Key Takeaways

  • Contract frauds occur when one party deliberately misrepresents or withholds material facts to deceive another party during contract formation or performance.
  • There are two main types: fraud in the inducement and fraud in the factum.
  • Statutory laws, such as the Statute of Frauds, can influence how contract frauds are interpreted and enforced.
  • Victims may seek remedies like rescission, damages, and injunctions.
  • Courts distinguish between fraud (a tort) and breach of contract (a contractual failure), applying different standards of proof and remedies.
  • Contract fraud cases must establish intent, misrepresentation, reliance, and damages.

Contract fraud is when one party of a contract misrepresents information such as a contract for a car claimed as a contract for a boat.

The two main types of contract fraud are Fraud in the Inducement and Fraud in the Factum. Fraud in the Inducement is when the entire contract is fraudulent, and Fraud in the Factum is when only portions are misleading.

To prove fraud, a person must show that one party purposefully misrepresented facts with the intention of misleading the other party, causing the deceived party to suffer a loss.

Remedies for Contract Fraud

Awards of monetary damages are the main remedy for fraudulent contracts, reimbursing the non-breaching party for the losses caused by fraud. If the award doesn't cover the suffered harm, an injunction is the next step. Other remedies can include revocation of the contract and damages. Contract revocation is the most common remedy as fraud renders a contract voidable. If the contract is not rescinded, the parties may choose to revert to their pre-contract positions.

Statute of Frauds and Its Role

The Statute of Frauds is a legal doctrine requiring certain types of contracts to be in writing to be enforceable. Its purpose is to prevent contract frauds by ensuring there is tangible evidence of the agreement’s terms and the parties' intent. Contracts that typically fall under the Statute of Frauds include those involving real estate transactions, agreements that cannot be performed within one year, and contracts for the sale of goods over a certain value.

When fraud is alleged in connection with these contracts, the written form can help courts evaluate whether fraud occurred or whether the issue arises from a misunderstanding or poor documentation. However, even a written contract may not protect a party if it was entered into based on fraudulent misrepresentation.

Defenses to Contract Fraud

One defense against fraud is called "unclean hands". Under this, one party cannot sue the other is they have engaged in the same type of violation. Someone cannot sue for fraud if they themselves have been involved in fraud.

How Courts Evaluate Contract Frauds

Courts assess contract frauds by distinguishing between mere breaches and actionable fraud. The key distinction lies in the intent and knowledge behind the misrepresentation. If one party knowingly makes false statements or omits crucial facts to induce the other party into the contract, it may rise to the level of fraud.

To establish fraud, courts typically require the plaintiff to prove:

  • A false representation was made.
  • The representation was knowingly false or made recklessly.
  • The intent was to induce reliance.
  • The plaintiff did in fact rely on the misrepresentation.
  • That reliance resulted in damages.

This burden of proof is higher than in ordinary breach of contract cases. Courts may allow the defrauded party to rescind the contract or seek tort-based damages if economic harm is proven.

Lawyer Assistance With Contract Fraud Issues

Contract fraud is often complicated and you may need to hire a lawyer if you get into legal issues or disputes. Your attorney can provide legal advice as well as assistance during court proceedings.

Legal Process for Proving Contract Fraud

Proving contract frauds involves both factual investigation and legal analysis. The legal process generally includes:

  1. Pre-litigation investigation: Gathering evidence such as emails, texts, contracts, and witness testimony.
  2. Filing a complaint: The injured party must assert claims of fraud and detail how the misrepresentation occurred.
  3. Discovery: Each side exchanges documents and takes depositions to build their cases.
  4. Motions and hearings: Defendants may file motions to dismiss, arguing that the alleged facts do not constitute fraud.
  5. Trial or settlement: If not resolved early, the case proceeds to trial, where the burden is on the plaintiff to prove fraud by a preponderance of the evidence or clear and convincing evidence, depending on the jurisdiction.

Because contract fraud can intersect with tort law, plaintiffs may also assert claims such as negligent misrepresentation or fraudulent inducement. An experienced attorney can help identify the best legal strategy and navigate procedural challenges.

Fraudulent Misrepresentation

Most business transactions are sealed with a contract. Contract law regulates transference of rights between parties, holding each party accountable. It's important for both parties of a contract to act in good faith, but if one party misleads the other and causes harm, the deceived party may sue for misrepresentation. A contract is invalid unless all parties have agreed to accurate terms, and making any kind of false statements is a misrepresentation if there is a material effect on the deal. Under contract law, if a court finds evidence of fraud, the plaintiff can be compensated for damages.

Courts typically decide that a defendant has committed fraud if six conditions have been met:

  1. Something was represented.
  2. The representation was misleading.
  3. The defendant was aware of the misrepresentation or misspoke.
  4. That the fraudulent action was intended to deceive the plaintiff.
  5. The plaintiff relied on the misleading information.
  6. There was damage to the plaintiff as a result.

When a Breach of Contract Becomes Fraud

There is a fine line between a breach of contract and fraud. A contract breach is opinion driven and deals with unmet expectations based on misunderstandings or non-performance. Fraud is fact driven and deals with purposeful misrepresentation with the intent to cause financial harm. The law may compensate fraud but a breach of contract is negligible. 

A contract breach becomes fraud when one party provides false information that should have been included at the onset of the contract, which the other party then relies upon. Fraud can also happen if one party realizes a misunderstanding has occurred but fails to fix it. Contracts that have been entered into based on fraud are voidable – a court can cancel them if they find evidence of deceit.

Courts must respect the boundary between contract law and tort, civil wrongs, law. The “Economic Loss” rule has helped to keep this distinction. This rule, designed to prevent contract law from getting lost in tort laws, only allows tort compensation in personal and property damage. This is the difference between bargain protection and the safety of individuals.

Someone who has been tricked or deceived after entering into a contract is a victim of fraud. The longer the fraud goes on, the more severe the damages.

Common Examples of Contract Frauds

Contract frauds can arise in various commercial and personal contexts. Common examples include:

  • A party falsely claiming to own property that is the subject of a sale agreement.
  • Concealing defects in goods or services provided under a contract.
  • Misrepresenting financial statements or business conditions in a merger or acquisition.
  • A contractor promising to complete work using specific materials but using cheaper substitutes instead.
  • An individual signing a contract under duress or without full knowledge of its terms (e.g., signing a different document than what was presented).

These examples often blur the line between breach and fraud, but the presence of deliberate deception and intent to mislead distinguishes fraud from mere non-performance.

Frequently Asked Questions

  1. What is the difference between contract fraud and breach of contract?
    Contract fraud involves intentional deception to secure unfair gain, while a breach of contract typically results from a failure to fulfill agreed terms without deceptive intent.
  2. What are the legal elements needed to prove contract fraud?
    You must prove a false representation, knowledge of its falsity, intent to deceive, reliance on the misrepresentation, and resulting damages.
  3. Does the Statute of Frauds apply to fraudulent contracts?
    Yes. The Statute of Frauds requires certain contracts to be in writing to be enforceable, helping reduce fraud, but it doesn't prevent a fraud claim if deception occurred.
  4. Can I sue for contract fraud if there’s a written contract?
    Yes. A written contract does not prevent a fraud claim if the contract was based on intentional misrepresentations or fraudulent inducement.
  5. What remedies are available for contract frauds?
    Remedies may include rescission of the contract, compensatory damages, and possibly punitive damages, depending on the severity of the fraud and state law.

It's important for victims of fraud to speak with an experienced attorney. If you need help with contract fraud, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.