What is Fraudulent Inducement?
Fraudulent Inducement (a.k.a. "Fraud In the Inducement")
To prove a claim of fraud a party must establish the following elements:
- a misrepresentation or a material omission of fact,
- which was false and known to be false by defendant,
- which was intentionally made for the purpose of inducing the other party to rely upon it,
- and the other party reasonably relied upon the misrepresentation or omission (a.k.a. justifiable reliance), and
- injury caused as a result of that reliance
Intent is a crucial element in proving or disproving these types of fraud claims. Courts also impose heightened pleading requirements requiring the plaintiff to state with particularity and specificity the who, what, when, where and why to put the other party on notice of what the precise fraud is. It is not enough to allege fraud generally without providing specific details. Likewise, it is insufficient to claim that the other party never intended to perform under the contract to prove a fraud claim.
Fraudulent Inducement Defenses
In the context of a breach of contract, the fraud claims is referred to as fraudulent inducement (a.k.a. “fraud in the inducement”). A party alleges that he or she would not have entered into a contract if the other party had not made fraudulent misrepresentations or had disclosed material information before the contract was executed.
In a fraudulent inducement claim, a party must prove that the misleading statements that induced him or her to execute the contract was not integrated into the contract. Therefore, it is common for merger clauses to be included in contracts to preempt fraudulent inducement claims.
Due Diligence & Reliance
Whether or not it was reasonable for a party to rely on the alleged fraudulent misrepresentation often hinges upon whether the aggrieved party had the opportunity and the means to conduct its own independent investigation. For that reason, if a party has access to New York and New Jersey business lawyers who can conduct reasonable due diligence before executing a contract (sometimes referred to as “sophisticated” parties), it might have been unreasonable for that party to rely upon the other contracting party.