What is fraud in the inducement?
What are the elements to prove to win such a case?
How do you defend against fraudulent inducement claims?
In this article, we will break down the notion of “fraud in the inducement” so you know all there is to know about it!
We will first answer the question “what is fraud in the inducement”, legal definition, we’ll look at the elements you need to prove in court, how you can defend against such a claim, breach of contract vs fraudulent inducement, fraud in factum vs fraud in the inducement and more.
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Table of Contents
Fraud in the inducement
In this section, we will look at what is fraud in the inducement and its components.
What does fraud in the inducement mean?
Fraud in the inducement is a type of legal claim raised in court as an equitable defence when someone was defrauded in signing a contract.
In other words, when someone is tricked into signing a contract under false pretences or misrepresentations, fraud by the inducement occurs or there is a fraudulent inducement.
John buys Jack’s used car on the specific assurance given by Jack that the car has 40,000 miles on the odometer while he knows the odometer was tampered with.
Later John discovers that the car had 80,000 miles on the odometer and Jack had made false representations on material facts relating to the car purchase.
John would not have bought the car if he knew that it had 80,000 miles.
Due to fraudulent tactics, statements and assurances, a person enters into an agreement that he or she would not have otherwise signed.
Fraud in the inducement or fraudulent inducement negates the meeting of the minds
For a contract to be legally binding and enforceable, there must be mutual asset or the meeting of the minds.
This means that the parties decide to sign a contract of their own volition without being induced or lured into signing something.
Contracts formed by false inducement are voidable
Without the meeting of the minds, the essential elements for the formation of a contract are not observed under contract law resulting in a voidable contract.
Definition of fraud in the inducement
According to Cornell Law School’s Legal Information Institute, fraud in the inducement is defined as follows:
Fraud in the inducement occurs when a person tricks another person into signing an agreement to one’s disadvantage by using fraudulent statements and representations. Because fraud negates the “meeting of the minds” required of a contract, the injured party can seek damages or terminate the contract.
What is notable with this definition is that fraudulent inducement “induces” or “tricks” a person to signing a contract to his or her disadvantage.
Without fraud in inducement, the person may not have signed the contract or may have negotiated it differently.
Suzanne signs a contract with Bob for major renovations of her property on the basis of Bob’s representations that he is a licensed contractor.
Suzanne later finds out that Bob was not a licensed contractor.
A material fact is factual information or knowledge that is of such importance that a reasonable person will rely on that information to decide to enter into a contract or not.
When a person makes false representations on material facts causing another person to believe the misrepresented facts to be true, you may have a fraud by inducement case.
What’s important is that the misrepresented facts must have existed at the signing of the contract and known to the defendant.
Intent to deceive
Fraud in the inducement is found upon the fact that a person intentionally deceived another by making false statements he or she knew to be false and would lead the other to take action and sign a contract.
Such deceptive statements, false representations or fraudulent actions may manifest themselves in different ways such as:
Fraud in the inducement elements
Each jurisdiction will have its own fraudulent inducement elements to prove in court.
Elements to prove
Typically, the following elements must be proved to succeed with a fraudulent inducement action:
Under Texas contract law, the plaintiff must demonstrate “material misrepresentation” on aspects he or she knew was false (or did not know the truth) inducing the plaintiff to sign the contract.
Under California contract law, a plaintiff can file a petition in court to attack the validity of the contract by demonstrating that his or her consent was obtained based on fraudulent statements or assurances.
Factors not considered
The court will assess the facts of the case carefully to determine whether there was contract fraud or not.
False statements known to the plaintiff may not be considered as misrepresentation
If a plaintiff relies on false statements made by the defendant when the defendant “knew” that such statements were false, the court may not accept the argument that there was fraud in the inception of the contract.
Relying on the defendant’s opinion does not constitute fraudulent inducement elements
The plaintiff may not be successful in proving the fraud in the inducement elements if the statements made by the defendant were mere opinions and not statements on material facts.
Defences against claims of fraud in the inducement
A defendant may have valid arguments to defend against a plaintiff’s claim for fraudulent inducement.
Here are some defensive arguments that may be presented to the court:
- The plaintiff unreasonably relied on oral statements
- The defendant did not make statements that he or she knew were false
- The defendant did not intentionally make statements to induce the plaintiff to act
- The defendant gave personal views and opinions that were not factual statements
- The plaintiff “knew” the information was false when signing the contract
To illustrate some defensive arguments:
Suzanne relies on John stating that he will renovate her kitchen so she can have a picture-perfect kitchen if she agrees to give her the contract immediately.
If John did not deliver a picture-perfect kitchen at the end of the project, Suzanne cannot demand the court to void the contract for fraud in the inducement as she unreasonably relied on John’s statement.
Consequences of fraudulent inducement
Tricking a person to sign a contract is illegal and cannot lead to a legally binding contract.
Repudiating the contract is one option for a plaintiff who was tricked into a contract.
When a person signs a contract and then realizes that the other party had made misrepresentations on essential elements, he or she can file a lawsuit for fraudulent inducement and request from the court to void the contract.
A contract signed by fraud in the inception is voidable and can be repudiated by the plaintiff
When the court permits the plaintiff to void the contract, it means that the court will dismiss any contractual obligations or duties that were extracted by fraud.
