San Diego Business Contracts: What is Fraudulent Inducement?

There are many possible defenses to a claim of breach of contract. One such defense is a charge of fraudulent inducement. Under California law, there are two types of fraudulent inducement with respect to contracts – fraud in the “executing of” or “inception” of a contract and fraud in the “inducement” of a contract. This article provides basic information on both defenses. A good San Diego corporate attorney can help your San Diego business avoid claims of fraudulent inducement.

San Diego Business Law: Fraud With Respect to Executing/Inception of Contract

The first type of contract fraud involves the act of signing or executing a written contract. Here, the execution/signing of the contract is accomplished by a trick or some other falsity. Examples include the following:

• The contracting party is deceived as to the nature of his act — told this is not a contract, for example
• The party signing actually does not know what he/she is signing — thinks he/she is signing correspondence or a receipt for money, for example
• The contract presented for signature is not the contract negotiated
• The party signing does not intend to enter into a contract at all
• And more

Such contracts are considered void under California law. See Bonacci v. Mass. Bonding & Ins. Co., 58 Cal. App. 2d 657 (Cal. App. 1st Dist. 1943) (release agreement was void where party signing was told that he was signing receipts with respect to money that was being paid to him).

San Diego Business Law: Fraud With Respect to Inducement

By contrast, fraud in the inducement deals with false statements and/or concealment with respect to inducing the other party to agree to the contract. In other words, the fraud is not in obtaining the signature, but rather in obtaining the party’s consent. Under California law, in general, for a plaintiff to succeed with a claim for fraud in the inducement, the plaintiff must prove the following:

• At least one misrepresentation — false statement — was made or at least one important fact was concealed
• The falsity/concealment was known
• The party making the false statement stated the false statement in order to induce the other party to enter into the contract
• Justifiable or reasonable reliance by the other party and
• No contract would have been entered into had the truth been known

See Grady v. Easley, 45 Cal.App.2d 632 (Cal. App. 1st Dist. 1941); Cal. Civil Code, §1572. Note that “materiality” is necessary. If the alleged false statement is something minor or unimportant, then fraud in the inducement will not succeed.

Note also that fraud in the inducement can be based on negligent and non-willful statements, too. In those cases, the plaintiff must prove that the party’s statement was negligently inaccurate, meaning that the party had no reasonable grounds for believing the statement was true.

Finally, under California law, a false statement can be a false promise. As stated by the California Supreme Court: “A promise to do something necessarily implies the intention to perform; hence, where a promise is made without such intention, there is an implied misrepresentation of fact that may be actionable fraud.” See Lazar v. Superior Court, 909 P. 2d 981 (Cal. 1996). In cases of a false promise, the plaintiff must prove that, when made, the promisor did not intend to perform as promised.

Contact San Diego Corporate Law

For further information, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard was named “best of the bar” three years running by the San Diego Business Journal. To schedule a consultation, contact Mr. Leonard via email or call at (858) 483-9200. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Mr. Leonard proudly provides legal services to business owners in San Diego and the surrounding communities.

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