A contract is a legally binding agreement between two private parties. Simply put, contract fraud occurs when a person knowingly makes a false statement in order to have someone else agree to a contract. This act is intended to deceive or trick the other person into signing a contract that they may not otherwise agree to. Contract fraud may also occur when a person uses misrepresentation to trick another person into signing a contract when that other person does not believe that they are entering into a contract.

In legal terms, misrepresentation can be defined as a false statement of a material fact, which is made by one party and affects the other party’s decision. Misrepresentation in terms of contract fraud can generally be categorized in one of the three following ways:

  • Innocent Misrepresentation: Innocent misrepresentation can occur when the defendant was unaware that their statement was untrue at the time of signing the contract;
  • Negligent Misrepresentation: Negligent misrepresentation happens when a statement is false, but the defendant did not attempt to verify the statement as either true or false prior to putting forth the contract; or
  • Fraudulent Misrepresentation: Fraudulent misrepresentation can be thought of as the most “blatant” type of contract misrepresentation. The defendant knowingly makes a fraudulent statement for the sole purpose of misleading the plaintiff.

A contract fraud lawsuit is a lawsuit in which the injured party sues the party who is responsible for the misrepresentation. Any sort of contract fraud or misrepresentation would render the contract void; a lawsuit would attempt to compensate the deceived party for their losses resulting from the defendant’s actions.

What Is Needed to Form a Contract?

There are many different types of contract, each with its own specific criteria that must be met in order for the contract to be valid and legally enforceable. Some contracts would be considered unilateral, in which a promise is exchanged for specific performance. Other contacts would be considered bilateral, which is a promise being exchanged for another promise. Additionally, contracts may be either oral or written.

Generally speaking, oral contracts are less likely to be legally enforced. Some contracts must actually be written in order to be considered valid at all. An example of this would be any contract that involves a significant amount of money, usually exceeding $500.

Regardless of the type of contract in question, the following elements are needed to form a valid contract:

  • An Offer and Acceptance: One party must make an offer, while the other party must accept that offer;
  • Mutual Assent: Mutual assent refers to an agreement made by both contracting parties regarding the subject matter of the offer, as well as what the contract’s terms mean;
  • Consent: Both parties must freely consent to entering into the contract, meaning neither party can enter into the contract while under duress; and
  • Mutual Contract Consideration: Consideration refers to the exchange of something of value from one party, in return for a promise or service provided by the other party. In legal terms, a consideration involves either profit to one party, or loss to another.

What Are the Types of Contract Fraud?

Contract fraud usually falls into one of two different categories: fraud in the inducement, or fraud in the factum.

Fraud in the inducement, or fraudulent inducement, refers to contract fraud wherein one party who is involved in the contract bases their decision on misleading information. To put it more specifically, an example of this would be if an employer convinces a potential job candidate to sign an employment contract by using falsified terms. The employee later discovers that the employment contract’s terms are not as initially promised, and they relied on the fraudulent term when making their decision to sign the contract. Using fake contracts would be another example of fraud in the inducement.

In order to have a successful fraud in the inducement claim, the following elements must be proven:

  • The defendant made a misrepresentation, or omitted an important fact;
  • The defendant knew, at the time that they made the statement, that the statement was false;
  • The defendant made their statement in order to cause the plaintiff to rely on the statement when making their decision;
  • The plaintiff reasonably relied on the misrepresentation, reasonably meaning what a prudent person would believe; and
  • This reasonable reliance is the direct cause of valid legal injury to the plaintiff, such as losing money or a valuable possession that they would not have given up otherwise.

Fraud in the factum, or fraud in the fact, also occurs when the injured party enters into the agreement based on a fraudulent misrepresentation. This false claim causes the plaintiff to misunderstand the nature, substance, or consequences of what they are agreeing to. A common example of fraud in the factum would be when the plaintiff believes that what they are agreeing to is not legally binding, when it actually is. Another way of saying it would be that they were tricked into signing a document.

To clarify the differences between the two, fraudulent inducement involves circumstances that caused the injured party to act, while fraud in the factum involves deceitful subject matter contained within the contract. Fraud in the inducement utilizes deceit to get the other party to sign the contract, while fraud in the factum involves the deceitful party actually acting out the fraud themselves.

What Are the Legal Consequences of Contract Fraud?

When a contract is found to be fraudulent, it is generally considered to no longer be enforceable. Contracts are considered to be void when there are mistakes, or cases of duress or fraud by one or more of the contracting parties.

The injured party may sue for either fraud in the inducement or fraud in the factum. Fraud in the inducement may be used as a defense to breach of contract claims, as breach of contract claims require proof that a valid contract was freely entered into. Any contract that is entered into fraudulently is, by definition, not entered into freely.

Fraud in the factum may also be used as a defense to breach of contract. A contract that is entered into because of fraud in the factum will be considered void due to the fact that the victim’s consent is essentially legally ineffective. One of the most common examples of this would be that the victim is mentally incapicated, or physically impaired, to the extent that they cannot understand all of the risks, rights, and obligations that are created by signing the contract. 

Damages awarded to the injured party most commonly include monetary damages. These are intended to compensate the victim for any money that the plaintiff may have given the defendant. Additionally, someone who fell victim to fraud in the factum may be allowed to recover any property that they gave to the defendant, in addition to being awarded monetary damages.

Do I Need a Lawyer for Help With Contract Fraud Issues?

If you think you have been victimized by contract fraud, you should consult with an experienced and local contract lawyer as soon as possible. Because state laws can vary in terms of what constitutes contract fraud, as well as limits on recovery, it is important to work with an area attorney. Someone who works where you live will be best suited to helping you understand your state’s specific laws, as well as how those laws may affect your legal options. Your attorney can help you gather evidence to support your claim, and will protect your legal rights while representing you in court, as needed. A contract lawyer may be able to secure a damages award for you as well.

Alternatively, if you are being accused of committing contract fraud, a contract lawyer will be able to determine whether any legal defenses are available to you based on the specifics of your case.