When a person commits fraud when entering into a contract, the consequences can be severe, including monetary or punitive damages. For a business to establish a claim for fraud in the inducement, which means that another party deliberately tricked the business or its agents, the following elements must be established:
- Someone misrepresented a material fact—one that is significant rather than trivial.
- The maker of the misrepresentation knew or should have known the statement was false.
- The maker of the statement intended to induce another to rely and act on it.
- The party that acted in justifiable reliance on the representation was injured as a result.
For example, suppose that Keshia had a contract with Gwen to buy Gwen's truck. According to the contract, Keshia agreed to pay Gwen, and Gwen would provide a truck that Gwen claimed had only one previous owner and was in perfect condition. In reality, the truck had had 15 owners and was unsafe to drive. In this case, Gwen knowingly misrepresented material facts and did so with the intent to deceive Keshia, who relied on the misrepresentations and suffered damages. In essence, Gwen misrepresented what Keshia was buying in order to get Keshia to enter the contract.
Another type of fraud is fraud in the factum. This happens when one or more misrepresentations cause someone to enter into a transaction without accurately realizing the risks, duties, or obligations incurred. For example, if a blind person is told that they are signing a contract to buy a house but the document is actually a quitclaim deed, a deed transferring the ownership of their current property, then fraud in the factum applies—that is, one party misled the other. Essentially, the agreement that the blind person is entering into is not the one that the blind person believes they are agreeing to.
In cases involving fraud, courts can sometimes void, or invalidate, the contract and put the parties in the position they were in before contracting. Courts can also award damages for any money that the injured party paid out or lost. On occasion, courts award punitive damages, which is more than just basic compensation and can be two to three times more than traditional contract damages.