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Damage award based on marketing brochure vacated

A surety’s marketing brochure did not fully support a damage award for a contractor on claims of fraudulent inducement and false advertising under Virginia law, the 4th U.S. Circuit Court of Appeals held earlier this week.

Persaud Companies signed a $3.5 million subcontract for work on a border fence project in Texas, which required it to post payment and performance bonds. Persaud had a history of using the same corporate surety on its previous jobs, but for this job, Persaud’s bond brokers recommended Edmund Scarborough, an individual surety, and his risk management company, IBCS Group.

During negotiations, Persaud’s brokers suggested Persaud have the general contractor pre-qualify the bonds, and asked IBCS if it would refund any bond premium paid by Persaud if the general contractor rejected the bonds.

The brokers were referred to IBCS’s brochure about Scarborough’s bonds, which said in a Q&A section, “we will reverse a transaction if a bond is promptly rejected.”

But Persaud’s General Agreement of Indemnity said that once the bond was executed, it would “not be refunded, waived or cancelled for any reason,” and any change to the Agreement would have to be in a writing, signed by the surety. The general contractor rejected the bonds because of concerns over Scarborough’s assets. Relying on the Agreement’s language, IBCS denied Persaud’s request for a refund of the premium.

When Persaud sued, Alexandria U.S. District Judge Gerald Bruce Lee granted summary judgment to Persaud on its claims of fraudulent inducement and false advertising, and awarded Persaud the full bond premium payment of $121,557.

The 4th Circuit vacated the award on April 25, because it agreed with IBCS that Persaud had access to the controlling language of the Agreement prior to signing. Under Virginia law, “the promise of a refund in the marketing brochure could not have reasonably induced Persaud into signing the Agreement,” the panel said in its unpublished per curiam opinion in Persaud Companies Inc. v. The IBCS Group Inc.

IBCS was entitled to summary judgment on the fraudulent inducement claim, but the panel gave Persaud another chance with its false advertising claim.

Virginia law distinguishes between fraud and false advertising, the panel said, because the misrepresentation in a false advertising claim doesn’t have to relate to a statement of present or pre-existing fact.

The appellate court agreed that the IBCS marketing brochure satisfiesd the elements of the statutory false advertising claim. It was an advertisement that was, at a minimum, misleading or deceptive. But the district court did not consider whether the ad caused any actual injury. It sent the case back to the Alexandria trial court to determine whether Persaud met that test under Va. Code § 18.2-216.
By Deborah Elkins

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