Fraud as a Defense in a Contracts Claim

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What is a Fraud in a Contracts Claim?

Fraud in a contracts claim occurs when one party causes economic injury to the other party through the use of misrepresentation.  Contract laws are very strict regarding fraudulent conduct, because the parties are expected to conduct business with one another in a manner that is fair and reasonable. 

In order to prove fraud in a contract claim, it’s usually necessary to show that the defendant knowingly made a misrepresentation of an important material fact to the contract.  Also, the defendant must have had the intent to defraud the other party.  Lastly, the non-violating party must have reasonably relied upon the misrepresentation, resulting in their economic loss.

An example of contract fraud is where the defendant knowingly lies about the price of an automobile in a car sale, in order to obtain a more favorable profit on the transaction. 

Is it Possible to Use Fraud as a Defense in a Contracts Claim?

Yes- in fact, citing fraud is commonly used as a defense to breach of contract.  For example, suppose that a buyer failed to render payment for goods that were already delivered to them by the seller as specified in their contract.  However, if it is later discovered that the buyer used fraudulent documents to complete the contract, it may have the effect of making the contract void.  That is, the court might void the contract, and the buyer would not be held liable for breach of contract.

You should note that fraud can result in making the contract either “void” automatically on its face, or “voidable” (that is, it can be voided at the option of the non-violating party).   These have to do with the difference between “fraud in the factum” and “fraud in the inducement”.  These are very complex legal distinctions that usually require the assistance of a contracts lawyer. 

In other words, the defense of fraud allows a breaching party in a contract to avoid liability because the other party’s fraud negatively affected the contract duties.

What if Both Parties Have Engaged in Fraudulent Behavior?

If both parties have engaged in fraudulent behavior, this usually means that neither of them can recover from the other for any damages.  That is, in order for one party to claim fraud as a defense, they must not have engaged in fraud themselves.  This would be considered unfair and therefore the court would usually cancel the contract in such situations. 

Do I Need a Lawyer for Assistance With Fraud and Other Contract Defenses?

Contract violations can often be very difficult and challenging to deal with.  As you may be able to tell, contract matters may involve areas of law that are complex and involved.  Thus, it’s in your best interest to hire a contracts lawyer in your area if you need help with fraud and other contract defenses.  Your attorney can advise you of your defense options and can provide you with guidance during court proceedings.

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Last Modified: 11-05-2012 03:09 PM PST

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