Commercial Division Blog

Posted: July 8, 2015 / Categories Commercial, Fraud/Misrepresentation

Fraudulent Inducement Claim Proper Even Though False Representation Was Contained in Contract

On July 7, 2015, the First Department issued a decision in Wyle Inc. v. ITT Corp., 2015 NY Slip Op. 05877, affirming a ruling by Justice Ramos of the New York County Commercial Division denying a motion to dismiss a fraudulent inducement claim as duplicative of a breach of contract claim.

The background to the dispute was not in dispute. Plaintiff Wyle Inc. purchased a company called CAS, Inc. from defendant ITT Corp. CAS derived most of its revenue from defense contracts with the government, so the Stock Purchase Agreement between the parties contained a list of government audits that were ongoing at the time the contract was signed, and the SPA also warrantied that the list reflected each ongoing audit. However, after the purchase Wyle alleged that an undisclosed audit had led to a reduction of labor rates being paid to CAS. Wyle then sued both for breach of contract (under the warranty) and also for fraudulent inducement (that non-disclosure of the present fact that the audit was ongoing caused Wyle to enter into the SPA). ITT Corp. moved to dismiss the fraudulent inducement claim as duplicative, and Justice Ramos denied the motion. (We blogged about Justice Ramos's decision when it was issued.)

The divided Appellate Division panel agreed on the general rule:

It is axiomatic that in order to state a claim for fraudulent inducement, there must be a knowing misrepresentation of present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury. In the context of a contract case, the pleadings must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract, in order to present a viable claim that is not duplicative of the breach of contract claim. Moreover, these misrepresentations of present fact must be collateral to the contract and must have induced the allegedly defrauded party to enter into the contract. Therefore, as a general rule, to recover damages for tort in a contract matter, it is necessary that the plaintiff plead and prove a breach of duty distinct from, or in addition to, the breach of contract.

(Internal citations omitted.)

Both sides also agreed that there had been a misrepresentation of present fact, and that reliance and injury were properly plead. The dispute arose over whether including the misrepresentation about the audits in a contractual warranty meant that the duty to disclose was no longer "distinct from" or "collateral to the contract."

Both the majority and the dissent examined two lines of First Department cases that had previously considered similar facts but had reached different outcomes.

The majority distinguished the cases denying fraud claims as duplicative, and instead followed precedents holding that "a warranty is not a promise of performance but a statement of present fact," that "unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract," and that "it is of no consequence that some of the allegedly false representations are contained in the agreements as warranties and form a basis of the breach of contract claim." (Emphasis by Appellate Division.) The majority therefore affirmed Justice Ramos’s decision that the fraud claim was not duplicative of the breach of contract claim.

In dissent, Justice Moskowitz would have followed the other line of cases and applied the rule that a fraud claim was duplicative "if the fraud alleged was based on the same facts as those that underlay the contract claim, and thus were not collateral to the contract, and that plaintiff had alleged no damages that would not be recoverable under a contract measure of damages." Because the complaint does not allege that defendant "made any misrepresentation other than the one specifically referring to the clause in the SPA, this situation therefore presents a claim for breach of contract, not fraud."

Based upon this case, any plaintiff suing for a breach of contractual warranty should also include a claim for fraud, on the theory that all warranties are statements of present fact and therefore collateral to the contract. Lawyers drafting contracts should also take account of this rule. However, rather than expressly overruling any of the many cases cited by the dissent, the Appellate Division merely distinguished them, so the question can be regarded as still unsettled. (This last may be of particular value to litigants in the other three departments.)