Business Fraud and Misrepresentation in Texas: When a Deal Goes Beyond Breach of Contract

By Hank FasthoffJuly 6, 2026

A breach of contract means someone didn't do what the agreement required. Fraud means someone lied to get the agreement signed in the first place. Both can produce financial harm, but the legal claims, the burdens of proof, the available defenses, and the recoverable damages are different. A plaintiff limited to a breach of contract claim can recover expectation damages and attorney's fees under CPRC Chapter 38. A plaintiff who proves fraud can recover out-of-pocket losses, benefit-of-the-bargain damages, mental anguish, and exemplary damages, which can produce a recovery several multiples of what contract damages alone would provide. Where the dispute crosses from breach into fraud, and which fraud claim applies, sets the litigation strategy and the potential outcome.

Common Law Fraud

Common law fraud is the broadest fraud claim available in Texas. A plaintiff must prove six elements: a material misrepresentation was made, the representation was false, the defendant either knew it was false or made it with reckless disregard for its truth (scienter), the defendant intended the plaintiff to act on the misrepresentation, the plaintiff justifiably relied on the misrepresentation, and the plaintiff suffered injury as a result. Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998).

A "material misrepresentation" is a statement of existing or past fact, not an opinion, prediction, or expression of future intent. Telling a buyer "this property generates $200,000 in annual rental income" when it generates $80,000 is a material misrepresentation of existing fact. Telling a buyer "I think this property will appreciate" is an opinion and isn't actionable as fraud.

Scienter distinguishes fraud from innocent mistake. A seller who believes in good faith that the information is accurate hasn't committed fraud, even if the information turns out to be wrong. A seller who knows the information is false, or who doesn't know whether it's true and doesn't care, has the mental state required for fraud.

Justifiable reliance means the plaintiff's reliance on the misrepresentation must have been reasonable under the circumstances. A buyer who conducts extensive due diligence and discovers the truth before closing may not be able to claim justifiable reliance on a pre-diligence misrepresentation. A sophisticated party that signs a contract containing a disclaimer-of-reliance provision may be barred from asserting fraudulent inducement, depending on whether the disclaimer satisfies the Texas Supreme Court's five-factor test from Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008), as refined in Italian Cowboy Partners, Ltd. v. Prudential Insurance Co., 341 S.W.3d 323 (Tex. 2011).

Fraudulent Inducement

Fraudulent inducement is a specific category of common law fraud that arises in the contract formation context. It occurs when one party makes a promise of future performance with no intention of performing at the time the promise was made. Formosa Plastics, 960 S.W.2d at 48.

A vendor who promises to deliver custom software by June 1 when the vendor knows on the date of signing that it can't deliver by June 1 (or has no intention of trying) has committed fraudulent inducement. A vendor who promises to deliver by June 1, intends to deliver, and then fails due to unforeseen difficulties has breached the contract but hasn't committed fraud. The distinction turns on the defendant's intent at the time the promise was made, not at the time performance was due.

Fraudulent inducement is independently actionable even when a binding contract exists between the parties. The legal duty not to fraudulently procure a contract is separate from the duties the contract itself creates. Formosa Plastics, 960 S.W.2d at 46-48. A plaintiff can pursue both breach of contract and fraudulent inducement in the same lawsuit, though the plaintiff must elect between inconsistent damage measures at or before judgment.

Negligent Misrepresentation

Negligent misrepresentation is a tort claim that doesn't require scienter. Instead of proving the defendant knew the statement was false or acted recklessly, the plaintiff must prove the defendant supplied false information in the course of a business transaction, the defendant failed to exercise reasonable care or competence in obtaining or communicating the information, and the plaintiff justifiably relied on the information to its detriment.

Negligent misrepresentation claims carry a two-year statute of limitations (shorter than the four-year period for common law fraud and breach of contract), which makes timing a significant consideration. A plaintiff who discovers the misrepresentation three years after the transaction can't bring a negligent misrepresentation claim but may still have time for common law fraud.

Statutory Fraud Under § 27.01

Texas Business and Commerce Code § 27.01 creates a statutory fraud cause of action for transactions involving real estate or stock. Statutory fraud has the same basic structure as common law fraud but differs in two important respects.

First, statutory fraud doesn't require the plaintiff to prove that the defendant knew the representation was false. Under § 27.01, the plaintiff must prove that a false representation of a past or existing material fact was made for the purpose of inducing the plaintiff to enter into a contract involving real estate or stock, and that the plaintiff relied on the representation. If the defendant made a false statement that induced the contract, the defendant is liable for actual damages regardless of whether the defendant knew the statement was false or believed it to be true. Ritchey v. Pinnell, 324 S.W.3d 815, 821 (Tex. App. - Texarkana 2010).

