When May a Breach of Contract Claim Evolve into or Include a Fraud Claim?

A breach is a failure to abide by a law, an agreement or set of rules. A breach of contract occurs when a party, or parties, to a legally binding agreement fail to follow some or all of its terms. The binding contract in question between the parties can either be a written agreement or a verbal one.

An example of a breach of contract can occur if someone hired a contractor to build a shed in their backyard. All terms are agreed upon, including a total payment of $1,000, with half to be paid at the onset of the job and the remainder to be paid upon completion. The contractor receives the initial $500 payment, starts and timely completes the shed. However, they only receive $250 as a final payment. A failure to pay on time, or not pay at all, constitutes a breach of contract. In this example, the individual that hired the contractor breached the agreement.

In addition to a failure to pay on time, other breach of contract examples can include:

Failure to deliver goods or services;
Providing inferior goods or services; and,
Failure to complete a job.

Under contract law, the non-breaching party, typically, has a right to some form of remedy. Remedies for a breach of contract claim can include:

Monetary damages;
Specific performance; and,
Recission.

The remedy that the court imposes will depend on the particulars of a case. Courts review the totality of circumstances in breach of contract matters to determine a just outcome.

What is Contract Fraud?

Contract fraud in contract law is the purposeful misrepresentation of a key element made by a party during the contract formation. The other party to the contract relies upon the information provided as true. Their decision to enter into the contract is based on the other party’s deceit.

Examples of contract fraud cases can include:

Person A wants professional photos of their family taken. They want a photographer
with ample experience to do the job. Person B tells Person A they have 10 years of family portrait photography experience. However, unbeknownst to Person A, Person B is lying and has no professional photographic experience whatsoever. Person A contracts with Person B to do the job. By lying about their experience, Person B committed contract fraud.
Person Y wants to purchase a used vehicle. Person Z is selling their car. Person Z tells Person Y that the car has 30,000 miles on it. However, Person Z rolled back the mileage on the vehicle and it actually has 100,000 miles on it. This is substantially more than what Person Y believes to be the true mileage. Person Y ends up purchasing the vehicle. Person Z’s misrepresentation about the mileage on the car amounts to contract fraud.

Contract fraud typically deals with one party’s dishonest behavior in order to make economic gains. Contract fraud is illegal and courts normally void fraudulent contracts. Breach of contract usually concerns a miscommunication and/or dissatisfied expectations amongst the parties. Often, with a breach of contract, a judge aims to clear up any miscommunications and put the parties as close as possible to fulfilment of the original contract.

Can I File a Fraud Claim Simultaneously or Within a Breach of Contract Lawsuit?

In some instances, a lawsuit may involve both a fraud claim and a breach of contract claim. While the claims cannot be filed simultaneously, a court will typically focus on the breach of contract claim and dismiss the fraud claim. The rationale is that the claims are duplicitous and the fraudulent allegations are implied in the breach of contract claim.

What are the Different Types of Contract Fraud?

Generally, there are two types of contract fraud: fraud in the inducement and fraud in the factum.

Fraud in the inducement, also known as fraudulent inducement of contract, occurs when a party knowingly provides misinformation to another in order to make a deal. The other party presumes the contractual information provided is accurate and enters into the contract. A fraudulent inducement of a contract is illegal and a court will typically rescind, or cancel, the contract.

Fraud in the factum also involves deception by one party. The other party, however, unknowingly enters into a contractual agreement because of the deception. Fraud in the factum is used as a legal defense by a party that unwittingly entered a contractual obligation because of deception.

At the root of fraud in the inducement and fraud in the factum is an intentional misrepresentation. If a party argues that the intentional misrepresentation was a breach of contract they must prove the elements of fraud in the inducement or fraud in the factum. These elements include:

A material misrepresentation of fact was made.
The individual making the misrepresentation, knew it to be untrue.
The individual making the misrepresentation, did so to persuade someone to enter into an agreement.
The misrepresentation was relied upon by the victim.
The victim would not have agreed to the terms if they knew the truth.