It is important to note that a fraud claim and a breach of contract claim are two very different legal matters. However, there are numerous instances where a breach of contract claim will also involve a claim of fraud. Generally, a fraud claim cannot be filed at the same time along with a breach of contract cause of action, if both are based on the same basic set of facts and circumstances.
In cases where both claims are filed contemporaneously (at the same time), the court will usually focus on the breach of contract claim and disregard the fraud claims as duplicative, especially when the fraud claim simply restates facts of the claim for breach.
Simply put, a breach of contract lawsuit implies that there may have been some amount of misrepresentation that resulted in one or more parties not performing their contractual obligations.
However, a breach of contract claim may evolve into a fraud claim, in certain circumstances discussed below. First, it is important to understand the differences between a fraud claim and a breach of contract claim.
A contract is a legally binding promise made between two parties. Each party to a contract promises to perform a certain duty, or pay a certain amount for a specified item or service. The purpose of a contract being legally binding is so each party will have legal recourse in the event of a breach. A breach of contract occurs when the promise of the contract is not kept, because one party has failed to fulfill their agreed upon obligations, according to the terms of the contract.
Breaching can occur when one party fails to deliver in the appropriate time frame, does not meet the terms of the agreement, or fails perform at all. Additionally, if one party fails to perform while the other party fulfills their obligations, the performing party is entitled to legal remedies for breach of contract.
A contract fraud claim occurs when one of the parties to the contract presents information to the other that is either incorrect, deceitful, or meant to confuse the other party. For instance, contract fraud may occur in an employment contract where an employee represents that they have experience performing a task, when in reality they have no practical job experience.
Another example of contract fraud is where one party is led to believe that they are purchasing a certain item in a certain quantity, but the contract specifies a different item or a different quantity.
There are two main types of contract fraud:
- Fraud in the Inducement: Fraud in the inducement occurs when the fraud exists with regards to the entire contract. That is, one of the parties to the contract is deceived into signing the contract due to fraudulent circumstances. For instance, the above example where an employer was induced into hiring an employee that did not have relevant practical experience; or
- Fraud in the Factum: Fraud in the factum occurs where the fraud exists only in relation to a particular fact. For instance, the above example where one party believed they were purchasing a certain item in a certain quantity, but the contract specified otherwise.
For both fraud in the factum or fraud in the inducement to exist, the party making the fraud claim must prove that one party knowingly misrepresented a material fact with the intent to deceive the other party.
Additionally, the party making the fraud claim must have relied upon that misrepresentation, and suffered an actual loss. Further, the misrepresentation must be related to fact, not opinion.
An exception to the general rule that a breach of contract claim cannot include a fraud claim is when the fraud claim derives from an entirely different set of facts from the contract claim being made. That is, the fraud claim must be based on some form of fraudulent representation or conduct that is collateral, i.e. unrelated to, the agreement itself.
For example, the examples of fraudulent inducement mentioned above, where one party is tricked into signing the contract. In those cases, the party making the fraud claim will often be given the option to void the resulting contract and possibly seek further monetary or punitive damages for any losses.
As can be seen, the difference between a breach of contract claim and a fraud claim is a very fine line. In essence, breach of contract claims are opinion driven and the typical remedies are non-punitive (i.e. do not punish the other party) with the remedies being limited to economic loss.
However, as noted above, fraud is fact-driven and involves dishonest conduct, and a party that brings a fraud claim may recover not only for their actual economic loss, but for a punitive remedy beyond that as well.
The easiest way to include a fraud claim in addition to a breach of contract claim is to prove that the fraud claim and the contract are two distinct and separate violations. In order to be successful in bringing both claims, you should show that the misrepresentation occurred before the agreement was entered into.
Further, it helps to show that you would not have entered into the contract if you were aware of the true nature of the circumstances. You can do this by stating very clearly the details of your fraudulent inducement, backed by evidence of supporting documents and dates.
As can be seen, the overlap between fraud and contracts may be very complex. Thus, if you are involved in a situation where you believe that you were misled into entering a contract and are wanting to bring a breach of contract and fraud claim, it may be in your best interests to consult with a knowledgeable and experienced business attorney.
An experienced business attorney will be able to inform you if you would be able to successfully bring one or both claims, as well as represent you in negotiations and court, if necessary.