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Understanding Consumer Fraud Consumers Protection Laws Affect Commercial Contractors

Just about every state has a series of consumer protection laws. Many large commercial construction companies overlook the significant impact that consumer protection laws can have on their businesses.

Consumer fraud is generally thought of as affecting only smaller home improvement contractors. However, consumer protection laws can reach deep into the pockets of large commercial construction companies and even can be used on a business-to-business basis. Understanding consumer protection laws is important for both litigation prevention and protection of the company when it acts in the capacity of a consumer.

What is the Purpose of Consumer Protection Laws?

Consumer protection laws exist to promote truth and fair dealing in the marketplace. Most consumer protection laws were enacted in the early 1960s as a way for individual states to protect consumers. Over the years, these laws have been expanded to provide for private causes of action, meaning that an individual consumer can file a lawsuit under these statutes for damages and injunctive relief. State lawmakers believed that it was important to give consumers ways to protect themselves against business entities that may not be acting in a truthful or fair manner, either through their actions or omissions.

Common Law Fraud v. Consumer Fraud

At its most basic level, fraud is dishonesty. Form a legal standpoint fraud is comprised of five elements:

  1. a false statement of material fact;
  2. defendant’s knowledge that the statement was false;
  3. defendant’s intent that the statement induce plaintiff to act;
  4. plaintiff’s reliance upon the truth of the statement; and
  5. plaintiff’s damages resulting from reliance on the statement. The key to common law fraud is that there must be intent to deceive.

Conversely, many consumer fraud laws require only a showing of:

  1. an affirmative misrepresentation, knowing omission or violation of a statute or law; and
  2. a connection with a sale, rental, distribution or advertisement of merchandise or real estate.

For example, in New Jersey, it does not matter whether the party making the affirmative misrepresentation knew that the statement was untrue. A business can violate New Jersey’s Consumer Fraud Act by negligently or unintentionally making a misrepresentation in connection with the sale of goods or services.

Who Can Sue Under Consumer Protection Laws?

Many consumer protection laws have broad definitions of who can sue under the law. “Persons” or “consumers” as defined by many of the laws includes anyone who purchased goods or services from a business. As a result of these broad definitions, businesses (including construction companies) can be deemed to be “persons” or “consumers” when they make purchases from other vendors or companies and can avail themselves of consumer protection laws.

So what does this mean for construction companies? Because the contractor can be considered to be a “consumer” when the company is purchasing goods or services, the contractor may have the protection of its state’s consumer protection laws. This can benefit the contractor when purchases are made from fabricators or vendors.

On the other hand, companies or individuals to whom the contractor sells goods or services are equally protected by the consumer fraud laws. This means that the construction company could become a consumer fraud defendant in litigation arising out of issues with a developer, building owner or other business “purchaser” of goods or services. This is particularly concerning in states where negligent misrepresentations constitute consumer fraud. If a contractor were to negligently misrepresent its services or “products,” it could be subject to a consumer fraud lawsuit.

Why Should Contractors be Concerned about Consumer Protection Laws?

Many states’ consumer protection statutes contain very harsh penalties. These penalties can include double or triple damages and the payment of the plaintiff’s attorney’s fees.

Double or Triple Damages

In an effort to ensure that businesses act reasonably and fairly, most states have included in their consumer protection statutes the ability for a prevailing plaintiff to recover double or triple damages. This means that if the plaintiff is successful in proving that a violation of the consumer law occurred, he or it would be entitled to recover two to three times the amount of actual damages. By way of example, if a business purchases construction services in the amount of $500,000 from a contractor and that contractor negligently makes a misrepresentation about the services, at trial a jury could award the prevailing plaintiff $1,000,000 in actual damages, assuming the litigation occurred in a state where actual damages were doubled.

Attorney’s Fees

Another important damages provision of many consumer protection laws is that the prevailing plaintiff can be entitled to the repayment of attorney’s fees by the defendant. It is not uncommon for the attorney’s fees to be more than the actual damages. For example, assume that a business plaintiff can prove that the defendant contractor violated its state’s consumer protection law and the damages awarded at trial were $5,000. Also assume that the business plaintiff paid its attorney $30,000 in fees. In states like New Jersey, the defendant contractor would be required to pay the $5,000 award plus reimburse the plaintiff $30,000 in attorneys’ fees, along with its own attorney fees.

Contractors and construction companies should be aware of the existence of consumer protection laws and the negative impact of violating the law. While consumer protection lawsuits impact large and small construction companies alike, the financial impact of a successful consumer fraud claim can have a devastating effect on smaller companies. However, consumer protection laws also can serve the contractors in situations where a business or vendor has made misrepresentations to the contractor.

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