Fraud and Fraud in the Inducement: What’s the Difference?

Many of us already know what fraud is, and would not think of doing anything to purposely defraud someone else. But what many people aren’t aware of, is that there are different kinds of frauds—including frauds that happen even before a contract is entered into.

When someone claims that they had a contract, and that fraud was involved, they usually will include a claim for fraud in the complaint, but they will also include what is known as a fraud in the inducement, or fraudulent inducement claim as well.

Before or After the Contract?

What differentiates typical fraud, with fraudulent inducement, is that the latter happens before the contract is even entered into. In other words, the claim by the party suing is that there was fraudulent activity that tricked, duped, or induced the other side to enter into the contract.

In the absence of the fraud, the party suing alleges that it would not have entered into the contractual agreement to begin with.

Since fraud in the inducement has to do with the parties actions, inactions, or misrepresentations that happened before the contract was entered into, providing the claim does not necessarily require proving that the terms of the eventual contract were breached. It’s the parties’ precontractual actions that matter, not the terms of the agreement.

Proving the Claim

The party suing must show that had it not been defrauded, lied to, or misrepresented, that it would not have entered into the contract.

Someone who sues for fraudulent inducement, must not have known that the claims being made by the other side, were false or misleading.

In larger business transactions, this is why the parties allow due diligence. If a party doesn’t do its due diligence, looking into the truth of the representations being made by the other side, it cannot later complain that it was induced into entering into the contract.

Proving Reliance

It must make sense that the side that was defrauded, would have relied on the false statement made by the other side. So, if someone is selling a car and says it “has no miles on it,” even though it’s on a used car lot, the tires are bald from wear, and is a car model that was discontinued ten years ago, the buyer probably would not be justified in relying on that somewhat ridiculous assertion.

Statements of opinion or puffery, can’t constitute fraudulent inducement—for example, saying “this is the best factory machine you will ever own,” is clearly not a statement made to mislead; it is just an opinion.

If fraud in the inducement is proven, the contract can be voided, or even rescinded, which allows a court to put the parties back where they were, before the contract was entered into.

Have you been defrauded, or are you a victim of fraud? We can help. Call the West Palm Beach business litigation attorneys at Pike & Lustig today.

Sources:

upcounsel.com/fraudulent-inducement

floridabar.org/the-florida-bar-journal/the-elr-and-fraudulent-inducement-claims/