Key Takeaways

  • Fraud in the Factum vs. Fraud in the Inducement: Fraud in the factum involves deception about the nature of a document being signed, while fraud in the inducement involves misleading a party into signing a contract they understand but based on false pretenses.
  • Legal Implications: Fraud in the factum serves as a legal defense that can void a contract, whereas fraud in the inducement is an equitable defense leading to contract rescission.
  • Elements of Fraud: Includes misrepresentation, materiality, intent, justifiable reliance, and damages.
  • Types of Recovery: Victims of fraud may recover compensatory and punitive damages, including mental anguish and attorney fees.
  • Proving Fraud: Courts analyze the level of misrepresentation, duty to disclose, and extent of reliance on false statements.
  • Preventing Fraud: Legal safeguards include contract transparency, legal counsel, and due diligence before signing agreements.

Fraud in the factum is a misrepresentation that causes one party to enter into a transaction without clearly understanding the duties, obligations, or risks incurred. 

Fraud in the Factum

The word "fraud" brings to mind that someone is being induced into signing a contract, but there is more to it than that. There is fraud in the factum, and there is non-contractual fraud. 

Either can be in the form of actual or constructive fraud; the "intent" is what makes the difference. The literal meaning of factum is "done" or "doing." It is a deliberate concealment or non-disclosure of existing facts that result in the other party entering into an agreement where they assume they have all the facts available. All relevant facts must be considered when determining whether an act constitutes fraud in the factum. 

There is often a comparison of fraud in the factum to fraud in the inducement. The difference between the two is fraud in the factum is a legal defense and fraud in the inducement can be described as an equitable defense. 

Fraud in the factum is used as a legal defense when one party makes or signs an agreement not realizing it is supposed to be a contract. They also may not understand the content or purpose of the contract due to false information they've been given. 

Fraud in the inducement occurs when a party enters into an agreement knowing it is a contract as well as understanding its purpose but signs or makes the agreement based on false information given to them. Fraud in the inducement is illegal. Contracts found to be fraud in the inducement are voided, which results in dismissal of contractual duties. 

An example of fraud in the factum may be found when a signature is forged on a contract previously agreed to. It may also involve an alteration of the terms of a contract without the knowledge of the other party.

Fraud may relate to the performance of a contract, and, as noted in some cases, it can be non-contractual. 

How Fraud in the Factum is Proven in Court

Fraud in the factum cases require clear evidence that one party was misled into signing a document they did not understand to be a contract. Courts look at:

  • The sophistication level of the defrauded party.
  • Whether there was intent to deceive.
  • Any misleading statements or concealment of the document’s true nature.
  • Proof that the fraud caused measurable harm. A well-known case, United States v. Baldwin, established that fraud in the factum invalidates contractual obligations, rendering them unenforceable.

Elements of Fraud

There are five elements of a fraud claim.

  1. Misrepresentation is usually in the form of a false statement. It may also be in the form of concealing or not disclosing the facts. A question surrounding fraud claims based on non-disclosure or concealment is whether or not there must first be a reason or duty to disclose.  An example of this situation was in Van Deusen v. Snead in 1994 in Virginia. The court determined there was a duty to disclose, which cited non-disclosure would be on the same equal basis of a knowing act of concealment with the end result being the intent to deceive.
  2. The misrepresentation must be of a material existing or a past fact. The materiality must be what influenced the other party to enter into the contract. In other words, to be material the misrepresentation must center on the heart of the deal. The fact portion of the misrepresentation is described as "exact knowledge when the statement is made." A fact must be something that may be true or false.
  3. The representation made to a party must be with the intention of procuring a contract. The element of intent is the distinguishable factor between an actual fraud claim and a constructive fraud claim. The misrepresentation in a constructive clause may be innocent or negligent. It may also be based upon an omission, concealment of facts, or an overt misstatement where a duty to disclose is expected.
  4. Justifiable reliance asks the question if the damage was the result of misrepresentation or did the plaintiff rely upon other facts such as their prior experience or other motives that encouraged them to take part in the transaction.
  5. Detriment or damage must be looked at as to whether or not to compensate the plaintiff based on certain laws involving property and personal safety. 

Common Defenses Against Fraud Claims

When accused of fraud in the factum, a defendant may assert the following defenses:

  1. Lack of Misrepresentation – The document was properly disclosed, and the claimant failed to read it.
  2. Assumption of Risk – The party had an opportunity to review the contract but chose not to.
  3. Statute of Limitations – The claim was filed beyond the legally allowed period.
  4. Negligence by Plaintiff – The victim failed to take reasonable steps to protect themselves from deception. Courts assess these defenses based on the specific circumstances of the case.

Types of Recovery

When a claim of fraud has been proven by convincing evidence, the following types of recovery are allowed.

  • Damages because of delay
  • Damages for embarrassment, humiliation, and mental anguish
  • Loss of potential future earnings
  • Attorney's fees
  • Punitive damages
     

Legal Strategies to Prevent Fraud in the Factum

To avoid fraud in the factum, individuals and businesses should take the following legal precautions:

  • Contract Clarity: Use plain language and provide ample time for review.
  • Legal Review: Have an attorney examine contracts before signing.
  • Secure Signatures: Utilize notarization or digital verification to prevent unauthorized changes.
  • Educate Signatories: Ensure all parties understand the document’s contents before signing. Taking these steps can help reduce legal disputes and ensure fair contractual agreements.

Frequently Asked Questions

How does fraud in the factum differ from forgery?Fraud in the factum misleads a party into signing a contract unknowingly, whereas forgery involves the unauthorized signing or altering of a document.

Can fraud in the factum be committed digitally?Yes, electronic fraud can occur through deceptive digital agreements or unauthorized e-signatures.

Is fraud in the factum considered a criminal offense?Yes, depending on the jurisdiction, it can result in both civil liability and criminal charges.

Can a contract be enforced if fraud in the factum is proven?No, a contract based on fraud in the factum is considered void and unenforceable.

What damages can be claimed in a fraud case?Victims can claim compensatory damages, punitive damages, attorney fees, and compensation for emotional distress.

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