Ask a Maritime Attorney: Is There an Argument for Fraud, and Should I be Worried About Breaking a Contract?

Question:

I am in the process of purchasing a boat through a yacht broker. According to the online listing information, the boat had new bottom paint and a lot of other work completed recently.  However, when I had the boat hauled out for the survey it was clear that the bottom had not been painted in a few years and most of the other work advertised in the listing was also incomplete.  The seller and the broker explained the error by claiming that they were working from a previous listing when the boat was offered for sale a few years ago, and they discounted the purchase price for me to compensate for the problem. But several days before the deal was scheduled to close I decided that I did not want to buy a boat that had been fraudulently misrepresented, so I backed out of the purchase. My broker now advises that I will lose my deposit since I had already signed the “final acceptance” section on the purchase contract. This seems ridiculous in light of the misrepresentations in the listing information, and I am considering legal action against the broker and the seller for fraud. What are my options in a case like this?

Answer

Our reader is considering legal action for fraud, but he must also deal with the possibility of legal action against him for breach of contract as a consequence of backing out of the purchase. Let’s look at each of these issues separately.

We can start our analysis of the possible fraud with a simple observation. There is a difference between lying and committing a fraud, and you can’t sue someone for lying to you.  Let’s look at this in more detail.

The boat was represented as having recent bottom work and other projects completed, but this apparently was not the case. The representations may have been intentional, in which case the seller may have lied to our reader and our reader may have a cause of action for fraud. It appears that the misrepresentations may not have been intentional, but for this discussion let’s assume that they were outright fabrications intended to mislead potential buyers..

According to section 3294(c) of the California Civil Code, “Fraud” is defined as “an intentional misrepresentation, deceit, or concealment of a material fact known to the defendant with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.”

The last part of this definition is where fraud is distinguished from simple lying. A legal claim for fraud or misrepresentation requires that a person suffer an “injury.”  In this context, “injury” refers to financial damages so we’re not looking for blood. And, the financial damage must have been suffered as a consequence of the buyer’s reasonable reliance upon the lie or misrepresentation.

Looking again at our reader’s case, he had an opportunity to back out of the deal after learning of the true condition of the boat. So he did not rely on the misrepresentations about the condition of the boat. And, since he never bought the boat, he did not suffer any financial damage from the misrepresented condition of the boat (except perhaps for the cost of the haulout and survey). As noted above, a lie that is not reasonably relied upon and that does not result in financial damage is not a fraud. This is not a fraud.

This brings us to the question of whether he will lose his deposit by backing out of the deal after he signed the final acceptance in the purchase contract.

Boat purchases in California may be executed on a wide variety of contracts, and the question of whether a contract was breached will depend in large part on the language of the document. However, most yacht purchases in California use the form contracts prepared by the California Yacht Brokers Association, so we will assume that this deal used a CYBA purchase contract.

The “final acceptance” section of the CYBA purchase contract allows a buyer to inspect the boat, secure financing, and satisfy other contingencies prior to making a final decision to proceed with the purchase. Generally speaking, buyers may back out of the purchase and recover their deposit until they sign the final acceptance, but they are obligated to go forward when they sign it.

Our reader may therefore be found to have breached the contract unless he is excused for some reason. A party may be excused from performing under a contract if the agreement was already breached by another party, or if some other legal claim arises against another party. In this case, our reader may be excused from the contract if he can establish that the seller is liable for fraud, but as we discussed above he is not likely to succeed with that claim. As such there is a good chance that he will be found to have breached the purchase contract if he fails to go through with the purchase, in which case he will probably lose his deposit.

We always include a disclaimer at the end of this column, advising that every legal dispute is different and that you should seek specific legal advice before reaching a conclusion on your particular case. Talk to an attorney experienced with purchase and sale transactions in your state if you are considering legal action of your own.

David Weil is licensed to practice law in the state of California and as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.

David Weil is the managing attorney at Weil & Associates (www.weilmaritime.com) in Seal Beach. He is certified as a Specialist in Admiralty and Maritime Law by the State Bar of California Board of Legal Specialization and a “Proctor in Admiralty” Member of the Maritime Law Association of the United States, an adjunct professor of Admiralty Law, and former legal counsel to the California Yacht Brokers Association. If you have a maritime law question for Weil, he can be contacted at 562-799-5508, through his website at www.weilmaritime.com,  or via email at dweil@weilmaritime.com.