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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: November 7, 2019

Claims Barred by Release

On October 11, 2019, Justice Schecter of the New York County Commercial Division issued a decision in Avnet, Inc. v. Deloitte Consulting LLP, 2019 NY Slip Op. 33026(U), holding that a claim was barred by a release, explaining:

It is well established that a valid release constitutes a complete bar to an action on a claim which is the subject of the release. If the language of a release is clear and unambiguous, the signing of a release is a jural act binding on the parties. A release should never be converted into a starting point for litigation except under circumstances and under rules which would render any other result a grave injustice. Significantly, a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is fairly and knowingly made.

The Settlement Agreement released Deloitte from any and all claims or actions or causes of action of every nature and description, including both known and unknown claims relating to Project Evolve. This includes an claims for breach of the MSA and the pre-settlement Work Orders and any related tort and statutory claims. Avnet’s contention that alleged fraud committed by Deloitte in conjunction with its presettlement work on Project Evolve is beyond the scope of the release is baseless. A release of all unknown claims includes fraud claims whose basis was not yet known to the plaintiff at the time of the release. That is the essence of a release of unknown claims.

The failure to uphold the release, which Avnet admits was not the product of duress, would foment commercial uncertainty by denying Deloitte the benefit of the bargain that these parties struck. Avnet, an extremely sophisticated party that was represented by counsel in connection with the Settlement Agreement, is bound by its explicit decision to release unknown claims. It was well aware of the serious problems with Project Evolve and their devastating effects on its business operations and adamantly believed that Deloitte was at fault. It could have sued or insisted on a more limited release, for instance, that carved out claims for gross negligence, intentional misconduct and fraud. It did not and must live with its own decision and the deal that it chose to make.

Nor can Avnet seek to vitiate the release by claiming fraudulent inducement. While a release may be set aside if it was procured by fraud, to do so, the plaintiff must plead, with specificity, a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury. Moreover, the fraud that allegedly induced the release must be a separate fraud from the subject of the release. ere this not the case, no party could ever settle a fraud claim with any finality.

Avnet has not pleaded any actionable fraud separate from the subject matter of the release. Virtually all of its complaints about how it was fraudulently induced into executing the release are based on Deloitte’s pre-Settlement Agreement conduct, including the alleged negligence and concealment that form the basis of Avnet’s underlying fraud claim. In any event, these allegations cannot support a fraud claim because the Settlement Agreement disclaims such collateral oral representations. Avnet’s contention that this disclaimer is not specific enough to be enforceable is wrong because the Settlement Agreement does not merely contain a general merger clause. Nor does the Settlement Agreement contain the. usual one-line, blanket disclaimer of collateral representations. Rather, paragraph seven of the Settlement Agreement is an extensive, single-spaced clause taking up half of a page. As the Court of Appeals long ago explained:

Were we dealing solely with a general and vague merger clause, our task would be simple. A reiteration of the fundamental principle that a general merger clause is ineffective to exclude parol evidence to show fraud in inducing the contract would then be dispositive of the issue. To put it another way, where the complaint states a cause of action for fraud, the parol evidence rule is of a bar to showing. the, fraud either in the inducement or in the execution despite an omnibus statement that the written instrument embodies the whole agreement, or that no representations have been made. Here, however, plaintiff has in the plainest language announced and stipulated that it is not relying on any representations¬∑ as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiff’s complaint that the agreement was executed in reliance upon these contrary oral representations.

Paragraph seven, therefore, bars the fraud claim, as it negates any reliance.

Simply put, no sophisticated party agreeing to the terms of section seven could reasonably rely on collateral representations. Avnet was well aware of the mess that it believed Deloitte created. It chose to keep working with. Deloitte and to release it as opposed to cutting ties with Deloitte and holding it to account for the system’s problems. Having done so, it cannot reverse course or make a different choice now. Based on the release, the only potentially viable claims it has are those that accrued after the execution of the Settlement Agreement.

(Internal quotations and citations omitted) (emphasis added).

Settlement agreements are treated just like any other contract in New York, and as this decision shows, if you release all claims against a party, including claims of which you may be unaware, the court will enforce that promise. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a settlement agreement.

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