In certain cases, monetary damages may not be suitable and voiding the contract will represent the most appropriate remedy.
The plaintiff can also demand monetary damages.
In other words, the plaintiff will demand compensation for the fraudulent inducement damages suffered as a result of the false statements.
John buys a used car from Jack assuring him that the car has 40,000 on the odometer.
John later finds out that the odometer was tampered with and the actual mileage was 80,000 when he bought the car.
John may choose to keep the car but ask for monetary damages to compensate him for what he paid over and above the fair market value.
In the presence of a voidable contract, the plaintiff has the option to accept the contract.
Even though a plaintiff may have the ability to legally repudiate the contract, he or she may choose to stay in the contract nonetheless.
In this case, the plaintiff confirms, accepts or ratifies the contract.
In that case, the contract will be fully ratified and fully enforceable.
Fraud inducement vs fraudulent misrepresentation
Fraud inducement is a legal claim or equitable defence raised by a person when another made false statements about a material fact relating to a contract leading him or her to sign a disadvantageous agreement.
Fraudulent misrepresentation is to refer to the actual fraudulent misrepresentation.
Fraudulent misrepresentation can be made in writing, oral, gesture, body motions, silence and inaction.
Fraud in inducement vs fraud in factum
What is the difference between fraud in inducement and fraud in factum or fraud in execution?
Fraud in the inducement is when a person makes false statements or deceives another for the person to act and sign a contract that they would not have signed otherwise.
On the other hand, fraud in factum or fraud in execution is when a person makes false statements or deceives another on the subject-matter of a contract.
Fraud in the “execution” is when a person signs a contract without knowing what he or she was signing.
Fraud in the factum claims relate to misrepresentations causing a person to miscalculate risks or contractual obligations
A plaintiff’s brother-in-law advises him to sign a letter to ask the bank for historic bank records while the document represented authorization to transfer funds to the brother-in-law.
This is an example of “fraud in factum” as the plaintiff was deceived in the subject-matter of what was being signed and not necessarily pressured into signing.
Fraud in the inducement vs breach of contract
Lawyers and litigants must carefully assess the type of legal action they file when they are in the presence of fraudulent inducement.
In breach of contract claims, the dispute is not about contract validity but performance of the obligations
A breach of contract claim is not the same thing as a fraud in the inducement claim.
A breach of contract means that a party is not executing his or her contractual obligations allowing the plaintiff to obtain the benefit or consideration initially intended.
Fundamentally, in a breach of contract claim, the plaintiff considers the contract as valid.
In a fraudulent inducement claim, the dispute relates to contract formation and not how well the obligations are performed
On the other hand, inducement by fraud claims attacks the validity of the contract.
The plaintiff argues that he or she would not have signed the contract to start with and would not have agreed to such contractual obligations.
If a plaintiff’s argument that the contract should be voided, it is contradictory and conflicting to ask for damages resulting from the poor execution of such obligations.
Fraud in the inducement FAQ
Let’s look at some common questions people ask on the topic of fraud in the inducement.
What is fraudulent inducement?
Fraudulent inducement is a type of legal claim raised by a contracting party against another for having made false statements to induce him or her in entering into a contract or transaction.
When a person raises the equitable defence of fraudulent inducement, he or she argues that the other party induced the signing of a contract for fraudulent reasons.
Helen convinces Mary on the basis of false assertions that she must immediately transfer the deed of her property to her now to protect the house against a bank foreclosure.
This is a case of fraudulent inducement under inducement law.
Mary reasonably relies on Helen’s statements to accept to transfer her property deed, something she would have never done otherwise.
What is the legal effect of fraud in the inducement?
A contract formed on the basis of fraud, misrepresentation and illegal inducement is voidable as there was never a true meeting of the minds.
In other words, the courts can dismiss certain obligations of the contract or void the entire contract when a person was illegally induced or deceived to sign a contract.
In addition to contract repudiation, the plaintiff may choose to keep the contract and ask for monetary damages or even confirm the contract.
Difference between fraud in the inducement and execution?
Fraud by inducement is when a person misrepresents important facts leading another person to sign a contract whereas fraud in the execution is when a person misrepresents the nature, purpose or subject-matter of the contract leading another to think it’s something else.
Example of fraud in the inducement:
A person makes false representations to sell you a property with major defects.
That’s inducement by fraudulent misrepresentation.
Example of fraud in the execution (fraud in the factum):
A person misrepresents that a person is merely transferring investments from one account to another while in reality they were giving them away.
What does inducement mean in law?
According to the Merriam-Webster dictionary, inducement means:
A motive or consideration that leads one to action or to additional or more effective actions
In practice, this means that a person presents false factual statements on important aspects of a contract leading the other party to take action and sign an agreement
How do you prove fraud in inducement?
You can prove fraud in inducement by establishing the following elements:
Is inducement a crime?
“Fraud in inducement” is an equitable defence in a civil action and is not a crime.
The term “fraud” can lead a person to believe that fraud in the inducement is automatically a criminal behaviour.
However, depending on the facts of the case, the severity of the misrepresentation of a person can reach a tipping point when a prosecutor may find sufficient grounds to prosecute the fraudster before criminal courts.
The burden of proof to win a case in a civil action is much lower than criminally convicting a person, so the fraudulent behaviour must be clear, malicious and with criminal intent.