Fraud and Breach of Contract: Everything You Need to Know
Fraud and breach of contract are two different things but both can ultimately end in legal action being taken against one of the parties involved in a contract.3 min read
Updated July 7, 2020:
Fraud and breach of contract are two different things, but both can ultimately end in legal action being taken against one of the parties involved in a contract. This can result in potential loss being suffered by other party or parties, as both involve the terms and conditions of a contract being unable to be met. Additionally, while they can be standalone acts, they can also sometime go hand-in-hand
Contract fraud exists when one of the parties involved in the contractual agreement presents information to the other party that is misleading, false, or in any way deceitful. For example, if you are the Executive Director of a nonprofit organization looking to contract with a grant writer, and the person whom you hire claims to have written a variety of successfully grant proposals over their many years working in that field, but they do not actually have any experience with grant writing and the references and writing samples they provided you were false, that would be considered contract fraud.
There are essentially two types of contract fraud:
- Fraud in the inducement, which is when the fraud exists as it pertains to the entire contract. For example, you sign a contract with an interior decorator to decorate your apartment, and it turns out they are not a decorator.
- Fraud in the factum, which is when the fraud exists only in relation to a particular fact. An example of this may be if you enter into a contract with a wedding photographer, intending to purchase 20 prints, but the photographer actually intends to sell you 50 prints.
To prove fraud, two things must exist:
- One party was knowingly misrepresenting material facts
- One party was intentionally attempting to defraud or deceive the other party
Additionally, for fraud to exist, the misrepresentation must be related to fact, not opinion. Using the above example of the grant writer, if it is a fact that the person whom you hired does not actually have the background and qualifications they claimed, that is fraud, whereas if you just end up not being pleased with the quality of the grant proposals they are writing, then that is more a matter of opinion.
With that said, issues of performance can still raise questions as it pertains to contract fraud. While failure to uphold your end of a contractual agreement, does not constitute fraud, there may be a claim for fraud, if a court is able to determine that you never had any intention of fulfilling the terms of the contract.
While this can certainly be difficult to prove, courts may take a look at the history of the relationship between you and the other party. For example, are you requesting advance payments for work that you do not seem to produce? Are you not keeping in communication with the client regarding the status of the job for which you were hired? Were there perhaps permits for which you needed to apply in order to do the job, for which you never actually applied? These can serve to be indications that you never actually intended on doing the job for which you were hired, or that you intended to commit fraud against the other party.
Breach of Contract with Fraud Claims
Breach of contract occurs when one party fails to uphold their end of a contractual agreement. This can differ from fraud in that there may not have been any false information provided, but rather the breaching party simply doe not follow through. Again, to use the example of the grant writer, perhaps all of their background information and references are legitimate, and you hire him to complete a grant proposal by a certain date. That date comes and goes, yet you do not have the final grant proposal, as agreed upon in the contract; this would then be an example of a breach of contract.
With that said, a breach of contract can sometimes also have claims of fraud, although the fraud cannot be filed alongside the breach of contract. Many times, courts will end up dismissing the fraud claims as duplicative, and instead focus on the breach of contract claims in the case. The reasoning behind this being that claims of fraud are essentially implied in the breach of contract; it is largely accepted that there was some sort of misrepresentation in a contract ended up in a breach.
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