Commercial Division Blog

Posted: July 24, 2019 / Categories Commercial, Fraud/Misrepresentation

Fraud Claim Not Duplicative of Contract Claim Because Alleged Misrepresentations Were Collateral to the Contract

On July 17, 2019, the Second Department issued a decision in, LLC v. Halo Group, Inc., 2019 NY Slip Op. 05644, holding that fraud claims were not duplicative of a contract claim because the alleged misrepresentations were collateral to the promises made in the contract, explaining:

The essential elements of a cause of action for fraud are representation of a material existing fact, falsity, scienter, deception and injury. Mere unfulfilled promissory statements as to what will be done in the future are not actionable as fraud and the injured party's remedy is to sue for breach of contract. Where, however, it is alleged that the defendant made misrepresentations of present facts that were collateral to the contract and served as an inducement to enter into the contract, a cause of action alleging fraudulent inducement is not duplicative of a breach of contract cause of action.

Here, contrary to the Supreme Court's conclusion, the cause of action alleging fraudulent inducement was not duplicative of the breach of contract cause of action. The first cause of action alleges that the defendants knowingly made false representations in Halo's financial statements, which were collateral to the APA, that these false statements were made in order to induce the plaintiff to enter into the APA, that the plaintiff would not have entered into the APA but for these false statements, and that the plaintiff was injured by this fraudulent conduct. As the first cause of action alleges misrepresentations of present fact that were collateral to the APA and further alleges that these misrepresentations induced the plaintiff to enter into the APA, the court should have denied that branch of the defendants' motion which was to dismiss the first cause of action.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule discussed here that a fraudulent inducement claim cannot duplicate a claim for breach of contract. Contact Schlam Stone & Dolan partner John Lundin at if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.