Distinguishing Breach of Contract and Fraudulent Inducement
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Top Tips in Ten Minutes
Distinguishing Breach of Contract and Fraudulent Inducement
Sara K. MacWilliams, MacWilliams Law PC; Derek T. Howard, The Howard Law Firm PLC

Breach of contract and fraud in the inducement often get mixed up, but the focus of allegations supporting each claim are distinct. Use these tips to help distinguish and plead the differences and avoid losing one or both claims on summary disposition.

Tip 1:  Consider the timing of the conduct to distinguish the claims
A fraudulent inducement claim literally requires a contract (the contract is what the defrauded party is being induced to enter). However, fraud in the inducement must be based solely on precontractual conduct. Contract claims, on the other hand, are based on postcontract conduct.
Tip 2:  Understand the purpose of a breach of contract claim
A breach of contract is based on one party’s failure to meet their legal obligations under the contract. Both parties negotiate at the outset what those obligations will be. If one party does not meet their obligation in the contract, which damages the other party, then an actionable breach has occurred. But the breaching party’s failure to meet a legal obligation in a contract is based on the actions of a party post–contract signing.
Tip 3:  Know when you have the right facts for a fraudulent inducement claim
A fraudulent inducement plaintiff must be deprived of the ability to make an informed decision based on the defendant’s fraudulent statements. If your facts don’t support that notion, you may not have a valid fraudulent inducement claim.
The focus of fraudulent inducement allegations is what one party misrepresented to the other to convince that party to sign a contract they may not have otherwise agreed to. Such allegations must also demonstrate that the inducing party knew those representations were false, that they made the representation with the intent that it be relied on, that it was relied on, and that damages were sustained (i.e., the client paid money) as a result.
Tip 4:  Plead the tort clearly
Because it’s a fraud claim, fraud in the inducement must be pled with specificity (detail). The allegations supporting your fraud in the inducement claim must be wholly separate from the parties’ rights and duties under the contract. However, most of the fraudulent actions and representations happen because there is a contract. Take the time to consider the purpose of each allegation and whether it demonstrates actions taken by the defendant to get the plaintiff to enter into an agreement. If it does, then include it when pleading your fraud count, and distinguish those allegations from any allegations that relate only to the breach of contract (post–contract signing) claim.
Tip 5:  Distinguish fraud in the inducement from fraud in general
Fraud claims are generally related to past or existing facts. However, fraud in the inducement claims are the exception to this rule and may be based on future conduct. See, e.g., Samuel D Begola Servs, Inc v Wild Bros, 210 Mich App 636, 639–640, 534 NW2d 217 (1995). To fit into this exception, be ready to show that representations of future conduct were made in bad faith by the inducing party.
Tip 6:  Separate the standards of proof
Fraud in the inducement must be established by clear and convincing evidence. Contract claims, by contrast, are considered under the less stringent preponderance of the evidence standard. You must keep these different standards in mind when pleading and arguing in motion practice.
Tip 7:  Counter the economic loss doctrine
The economic loss doctrine is commonly used as a defense by the inducing party to claim a limit to the plaintiff’s damages and try to get fraud claims dismissed. However, there is a carveout to the economic loss doctrine that allows a plaintiff to pursue fraud in the inducement claims separately from breach of conduct. See Huron Tool & Eng’g Co v Precision Consulting Servs, Inc, 209 Mich App 365, 374, 532 NW2d 541 (1995). This is so because a claim for fraud in the inducement “redresses misrepresentations that induce the buyer to enter into a contract but that do not in themselves constitute contract or warranty terms subsequently breached by the seller.” Id. at 375.
Tip 8:  Anticipate the merger or integration clause defense to a fraud in the inducement claim
This is another defense used to limit damages and keep the trier of fact from looking at precontract actions. Typical merger clauses limit evidence to the four corners of the agreement. Therefore, it can be difficult to nearly impossible to allow for extrinsic evidence of precontract misrepresentations. But fraud in the inducement may vitiate the entire contract (including the merger provision), so extrinsic evidence will not be barred, and evidence of precontract misrepresentations may be used to establish your fraudulent inducement claim.
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