Key Takeaways:

  • Fraud in the inducement occurs when one party misleads another to enter into a contract, often by providing false information or omitting crucial details.
  • Fraud in the factum is a more severe form of fraud where the victim does not understand the nature of the contract they are signing.
  • Examples include investment scams, real estate deception, and contractual misrepresentation.
  • Legal consequences can include contract rescission, compensatory damages, and sometimes punitive damages.
  • Preventative measures include thorough due diligence, legal counsel, and careful contract review.

Fraud in the inducement is a term used for contract fraud and occurs when one party involved in the contract used deceit or trickery to get the other party or signer to act for their advantage. For fraud in the inducement to have occurred:

  • One of the parties had been misled by the facts
  • The wrong facts were used for the party to make their decision

An example would be a person telling another that they need to sign the property over to them to prevent their home from going into foreclosure. They are misleading the person into signing the deed of their home over to the other party using fear. For fraud in the inducement to occur, there has to have been circumstances that pushed the person to act. This is what separates it from the term fraud in factum, which refers to deceitful subject matter in a contract.

Fraud in the inducement specifically refers to a form of trickery that was used against someone to enter into an agreement that was to their disadvantage. The guilty party in this type of case will have used the information to purposely mislead the other signer in an attempt to get them to go against their best interest. If this type of deceit occurs, it would be unfair to require that the deceived party abide by the terms of the contract that was fraudulently agreed upon. Once proof of fraudulent inducement has been given, the defrauded party will likely be able to get the transaction rescinded, as well as seek monetary damages from the party that deceived them.

It is important to note that there is a difference in such items as fraud in the inducement and fraud in the factum. One of the primary differences is that fraud in the inducement will occur before the contract is signed and is part of the original agreement process. The fraud will basically consist of misrepresenting the facts or material with the intentional purpose of cheating or defrauding the other party.

What Is Fraud in the Factum? 

The other type of contract fraud, referred to as fraud in the factum, involves deceit that has been done by the offending party. This can include such acts as:

  • Forging the other party's signature
  • Altering a contract that has already been signed and agreed upon

Other types of fraud can also go beyond the actual writing and execution of the contract and be relative to the performance of the contract, as well as other noncontractual factors. An example would be a home that is built as part of the construction process. The builder shows that a deck is going to be built in a quality workmanlike manner, when in fact the builder knows it has not been. The homeowner, who then believes the builder, uses the deck when it collapses. In this situation, the builder could end up liable in tort. The fraud was not used to get the homeowner to sign a new contract, but occurred by the homeowner using the deck as it was listed in the contract, which the builder did not deliver. The fraud occurred by the builder not performing their duty. This is referred to as noncontractual fraud.

Legal Consequences of Fraud in the Factum

Fraud in the factum is a severe violation of contract law, often resulting in more serious legal repercussions than fraud in the inducement. If a court determines that fraud in the factum has occurred, the contract is typically deemed void, meaning it is treated as if it never existed. Some key legal consequences include:

  • Contract Rescission: The fraudulent contract can be declared invalid, freeing the deceived party from any obligations.
  • Restitution: Courts may order the offending party to compensate the victim for any financial losses.
  • Criminal Liability: In cases where fraud in the factum involves forgery or intentional deception of an extreme nature, criminal charges may apply, leading to fines or imprisonment.

Since fraud in the factum often leaves victims unaware that they were even signing a contract, courts take a strict stance on such cases. If you believe you have been a victim, legal intervention is crucial.

Examples of Both Types of Fraud 

There are many examples of fraud in the inducement. An example that can occur during an investment contract would be an individual telling another that they are a licensed broker to get them to sign an investment contract, when in fact they are not. This would be a case of fraud in the inducement because the deceiving party claimed fraudulent credentials in order to induce the other party to sign with them as they believed they are retaining the services of a licensed individual. 

