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  • Writer's pictureAshwani Agarwal

Contracts: Be careful, words are always mightier than the sword

What you should know before getting involved in a contract.

Contracts are very complex, dense legal documents that many not even fully understand. A contract is a legally binding agreement that two parties enter; the promises made by both parties are legally enforceable if it is part of a valid bargain, both promises are reasonable to each party as agreed upon, or it is deemed enforceable by a statute despite the lack of consideration.Understanding Misrepresentations and Fraud

Misrepresentations make a contract void, and there are two specific kinds of misrepresentations that relate to contracts. A misrepresentation is “an assertion that is not in accordance with the truth.”

Innocent misrepresentation means that the misrepresentation is not intentionally deceptive. Fraudulent misrepresentation is intentionally deceiving.

To have misrepresentation, one of the parties must have made an untrue assertion of fact or engaged in conduct that is equivalent to an untrue assertion of fact. The fact must be a past or existing fact, as distinguished from an opinion or a promise or prediction about something happening in the future. Misrepresentation can also occur through concealment and nondisclosure of facts.

If a part of a contract is found to be misrepresented, the entire contract is voidable. There are certain requirements needed in order to prove a misrepresentation. One of the parties must have made an untrue assertion of fact or engaged in conduct equivalent to an untrue assertion of fact.

Innocent misrepresentation is known as materiality. The person looking to void the contract in the case of materiality has to prove that the asserted fact was material.

A material assertion is a false assertion that is likely to induce a reasonable person into a contract, and it is known by the person falsifying a fact that the other person will rely on that fact when entering the contract.

Fraud is knowingly deceiving another party in the contract, regardless of whether or not the assertion is material or not.

Intent to deceive can be proven if the other party in the contract had actual reliance, which means that they pursued some course of action because they had faith in the assertion that was being made. However, to be deemed actual reliance, that reliance must be justifiable, which means that a party relies on an assertion that is not obviously false or shouldn’t be taken seriously.

In order to recover damages from a false assertion, the party must prove that an economic loss happened due to relying on that false statement. If that party merely wants to void the contract, economic loss is usually not required. A party may rescind a contract, which means that each party is required to return what was given to them. A person who commits an innocent misrepresentation is not liable to damages, while someone who commits a fraudulent misrepresentation is.

Rescission and Damages

Rescission is a solution for both innocent misrepresentation and fraudulent misrepresentation. In order to rescind a contract, there must be a necessity for prompt and unequivocal rescission. The person requesting the rescission of the contract must promptly inform the other party and clearly express the intent to cancel the contract, and cease all behavior that would be contrary to the desire to rescind the contract.

A person who commits fraudulent misrepresentation may be liable for damages, perhaps even punitive damages, for the tort of deceit. In some states, a person who is injured by fraud must choose between rescinding the contract and suing for damages, while in others, both actions are possible.

Types of Fraud

There are a wide variety of frauds and schemes, and it is important to be aware of them before entering any contract.

Co-mingling of contracts is where a company is awarded separate contracts for different efforts, and each contract allows charges for services used in other contracts as well — through collusion, contractors can bill for the same work or services multiple times. Rigged specifications occurs when requirements and specifications are geared toward one business or group, so only it can qualify.

Collusive bidding happens when a group of companies get together and exchange contract information, then take turns submitting low bids, essentially defeating competition and getting contracts for the best prices possible. Sometimes companies conduct businesses under several names, which allows them to hide poor reputations, as well as restrict competition by submitting multiple bids. Conflict of interest situations happen when the owner of a business has a close relationship with a government official or those awarding contracts.

Failure to properly monitor contract performance allows businesses to be paid more for goods and services than what they delivered. Failure to meet specifications is when a company may use less/inferior goods on the job in order to make a larger profit.

If the same individual is authorized to order and receive for goods and services, this person can arrange for a diversion of goods in order to benefit himself or herself or others. Unvarying patterns in small purchases may mean that a buyer is favoring a particular vendor without considering bids from competing firms.

Frequent complaints by users of supplies or services can show that a company may not be providing quality goods or services to its customers. If a service contract’s specifications include bid schedule items for which there is little or no requirement, the government may be paying more than necessary for contract services when bid items for which there is little or no demand are included in annual requirement contracts.

In the case of splitting large requirements, smaller requirements and purchase amounts can conceal fraud easier than larger requirements or contracts. If government estimates and contract award prices are consistently very close, employees may be releasing advance purchasing information to favored contractors in violation of conflict of interest, bribery, or other statutes.

If a contractor complains of late payment by an agency, this is a clear sign of potential fraudulent activity. Mischarging costs among contracts happens when a contractor shifts costs in order to make a larger profit, and these costs are usually not justified.

These are just a few of the many kinds of schemes and frauds out there, and it is important to be aware of what can go wrong when entering a contract.

What if I Make a Mistake? What Happens Next?

If you are involved in a contract and make a mistake unknowingly, there are ways to get out of the contract or alter it without legal ramifications. Depending on the laws of the area, rescission is always an option for unintentional misrepresentation. You can also look to amend the existing contract by contacting the other party.

You Can Be Happy if the Other Party Commits a Mistake in the Contract

You can get out of a misrepresented contract if you can prove any of the following situations: duress, undue influence, misrepresentation, or mental impairments.

If you can prove that another party in the contract has made a mistake, you will be able to receive a wide range of damages and restitutions — before you enter into a contract, be aware of the legal ramifications and any misrepresentations that may occur.

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