Key Takeaways

  • Difference Between Breach of Contract and Fraud: Breach of contract involves failure to meet the terms of an agreement, while fraud requires intentional deceit.
  • Contract Fraud Types:
    • Fraud in inducement impacts the entire contract.
    • Fraud in factum misrepresents a specific element of the contract.
  • Legal Proof for Fraud: Courts require evidence of intentional misrepresentation of material facts.
  • Overlap Between Breach and Fraud: Some cases involve elements of both but are typically resolved under breach of contract law.
  • Remedies: Legal actions can include damages, contract rescission, or penalties.

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

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.

Indicators of Contract Fraud

Detecting contract fraud early can save significant time and resources. Here are common signs that fraud may be involved:

  1. Discrepancies in Documentation: Missing, falsified, or inconsistent records provided during negotiation.
  2. Misrepresentation of Credentials: As in the grant writer example, false claims about experience or qualifications.
  3. Unusual Contract Terms: Incomplete or ambiguous terms that heavily favor one party.
  4. Avoidance of Transparency: Reluctance to share information or documentation during or after signing.

Fraud indicators should prompt immediate action, such as consulting a legal professional for contract review.

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.

Consequences of Breach and Fraud

The consequences of breach of contract and fraud vary based on the case's specifics:

  1. Financial Damages: Compensatory damages are most common in breaches, while fraud cases might include punitive damages.
  2. Rescission: The court may nullify the contract, restoring the parties to their pre-agreement state.
  3. Reputation Loss: Fraud allegations can cause long-term damage to business or professional credibility.
  4. Legal Penalties: Fraudulent acts may lead to civil and criminal penalties, depending on severity.

Understanding these potential consequences is critical when entering contracts, particularly with unknown parties.

Preventative Measures

Minimize risks by implementing these measures:

  1. Detailed Contracts: Ensure contracts are comprehensive, with clear terms and conditions.
  2. Background Checks: Verify the credentials and past performance of contracting parties.
  3. Third-Party Mediation: Use neutral third parties to oversee negotiations or ensure fairness in agreements.
  4. Legal Review: Have all contracts reviewed by qualified legal professionals before signing.

FAQ Section

  • What is the main difference between breach of contract and fraud? Breach of contract is a failure to fulfill agreed terms, while fraud involves deliberate deceit or misrepresentation.
  • Can fraud and breach of contract occur together? Yes, but fraud claims often hinge on proving intent to deceive, while breach claims focus on non-performance.
  • What are common legal remedies for contract fraud? Remedies include financial damages, contract rescission, and in some cases, punitive damages for intentional deceit.
  • How can businesses avoid contract disputes involving fraud? By performing due diligence, creating clear contracts, and involving legal counsel in drafting and negotiations.
  • When should I consult a lawyer for a breach or fraud case? Immediately upon suspecting fraud or facing a significant breach of contract to protect your legal and financial interests.

If you need help with fraud or breach of contract, 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.