Fraudulent inducement may provide a defense to a breach of contract lawsuit in Texas. Fraudulent inducement is a “species of common-law fraud” that “arises only in the context of a contract.” The defense exists when a party lies or misrepresents an important term of the contract and thereby induces the other party to enter into the contract.
The Texas Supreme Court recognized in Formosa Plastics that “Texas law has long imposed a duty to abstain from inducing another to enter into a contract through the use of fraudulent misrepresentations.” Of course, the defense of fraudulent inducement only exists where the defendant was actually induced to enter into a contract. Proof that a party relied to its detriment on an alleged misrepresentation is, in other words, an essential element of a fraud claim. That is because when a party has not incurred a contractual obligation, it has not been induced to do anything.
In order to establish a fraudulent inducement defense, the elements of fraud must be established as they relate to an agreement between the parties. Under Texas law, a defendant can assert fraudulent inducement as a defense to a breach of contract claim if the defendant can show that:
- The plaintiff made a misrepresentation about a material term to the contract to induce the defendant to agree to contract terms.
- The plaintiff made the material misrepresentation knowing it was false or without knowledge of its truth.
- The plaintiff made the misrepresentation with the intent that the defendant act on the misrepresentation.
- The defendant’s reliance on the plaintiff’s misrepresentation was justifiable when the defendant agreed to the terms of the contract’s terms.
- The defendant suffered an injury because it relied on the plaintiff’s misrepresentation.
In a fraudulent–inducement claim, the “misrepresentation” occurs when the defendant falsely promises to perform a future act while having no present intent to perform it. The plaintiff’s “reliance” on the false promise “induces” the plaintiff to agree to a contract the plaintiff would not have agreed to if the defendant had not made the false promise.