An example of fraud in the factum could involve a grandchild telling their grandparent to sign a letter when the document was, in fact, an addendum to his will, altering it to leave all of the assets to the grandson.

How Courts Differentiate Between Fraud in the Inducement vs. Fraud in the Factum

While both types of fraud involve deception, courts use specific criteria to differentiate them:

  • Fraud in the inducement involves a party knowingly entering into a contract under false pretenses. The victim understands they are signing a contract but is misled about the details.
  • Fraud in the factum occurs when a person is deceived about the nature of the document itself. The victim does not realize they are signing a contract or is misled about its fundamental purpose.

For example, in cases involving real estate fraud, if a seller misrepresents the condition of a property to induce a buyer to sign, this would be fraud in the inducement. However, if a document is altered after being signed without the buyer’s knowledge, it could be fraud in the factum.

Courts analyze intent, the level of deception, and whether the victim had an opportunity to understand the contract. The ability to prove fraudulent intent is key in seeking legal remedies.

What Happens When Fraud in Inducement Occurs 

Since fraud in the inducement is illegal if a court found that the fraud occurred, they can make the contract voidable, releasing the party from any obligation to it. In addition to invalidating the contract, the plaintiff may also seek out monetary damages as well.

Legal Remedies for Fraud in the Inducement

Victims of fraud in the inducement have several legal options to seek justice and compensation. These remedies typically include:

  1. Rescission of the Contract: The court may declare the contract void, effectively undoing the agreement and returning both parties to their pre-contract positions.
  2. Compensatory Damages: The deceived party may receive financial compensation to cover losses resulting from the fraudulent contract.
  3. Punitive Damages: In cases where the fraudulent act was particularly egregious, courts may award punitive damages to deter similar behavior.
  4. Reformation of the Contract: If parts of the contract were fraudulent but the agreement itself is otherwise enforceable, a court may modify it to reflect a fair arrangement.
  5. Criminal Prosecution: In extreme cases, fraud in the inducement can lead to criminal charges, especially if the deception involves large financial losses or intent to defraud multiple parties.

Each case is unique, and legal outcomes depend on factors such as the severity of deception, available evidence, and applicable state laws.

How to Protect Yourself from Fraud in the Inducement

Preventing fraud in the inducement requires vigilance and proactive measures, particularly when entering into contracts or financial agreements. Some key strategies include:

  • Conduct Due Diligence: Research the background and credibility of the other party before entering into an agreement.
  • Verify Claims: If a contract involves representations about assets, finances, or legal rights, verify the information with third parties.
  • Consult an Attorney: Seeking legal counsel before signing significant contracts can help identify potential red flags.
  • Request Written Documentation: Ensure that all verbal agreements are documented in writing to prevent misrepresentation.
  • Read the Fine Print: Carefully review contract terms, especially clauses related to obligations, penalties, and dispute resolution.

By taking these steps, individuals and businesses can significantly reduce the risk of falling victim to fraudulent inducement.

Frequently Asked Questions

1. How do I prove fraud in the inducement? To prove fraud in the inducement, you must show that the other party knowingly misrepresented material facts, that you relied on those misrepresentations, and that you suffered damages as a result.

2. What are some real-world examples of fraud in the inducement? Common examples include investment fraud (where false credentials are used to induce investments), real estate scams (where property conditions are misrepresented), and business contracts (where financial statements are falsified to close a deal).

3. Can fraud in the factum be considered a criminal offense? Yes. Fraud in the factum often involves forgery or document tampering, which can result in criminal charges such as fraud, forgery, or identity theft.

4. How long do I have to file a lawsuit for fraud in the inducement? The statute of limitations varies by state, but it typically ranges from 2 to 6 years. Consulting an attorney can help determine the specific time limits applicable to your case.

5. What is the difference between fraud in the inducement and mistake in contract law? Fraud in the inducement involves intentional deception, whereas a mistake refers to an unintentional error made by one or both parties regarding a key aspect of the contract.

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