Legal Definitions - fraud in the inducement

Fraud in the inducement occurs when one party intentionally misleads another with false statements or misrepresentations, causing the second party to enter into a contract they would not have otherwise agreed to. In essence, the person knows they are signing a contract, but their decision to do so is based on a lie about a crucial fact or circumstance related to the agreement itself.

This type of fraud affects the reasons why someone agrees to a contract, rather than whether they knew they were signing a contract at all. Because the agreement was based on a fundamental deception, the contract is considered voidable. This means the misled party has the option to either cancel the contract and seek compensation for their losses, or, in some cases, choose to uphold the contract despite the fraud.

• Example 1: Real Estate Purchase

  A homeowner is selling their property and knows that the house has significant, undisclosed structural damage to the foundation that will cost a substantial amount to repair. To induce a potential buyer to purchase, the seller explicitly states in disclosures and verbally that the foundation was "fully inspected and is in perfect condition," even providing a falsified inspection report. The buyer relies on this statement and purchases the house.

  This illustrates fraud in the inducement because the seller made a false statement (about the foundation's condition) intending to persuade the buyer to sign the purchase agreement. The buyer relied on this lie and entered the contract, suffering a disadvantage. The buyer knew they were signing a house purchase contract, but their consent was induced by the fraudulent representation about a critical aspect of the property.

• Example 2: Business Acquisition

  A small business owner is trying to sell their company. To make the business appear more profitable, they create falsified financial statements showing significantly higher revenue and lower expenses than the actual figures. A potential buyer reviews these statements, believes them to be accurate, and, based on this information, agrees to purchase the business at an inflated price.

  Here, the seller intentionally presented false financial data (a misrepresentation) to induce the buyer to enter into the business acquisition contract. The buyer relied on these fraudulent figures, leading them to agree to a deal that was not truly in their best interest. The buyer understood they were signing a contract to buy a business, but their decision was based on the seller's deceptive inducement regarding the company's financial health.

• Example 3: Investment Agreement

  An investment firm representative approaches a client, promising guaranteed "risk-free" returns of 15% annually on a new, exclusive investment product. They present fabricated testimonials and a prospectus containing misleading information about the product's underlying assets and historical performance. The client, swayed by these assurances and false documents, signs an agreement to invest a substantial sum.

  This demonstrates fraud in the inducement because the investment firm used false promises (guaranteed returns, risk-free) and fabricated documents to induce the client to sign the investment agreement. The client relied on these deceptive statements and entered into the contract, which put their funds at significant risk. The client knew they were signing an investment contract, but their consent was fraudulently induced by the firm's misrepresentations about the product's safety and profitability.