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 If the contract is not rescinded, the parties may choose to revert to their pre-contract positions.

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.

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.

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.

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.