Do you play a custom (user-created) freebuild mission? In the map editor, you can restrict which buildings can or can't be built, as well as the victory conditions. This way, you can set a paradox victory condition like that. Obviously you can't win a mission like that.
As a solution, try to open the map editor and check for the victory/defeat conditions, then the building availabilities. If you see 'Bad Things' off and the 'Fear Factor Achieved' -5, then it must be the problem.
To prevent confusion, the normal Freebuild doesn't support victory/defeat conditions, as it cannot be lost or won.