Fraud in the Inducement Claim in Construction Contect

In its recent opinion in Road & Highway Builders, LLC v. North Nev. Rebar, Inc., 284 P.3d 377 (Nev. Aug. 9, 2012), the Nevada Supreme Court considered whether a subcontractor had a valid claim for fraud in the inducement, allowing it to recover punitive damages against a general contractor. In this case, Road and Highway Builders, LLC (Builders), the general contractor on a Nevada Department of Transportation project, retained North Nevada Rebar, Inc. (NN Rebar) to provide all rebar needed for the project. Due to the large quantity of rebar required, NN Rebar agreed to a lower unit price in its contract. However, at the time the subcontract was being executed, Builders had already made the decision to use a different method for constructing roadside concrete boxes (precast instead of poured), and had already retained a precast box supplier, substantially reducing the amount of rebar necessary for the project. The Builders did not disclose to NN Rebar that it had no intention of ordering the amount specified.

After several disputes arose between Builders and NN Rebar, Builders filed suit.  NN Rebar filed a counterclaim asserting a tort claim for fraudulent inducement along with claims for breach of contract.  Finding in favor of NN Rebar, the trial court found that NN Rebar had been fraudulent induced to enter into the subcontract, and awarded it $700,000 in compensatory damages and $300,000 in punitive damages. 

On appeal, the Nevada Supreme Court overturned the trial court’s award for punitive damages for fraud in the inducement. The Court explained that the fraudulent inducement claim contradicted the express terms of the subcontract.  Here, the subcontract contained a changes clause specifically permitting Builders to order revisions to NN Rebar’s work, regardless of any changes to the rebar work provided under the prime contract.  In addition, the total price was subject to additions and deductions for changes in the work while the unit prices were fixed regardless of quantity.  Based on these provisions, the Court found that the parties contemplated a potential alteration in the scope of the work to be performed.  Therefore, the fraud in the inducement claim was at odds with the express terms of the subcontract, and could not stand as a matter of law.

Despite the fact that Builders knew that it would be unilaterally reducing NN Rebar’s scope of work at the time of signing the subcontract, Builders avoided a tort claim and punitive damages by drafting a subcontract that permitted it to unilaterally reduce the rebar quantities. Conversely, NN Rebar limited itself to pure contract damages by fixing the price of its rebar, while permitting Builders to unilaterally alter the quantity at any time for any reason. Although NN Rebar lost its fraudulent inducement claim, it could have avoided the losses altogether by providing for a mechanism to adjust the price of rebar depending on the quantity required, or simply by setting a minimum quantity for the rebar. Courts routinely deny fraud claims in breach of contract cases, especially when the parties to the contract are sophisticated commercial players.