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What does “Fraudulent Inducement” mean?

Fraudulent inducement occurs when one person is induced by another through misleading information in order to encourage them to act in their favor. It is usually applicable in a contract setting, such as an employment contract where one person induces the other to sign in through trickery or deceit.

An example of fraudulent inducement is where one person tells another that they must sign a mortgage contract or else their car will be repossessed, when in fact there are no consequences for not signing. Fraudulent inducement would be found if the person entered into the contract relying on the false statement. 

What are the elements for proving fraudulent inducement? 

The basic elements used to prove fraudulent inducement are:

The misrepresentation need not be the predominant reason for entering into the contract. Further, it is irrelevant that the plaintiff would have entered into a contract even without a misrepresentation. Most courts also do not require the plaintiff to verify the truth of the misleading act or statement. 

Finally, for oral contracts, the “reasonable reliance” element is difficult to satisfy. Courts are less likely to find fraudulent inducement when the contract is based on an oral promise and there are no written documents to support it. This is because courts may deem it unreasonable to rely on statements that are not contained in a writing.

What are the remedies for fraudulent inducement?

Fraudulent inducement is an equitable cause of action. This means that the remedies will not involve money damages but rather, the court will order the offending party to take certain actions or refrain from doing something.

In this case, contracts made under fraudulent inducement conditions are declared voidable at the innocent party’s election. This means that the contract is not automatically considered to be void, but the innocent party can void the agreement if they so desire.

Money damages may be available if there are crossover claims involving a tort cause of action.

How is fraudulent inducement different from “fraud in the factum”? 

Fraudulent inducement is often mentioned alongside fraud in the factum, which is a legal cause of action based upon a different type of contract issue. Fraud in the factum occurs when one party deceives the other as to the factual contents of the agreement which is being entered into. 

For example, if the offending party states that the contract deals with the sale of land, when in fact it deals with the sale of jewelry, it will be considered fraud in the factum. 

So, fraudulent inducement deals with circumstances surrounding the contract formation which cause the innocent party to enter into the agreement. In contrast, fraud in the factum deals with the content of the contract itself. Unlike fraudulent inducement, contracts resulting from fraud in the factum are immediately void. 

Are there any defenses to fraudulent inducement claims?

A person who is sued for fraudulent inducement has several defenses, most of them involving an element of proof that was not satisfied. For example, they may contend that the statement was not misleading or was not intentionally made, or that no person could have reasonably relied upon the statement or action. 

Do I need a Lawyer?

Fraudulent inducement is a very serious matter and can lead to lost opportunities for both parties to the contract. Whether you are bringing a claim or are the party being sued, it is important to work closely with a contract lawyer who can represent your interests. Contract law can be somewhat complex, so it is best to rely on the expertise of an experienced lawyer.  

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Last Modified: 02-23-2012 10:56 AM PST

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