Contracts: principles and applications

Contracts and Fraud

Contracts are one of the cornerstones of our modern legal system. They are necessary to conduct reliable economic transactions between individuals. When people make a formal agreement such as buying a car they must be assured that the requirements of both parties will be fulfilled: the seller will receive his or her money and the buyer will receive a vehicle. A critical component of contract law is the need for a contract that is not fraudulent in nature, since contracts depend upon a system of trust between both parties. "If fraud or misrepresentation occurred during the negotiation process, any resulting contract will probably be held unenforceable. The idea here is to encourage honest, good faith bargaining and transactions. Misrepresentations commonly occur when a party says something false (telling a potential buyer that a house is termite-free when it is not) or, in some other way, conceals or misrepresents a state of affairs (concealing evidence of structural damage in a house's foundation with paint or a particular placement of furniture)" (Fitzpatrick 2013).

Without fraud invalidating a contract, there would be a great incentive for people to conceal the truth about the full terms of a contract, to construct an agreement give them an unfair advantage. Contracts are based upon an offer and acceptance of that offer, but when there is fraud there is no true 'acceptance' of the extended offer. To prove fraud in a court of law, however, requires the offended party to establish that very specific conditions were met which invalidate the contract. For fraud to exit, there must be "an untrue representation of fact knowingly by a party; making such representation recklessly; [and] making untrue representation to deceive the other party and to induce him/her to act upon the same" (Grounds for invalidating a settlement agreement, 2013, U.S. Legal). However, "an unintentional nondisclosure without an intention to deceive will not constitute fraud" (Grounds for invalidating a settlement agreement, 2013, U.S. Legal).

For example, if someone sells a horse and the horse develops health problems later on, this does not invalidate the contract if the seller had no way of knowing that the horse was likely to develop lameness or colic. "However, a compromise can be invalidated for fraud if one party deliberately conceals facts with the intent to induce the action of other party," such as the fact that the seller did not disclose that the horse had numerous health problems and sold the horse on the premise that the horse was sound (Grounds for invalidating a settlement agreement, 2013, U.S. Legal).

Contracts are also invalidated if they are constructed under duress or under undue influence. "If Person B. forced Person A to enter into an agreement by taking advantage of a special or particularly persuasive relationship that Person B. had with Person A, the resulting contract might be found unenforceable on grounds of undue influence" (Fitzpatrick 2013). Such a stipulation is required given that without it there would be no protection for individuals who entered into contracts under threat of violence (the most obvious of which is a person forced to sign a contract at gunpoint). The law also acknowledges that certain persuasive relationships can cloud a person's judgment and make it difficult to consent, and thus the law creates provisions to prevent the exploitation of such ideas. "Any type of threats, intended harm or stress put upon a person in order to get them to perform an act they would not normally perform would be considered duress" (Signing a contract under duress, 2012, Law Guru). Proving duress, much like proving fraud, can be difficult in a court of law and often requires third parties to testify how the duress took place. In a business context, an example of duress might include a seller putting undue pressure upon a buyer, saying "this offer will be withdrawn if you don't sign right now," or pressuring an employee to agree to work extra hours not stipulated in the original employment agreement with the implied threat of the employee losing his or her position (Signing a contract under duress, 2012, Law Guru).

There are two major forms of remedies in contract cases. One is monetary damages (such as a full refund for a purchase). Methods of computing monetary damages include "expectation interest. The goal is to put the non-breaching party in the position it would have been in had the contract been performed. This is the default measure of damages. Formula: lost profits plus incidental/consequential damages minus avoided expenses" (Goldman 2003). Another method includes "reliance interest. The goal is to put the non-breaching party in the position it would have been in had the promises never been made" (Goldman 2003). An example of this might be refunding a car buyer who was knowingly sold a defective vehicle. However, in some instances, monetary damages may not be acceptable and instead equitable relief is required which demands "specific performance (an order to perform in accordance with the contract) or an injunction" upon the breaching party (Goldman 2003). An example of this might be an actor who fraudulently claimed to be ill to get out of a contract to do a movie he decided he did not want to perform in: the actor would be required to make the performance to fulfill the terms of the contract.