Commercial Division Blog

Posted: June 23, 2015 / Categories Commercial, Fraud/Misrepresentation

Contractual Disclaimers Preclude Party From Pleading Justifiable Reliance Element of Fraud Claim

On June 2, 2015, Justice Ramos of the New York County Commercial Division issued a decision in Harmit Realties LLC v. 835 Ave. of the Ams., L.P., 2015 NY Slip Op. 30931(U), granting a motion to dismiss a fraud claim on the ground that justifiable reliance could not be established in light of the disclaimers in the parties' contract.

Harmit Realties arose from a transaction in which the owner of a building (Carlisle) purchase air rights from the owner of an adjacent building (Harmit). During the negotiations, Carlisle retained a surveyor "to conduct a survey of [Harmit's] building to determine the amount of air rights that were available for Harmit to sell." The survey "understated the amount of square feet being used by [Harmit]" because the surveyor overlooked the existence of a mezzanine, and thus "overstated the amount of square feet of air rights available for sale." In the ensuing litigation between the parties, Carlisle asserted a fraud claim alleging that Harmit knew of the surveyor's error -- and of Carlisle's reliance on it in determining the purchase price -- but allowed the transaction to go forward without disclosing the truth.

The contract contained disclaimers providing that Harmit made no representations regarding the square footage of the building or the amount of development rights that would be transferred. Justice Ramos found that these contract provisions precluded Carlisle from pleading the justifiable reliance element of a fraud claim. The Court explained:

The disclaimers in the agreements are clearly specific and expressly contract away reliance by Carlisle on any representations made by Harmit with respect to the amount of development rights transferred by the parties and the amount of square footage. Since Harmit's alleged representations and omissions as to the amount of development rights form the basis of Carlisle's fraud claims, Carlisle cannot establish the "reasonable reliance" element of fraud.

Justice Ramos rejected Carlisle's argument that "the disclaimers cannot be invoked to negate justifiable reliance since the misrepresented facts were peculiarly within the seller’s knowledge." The Court found that Carlisle could have discovered the correct square footage by reviewing (1) publicly filed certificates of occupancy, or (2) the Real Property Tax Transfer Tax Return signed by both parties prior to the closing. Thus, the Court concluded "Carlisle should have done more due diligence as a sophisticated investor in an arm’s length transaction."