Second, statutory fraud doesn't encompass fraud by omission. Section 27.01 requires a "false representation" made "for the purpose of inducing" a contract. Remaining silent when there's a duty to speak may support a common law fraud-by-nondisclosure claim but doesn't fit within § 27.01's statutory language.

Statutory fraud allows recovery of attorney's fees and litigation costs, which common law fraud generally doesn't. Exemplary damages are available under § 27.01 if the plaintiff proves with the heightened standard that the defendant had "actual awareness" of the falsity and benefited from the false representation.

Fraud by Nondisclosure

Fraud by nondisclosure arises when a party has a duty to disclose material information and fails to do so, and the other party is injured by the nondisclosure. A duty to disclose exists when the parties have a fiduciary or confidential relationship, when the defendant discovers new information that renders a prior representation misleading, when the defendant makes a partial disclosure that creates a false impression, and when the defendant has exclusive knowledge of material facts that aren't reasonably available to the other party.

In real estate transactions, sellers have a duty to disclose known material defects that aren't discoverable through a reasonable inspection. In business transactions between parties with a fiduciary relationship (partners, LLC members, corporate officers and directors), the fiduciary has a duty to disclose material information bearing on the transaction.

The Economic Loss Rule

When a plaintiff's only injury is economic loss from a failed contract (as opposed to personal injury or property damage), Texas law generally requires the plaintiff to pursue contract remedies rather than tort claims. This is the economic loss rule, and it prevents a plaintiff from repackaging a breach of contract claim as a fraud claim to access tort damages.

Exceptions exist. A tort claim survives the economic loss rule when the duty breached is independent of the contract. Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407 (Tex. 2011). Fraudulent inducement satisfies this exception because the duty not to fraudulently procure a contract exists independently of the contract's terms. The economic loss rule doesn't bar fraudulent inducement claims even when the only damages are economic.

Damages for Fraud

Texas recognizes two measures of direct damages for common law fraud: out-of-pocket (the difference between the value of what the plaintiff gave up and the value of what the plaintiff received) and benefit-of-the-bargain (the difference between the value as represented and the value as received). Formosa Plastics, 960 S.W.2d at 49.

Mental anguish damages are recoverable for fraud when the fraud was committed knowingly. Mental anguish requires proof of a high degree of mental pain and distress beyond mere disappointment, resentment, or embarrassment.

Exemplary damages under CPRC § 41.003 require proof by the heightened evidentiary standard that the harm resulted from fraud, malice, or gross negligence. The exemplary damages cap under § 41.008(b) limits recovery to the greater of $200,000 or twice the amount of economic damages plus an amount equal to any non-economic damages up to $750,000. The cap doesn't apply to certain statutory claims.

A plaintiff who proves both breach of contract and fraud must elect between inconsistent damage measures. A plaintiff can't recover both expectation damages (what the contract promised) and out-of-pocket damages (what the plaintiff lost) for the same harm, because the two measures compensate for different injuries.

Practical Recommendations

Evaluate whether the dispute involves misrepresentation at the outset. If the defendant made statements during negotiations that turned out to be false, and those statements induced the contract, the case may support fraud claims in addition to breach of contract. Fraud claims produce different (and often larger) damages, but they also require more evidence and carry higher burdens of proof.

Preserve communications from the negotiation phase. Emails, text messages, presentations, term sheets, and recorded statements made before the contract was signed are the evidence that proves (or disproves) what was represented, whether the representation was false, and whether the defendant knew it was false at the time.

Review the contract for disclaimer-of-reliance provisions before asserting fraudulent inducement. If the contract contains a provision stating that the parties aren't relying on any representations outside the four corners of the agreement, the enforceability of that disclaimer under the Forest Oil factors will determine whether the fraudulent inducement claim survives.

Don't wait. Common law fraud and statutory fraud under § 27.01 carry a four-year statute of limitations. Negligent misrepresentation carries a two-year limitations period. A plaintiff who discovers the fraud but delays filing risks losing claims that were available at the time of discovery.

If the transaction involves real estate or stock, evaluate statutory fraud under § 27.01. Statutory fraud is easier to prove than common law fraud (no scienter required for actual damages) and allows recovery of attorney's fees, which common law fraud doesn't.