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 of the parties to the contract presents information to the other that is either incorrect, deceitful, or meant to confuse the other party. Fraud in a contracts claim also serves to make any contract entered into under fraudulent circumstances a voidable contract. In general, contract violations involving fraud, mistake, or duress by one or more parties involved in the contract will result in the contract being voidable.

In general terms, a contract is a legal agreement between two or more parties, which documents their promise to sell goods or perform services. Although a contract can be made orally, it is generally recommended that all parties to a contract put the terms of the agreement in writing, in order to decrease the potential for disputes associated with what each party agreed to do.

Then, if a legal dispute arises in which one party alleges that the other has failed to fulfill their obligation under the contract, the other party may sue the breaching party for a breach of contract.

In order for a contract to be considered valid, it must fulfill all of the legal requirements for a valid contract. These requirements are set forth by state and federal laws; generally speaking, a legal contract should meet the following requirements:

  • Offer and Acceptance: One party needs to make an offer, and the other party must accept the offer. Both offer and acceptance must be done in such a way that is clear and unambiguous;
  • Assent: Both parties must mutually assent to the terms of the contract. Additionally, they should be clear as to the terms, words, and definitions that are used in the agreement; and
  • Consideration: Each party must exchange something of value. An example of this would be how one party is generally providing a service or goods in exchange for monetary payment.

Additionally, there are some contracts that must be in writing in order to be considered legal and in compliance with the Statute of Frauds. Examples of such contracts include:

  • Marriage contracts;
  • Contracts not to be performed within one year;
  • Interest in land contracts;
  • Paying a decedent’s debt guarantees; and
  • Contracts involving the sale of goods which are over a specific amount (generally $500).

Generally speaking, 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.
    • In other words, one of the parties to the contract is deceived into signing the contract due to fraudulent circumstances, such as an employer being induced into hiring an employee that did not have relevant practical experience; or
  • Fraud in the Factum: Fraud in the factum occurs when the fraud exists only in relation to a particular fact.
    • For example, where one party believed they were purchasing a certain item in a certain quantity, but the contract specified otherwise.

For either type of contract fraud 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 an actual fact, not an opinion.

Does Fraud Make a Contract Void?

In short, yes, the act of fraud generally serves to make a contract voidable. It is important to note that there are times in which a party that enters into a contract by means of fraud may want to instead maintain the executed contract in order utilize the damage provisions within the executed contract.

In some cases, a contract may be rewritten to avoid the fraud that is present in the contract. As such, fraud does not generally make a contract void, but instead fraud makes the contract voidable.

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

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 speaking, a fraud claim cannot be filed at the same time along with a breach of contract cause of action, if both claims are based on the same basic set of facts and circumstances.

However, it is possible to bring both a fraud claim simultaneously with a breach of contract lawsuit or within a breach of contract lawsuit. In cases where both claims are filed contemporaneously (i.e. at the same time), the local civil court will usually focus on the breach of contract claim and disregard the fraud claims as duplicative, especially when the fraud claim simply restates the facts alleged in the claim for breach.

In other words, a breach of contract lawsuit often implies that there may have been some amount of misrepresentation that resulted in one or more parties not performing their contractual obligations. However, such a claim may then evolve into a fraud claim.

One 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. In such a case, the fraud claim must be based on some form of fraudulent representation or conduct that is collateral, i.e. unrelated to the contract agreement itself.

For example, where one party is tricked into signing the contract, 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 related to the fraud. Importantly, the difference between a breach of contract claim and a fraud claim is a very fine line.

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, the party that was harmed (i.e. the non-breaching party or “plaintiff”) must demonstrate that the misrepresentation occurred before the agreement was entered into.

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

As mentioned above, it is possible to use fraud as a legal defense in a contract claim. In fact, fraud is a common legal defense that is raised to void contracts and as the basis for a breach of contract claim. If the legal defense of fraud is raised in a contracts claim, and the party that raises the defense is successful, then the party raising the defense will not be liable for a breach of contract claim.

In other words, raising fraud as a legal defense in a contracts claim may allow a breaching party to a contract to avoid the legal liability and consequences associated with a breach of contract claim because the fraudulent acts of the other party to the contract impacted their ability to perform their contract duties.

What Are the Different Types of Contract Fraud?

Once again, there are generally two categories of contract fraud, fraud in the inducement and fraud in the factum. Fraud in the inducement occurs when one party knowingly provides false or misinformation to the other prospective party to the contract in order to coax them into entering the contract. If fraudulent inducement occurs, a court will typically make such a contract voidable.

Fraud in the factum is a type of contract fraud that involves a deceptive action by one of the parties. In a fraud in the factum case, one party to the contract will unknowingly enter into a contract based on that deception and the contract will specify a different fact. If fraud in the factum occurs, a court will typically either make such a contract voidable or allow for the contract to be rewritten to the terms understood by both parties.

What If Both Parties have Engaged in Fraudulent Behavior?

If both parties have engaged in fraudulent behavior, then generally a legal contract will not have been made. This is generally due to the fact that there was no mutual assent as to the terms of the contract, as both parties engaged in fraudulent behavior and had a different understanding regarding the terms of the contract.

In such cases, neither of the parties will be able to recover damages from the other party as there was no contract executed. In other words, a party cannot claim fraud when they themselves also engaged in fraud.

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

As can be seen, the overlap between fraud and contracts may be very complex. As such, if you are involved in a situation where you believe that you were misled into entering a contract based on fraud, or wish to bring a breach of contract and fraud claim, it may be in your best interests to consult with an experienced contract lawyer.

An experienced contract attorney will be able to inform you of your legal rights and your best course of legal action to bring a fraud or breach of contract claim against the other party or parties to a contract. Additionally, a contract lawyer will also be able to raise any applicable legal defenses if you have breached or wish to breach a contract that was entered into as a result of fraud. Finally, an attorney can also represent you in court, as needed.

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