When a deal goes bad or unravels, the parties involved often describe the situation in moral terms, using words like “dishonest,” “deceptive” or “fraudulent.”
While those descriptions may feel accurate on a personal level, the legal distinction between fraud and breach of contract is specific – and consequential. Claims for fraud and claims for breach of contract are handled very differently, and mislabeling the nature of a contract dispute can affect whether a claim survives early challenges, how damages are calculated and how the case is ultimately resolved.
What is a breach of contract?
A breach of contract occurs when one party fails to perform the obligations it has under a valid agreement. This can include a contractor failing to provide agreed-upon services, a supplier not delivering goods or a client refusing to pay.
The focus of a breach of contract claim is the agreement itself. The court will examine whether a contract existed, what the contract required and whether one party failed to perform as promised. Intent, however, is not usually central to the analysis. A party can breach a contract merely through negligence, poor planning or the simple inability to perform due to unexpected circumstances.
What is contract fraud?
Fraud typically involves intentional deception, rather than simply the nonperformance of a contractual agreement. In general, fraud requires proof that one party misrepresented a material fact – knowing that a false assertion was being made or acting with a disregard for the truth – and intended the other party to rely on that misrepresentation to their detriment. Merely failing to follow through on a promise in a contract does not usually amount to fraud.
Examples of fraud include a CEO misrepresenting their company’s financial condition to entice another company into a merger, or a salesman making factual statements about a product that they know are untrue or a contractor falsely alleging the ability to do a job despite not having the required skills.
Why does the difference matter?
For businesses, the difference between fraud and breach of contract is not merely technical. It affects litigation strategy, potential exposure, settlement leverage and risk assessment. Unsupported fraud allegations may be dismissed, increase litigation costs or damage credibility with the court. In some cases, they can even expose a party to sanctions or fee shifting.
Fraud claims are subject to heightened pleading standards. Plaintiffs are generally required to plead fraud with particularity, identifying who made the alleged misrepresentation, what was said, when and where it occurred and how it caused harm.
As a result, fraud claims are often challenged early through motions to dismiss. Breach of contract claims are typically more straightforward and more likely to proceed into discovery based on the contract language and performance history.
Finally, there are significant differences between the way damages are handled when it comes to fraud versus breach of contract. Damages in a breach of contract claim are typically limited to what the parties could reasonably have expected to gain via the agreement, if it hadn’t been broken. The goal is to make the non-breaching party “whole” by putting them in the position they would have enjoyed if the contract had been properly performed. To that end, the damaged party can usually ask for compensatory damages, specific performance or rescission of the contract.
Fraud claims, however, can have much broader remedies. In addition to the remedies offered in a breach of contract claim, losses beyond the contract’s express terms – including punitive damages – may apply in cases of fraud. In some cases, a fraud claim can also end up having consequences in criminal court, as well.
Sometimes, fraud and breach of contract claims overlap. In all cases, it is essential to have experienced legal guidance as you respond to the situation. An experienced attorney can evaluate the situation and help you understand how best to proceed.