Commercial Division Blog

Posted: September 21, 2017 / Categories Commercial, Fraud/Misrepresentation

Fraud Claim Based on Promise to Perform Under the Parties' Contract Dismissed

In September 19, 2017, a divided First Department issued a decision in Cronos Group Ltd. v. XComIP, LLC, 2017 NY Slip Op. 06515, reversing a decision by Justice Ostrager of the New York County Commercial Division and dismissing a fraud claim founded upon an allegation that the defendant made promises with an undisclosed present intention not to perform their contractual obligation.

This decision is of interest because it represents the First Department’s most recent pronouncement on the contentious question of when, if ever, failure to perform a contractual obligation can give rise to a claim for fraud. (Compare, for example, another recent decision discussed here)

Writing for a four-Justice majority, Justice Friedman rejected the fraud claim based upon the following analysis:

Initially, Cronos's fraud cause of action falls short under the principle that a fraud claim is not stated by allegations that simply duplicate, in the facts alleged and damages sought, a claim for breach of contract, enhanced only by conclusory allegations that the pleader's adversary made a promise while harboring the concealed intent not to perform it. This Court has held numerous times that a fraud claim that arises from the same facts as an accompanying contract claim, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties' agreements is subject to dismissal as redundant of the contract claim . . . . As should be apparent from the foregoing, the fraud cause of action adds to the contract cause of action only the allegation that XComIP gave Cronos insincere oral assurances that XComIP would perform the very same act (reversal of the charges for the fraudulent calls) that Cronos contends, in the contract claim, that XComIP was already contractually obligated to perform under the parties' written agreement. Thus, the allegedly false promise at issue in the fraud claim was, according to the complaint, a promise to perform under the parties' contract, not any promise collateral or extraneous to that contract . . . . Moreover, as the dissent concedes, the fraud claim seeks recovery solely for one of the very same losses at issue in the contract claim (the charges for the fraudulent calls), and both claims seek compensatory damages for that loss in the very same principal dollar amount, to the penny.

. . .

We do not take issue with the dissent's point that making a promise to do something in the future, while harboring an undisclosed intention to break that promise when the time comes to perform, constitutes a misrepresentation of an existing fact. What the dissent loses sight of, however, is that, under our case law, where the promised performance is an obligation of the promisor under an enforceable contract between the parties, and the only damages sought are those recoverable for a breach of contract, allegations of such an insincere promise are redundant of a claim for breach of the parties' contract and, therefore, do not state a cause of action for fraud.

Justice Kahn, dissenting, would have followed the other First Department line of cases:

The aspect of the fraud claim alleging that Adams made false promises to Cronos is not duplicative of the breach of contract claim. In order for a fraud claim to be duplicative of a breach of contract claim, the fraud claim must be based on the same facts that underlie the contract cause of action, must not [be] collateral to the contract, and must not seek damages that would not be recoverable under a contract measure of damages.

With respect to the first Financial Structures prong, whether both claims are based on the same facts, here, the breach of contract claim makes no clear reference to the false promises made by Adams to Levi and Cronos to remove the disputed charges for the fraudulent calls, while the fraud claim clearly includes them. Therefore, viewing the complaint most favorably to plaintiff, the fraud claim is not based on the same facts that underlie the contract cause of action.

With regard to the second Financial Structures prong, whether the fraud claim is not collateral to the contract, we have explained that, in a case involving allegations of both breach of contract and fraud, a misrepresentation of present fact is collateral to a contract and supports a separate claim for fraud . . . . As Adams's alleged promises constituted misrepresentations of present fact rather than mere insincere promises of future performance, the alleged misconduct here is collateral to the contract.

(The majority and the dissent also disagreed as to whether the facts alleged satisfied the rule “that where a fraud claim is based upon an alleged false promise, the plaintiff is required to plead specific facts from which it may be reasonably inferred that the defendant did not intend to keep the promise when it was made.”)

This decision should be examined by anyone pleading a fraudulent inducement claim (or making or opposing a motion to dismiss such a claim), either as an example of the First Department’s most recent take on the "collateral promise" question or (depending on the procedural posture) to distinguish it on its facts.