A contract is a legal document that creates mutual obligations between the parties that enter into the contract. There are many different types of contracts. Additionally, the laws regarding contracts vary by state. It is always important for an individual to have an attorney review any contract prior to signing.

What is Necessary to Form a Contract?

There are several elements that are required to form a valid and legally enforceable contract. These include:

  • An offer
  • An acceptance of the offer; 
  • Mutual assent, or an agreement by both parties as to what the subject matter of the contract is and what the terms mean; 
  • Both parties freely consenting to enter into the contract; and
  • Mutual contract consideration, or the exchange of something of value in return for a promise and/or service of the other party.

What is Contract Fraud?

In some cases, a party may enter into a contract due to an intentional misrepresentation and/or deceit of the other party. In these cases, a court will usually find there is no valid contract between the two due to fraud. 

An individual may also commit contract fraud when, through misrepresentation, they trick another individual into signing a contract when they do not realize they are entering into one.

What are Types of Contract Fraud?

There are two main types of contract fraud: fraud in the inducement and fraud in the factum (also known as fraud in the fact). Fraud in the inducement occurs when a party is tricked or deceived into signing a contract because of another individual’s knowingly false statement that they reasonably relied upon. In these cases, the misleading statement is designed to cause an individual to enter into a contract that they otherwise would not have. 

 The elements of a fraud in the inducement claim include:

  • A misrepresentation and/or omission of a material fact made by the defendant;
  • The defendant knowing at the time the statement was made that it was false;
  • The defendant making the statement in order to make the plaintiff rely on it, or inducement;
  • The plaintiff reasonably relied on the defendant’s misrepresentation;
    • Reasonable reliance is that which a prudent person, or a person with average intelligence and common sense, would believe and how they would act in response to the misrepresentation; 
  • The reasonable reliance caused legal injury to the plaintiff. Legal injury may include the plaintiff losing money and/or parting with a valuable possession they would not have given up but for the misrepresentation. A valid injury may also include emotional distress.

An individual may sue a deceiving party for fraud in the inducement. This can also be used as a legal defense to a breach of contract claim. Breach of contract occurs when a party fails to fulfill their legal obligations under a contract. 

In order to prove a breach of contract claim, a party must show, among other things, that the contract was freely entered into. A contract that was entered into through a fraudulent inducement was not freely entered into.

Fraud in the factum occurs when an individual enters into an agreement based on a fraudulent misrepresentation to their detriment. In these cases, the misrepresentation causes the victim to be unable to understand the nature, substance, and/or consequences of that which they are agreeing to. A common example of this type of fraud occurs when an individual makes a misrepresentation about the nature of a legal document and induces the other party to sign the document and be bound by it.

Fraud in the factum commonly occurs when an individual believes the agreement is not legally binding when, in fact, it is a contract. This type of fraud also occurs when the individual believes they are signing a contract that pertains to a specific subject matter when, in fact, the other party has misrepresented the subject matter.

 Fraud in the factum may also be used as a defense to a claim of breach of contract. A contract entered into based on fraud in the factum will typically be set aside by a court on the grounds that the consent obtained from the individual is legally ineffective. In these cases, ineffective consent may be due to the party’s mental incapacity or physical impairment which caused them to not understand the risks, rights, and/or obligations created by signing the contract.

The aggrieved party may obtain damages for their injury. Damages may include monetary damages, which are intended to compensate the party for money they gave to the individual who committed fraud. Additionally, an individual who was a victim of fraud in the factum may also be able to recover the property they gave to the individual who committed the fraud.

What is Justifiably Relied Upon?

“Justifiably relied upon” means that it would be reasonable for an individual to have relied upon the statements made by the other party. If any obvious reasons to doubt the validity of the other party’s statements exist and/or if an individual knows for a fact that the other party is lying but the individual still enters into the contract, there is no justifiable reliance.

For example, suppose a car salesman tells an individual that a car is painted with real gold on the surface but an individual can see the car is blue colored. In this case, if the individual purchased the car anyway, it will not likely be justifiable to rely on the salesman’s statement.

What is a Misrepresentation of a Material Fact?

A misrepresentation of a material fact usually means being deceitful about a fact that is essential to the decision to enter into the contract. For example, a party may lie to an individual and tell them that a painting they are selling was painted by Picasso and the only reason the individual would purchase the painting is because it was painted by Picasso.

A statement regarding the value of an item and opinions are usually not facts and therefore cannot constitute fraud even if they were misrepresented. An exception to this rule is when the opinion is provided by an expert and may be taken as facts. Experts may include:

  • An appraiser;
  • A lawyer;
  • An engineer;
  • A physician; and/or
  • A financial advisor.

Can I Claim Fraud If I Did Not Suffer Any Injury from the Misrepresentation?

No, an individual cannot claim fraud if they did not suffer any injury from the misrepresentation. In order to recover damages and bring a fraudulent contract claim, an individual must have suffered some injury, such as monetary damage.

What are Remedies to Contract Fraud?

If an individual has been defrauded in a contract, they generally have two options for remedies. These include rescinding the contract and receiving a refund of any consideration, or money they paid or affirming the contract and suing for damages, such as the decreased value of the item. The party who committed the fraud may also be liable for criminal fraud.

Should I Contact a Lawyer Regarding Contract Fraud?

It is essential to have the assistance of an experienced contract lawyer for any issues involving contract fraud. Contract fraud can be a complicated issue. An attorney can review the contract, determine if fraud occurred, and represent you during any court proceedings, if necessary.