ABA Family Legal Guide

Contracts and Consumer Law

Introduction to Contracts

Limits to a Contract

What is fraud?

A court can cancel a contract because of fraud if one person knowingly made a material misrepresentation. A material misrepresentation is an important untruth, made with the intent to deceive, that the other person reasonably relied on, to his or her disadvantage.

Consider our earlier example involving a car sale. You offered to sell your Yugo to a friend. Suppose you knew it had a defective transmission, and you knew she wanted it for the usual purpose of driving it. You told her it was working fine, and she relied on your statement. Therefore, the contract you made may be set aside on the grounds of fraud.

Here, there is no issue of the statement being merely the seller's opinion, or exaggerated sales talk puffery that people know not to believe literally. You didn't merely say it was a great car when really it was mediocre. Saying it's great is just an opinion, while fraud requires an outright lie, or, in many cases, a substantial failure to state a material fact about an important part of the contract.

Some common examples of fraud occur in used car transactions and sale-by-owner real estate deals. Used car dealers may lie about the repair history, odometer readings, and prior use of their cars. Homeowners may find it too tempting to fail to disclose serious defects, like drainage problems.