Construction fraud

Business Litigation · Construction

Fraud reaches people that a contract claim cannot.

A breach of contract claim runs against the company. A fraud claim can reach the individual who made the misrepresentation, and it opens the door to exemplary damages and to claims that survive a bankruptcy. That is why the distinction matters — and why it should not be pleaded loosely, because fraud requires proof of a false material representation made knowingly and relied upon.

Texas construction trust funds

Payments made to a contractor for work on a project are trust funds under Texas law, held for the benefit of the subcontractors, labourers and suppliers who provided the work and materials. A contractor who takes draws for one project and spends them elsewhere while those parties go unpaid may be misapplying trust funds — a claim that can reach officers and directors personally, and which carries criminal exposure in serious cases.

What these cases look like

• Draw requests certifying work that was not performed, or lien waivers obtained for payments never made.
• A contractor collecting deposits and never returning to the site — the classic storm-season pattern on the Gulf Coast.
• Misrepresented licensing, insurance or bonding.
• Overbilling, duplicate billing and inflated change orders.
• Substitution of cheaper materials than those specified, concealed by the finished work.
• Fraudulent inducement: promises about schedule, capacity or prior projects that were untrue when made and that got the contract signed.

Defending a fraud allegation

Fraud is pleaded far more often than it is proved, because the word does work that a breach of contract claim cannot. The defences are specific and they are frequently available:

• No intent. Fraud requires a knowing misrepresentation. A forecast that turned out wrong, a job that ran over, or a promise defeated by events is not fraud.
• Misunderstanding or miscommunication. Two parties who heard different things from the same conversation, with no false statement by either.
• Insufficient evidence. A suspicion about where money went is not a tracing analysis, and the burden is on the party alleging fraud.
• Errors in documentation or accounting. Sloppy books are a real problem and a poor substitute for proof of deceit.

Where these allegations go beyond the job site

The same conduct can attract more than a civil claim. Serious fraud allegations carry criminal exposure, including prison, and the firm also handles fraud matters outside construction — investment and securities fraud, check fraud and financial misconduct, and online, digital and cyber fraud. Where a civil case and a criminal investigation are running together, what is said in one lands in the other, so they are handled with each other in mind.

Proving it

These cases are built from the money. Bank records showing where draws actually went, comparison of pay applications against site photographs and inspection records, supplier and subcontractor statements, and the licensing and insurance records that were represented. Where the amounts justify it, a forensic accountant traces the funds. The economic loss rule can bar a fraud claim that is really a contract claim dressed up, so the misrepresentation and the reliance have to be identified precisely.

Common questions