A recent decision of the New York Appellate Division, First Department (Iberdrola Energy Projects v Oaktree Capital Mgt. L.P., 2024 NY Slip Op 03798 (1st Dep’t Decided July 11, 2024), analyzed a contractual nonrecourse provision and determined that it did not bar fraud claims, but found that the fraud claim was insufficiently pled because a contracting party cannot establish detrimental reliance from continuing to perform its required contractual obligations.
Oaktree
The factual foundation of the decision in Oaktree was bit convoluted, but the First Department succinctly summarized the situation presented as follows:
On this appeal we are asked to ascertain the scope of a nonrecourse provision in a contract between two sophisticated commercial actors relating to the construction of a power plant, and, relatedly, the extent to which certain nonparties to the contract (defendants here) are insulated from liability by virtue of that provision. We agree with the motion court that the nonrecourse provision bars the majority of plaintiff’s claims against defendants, and that plaintiff’s fraud claim, which would otherwise have survived the nonrecourse provision, was not sufficiently pleaded.
In connection with the power plant at issue, defendants created a limited partnership entity (“Footprint”) to construct the plant (they were replacing a coal power plant with a gas generated plant). Plaintiff was hired as the project’s engineering, procurement, and construction contractor. The contract between plaintiff and Footprint had a “nonrecourse” provision that provided as follows:
Owner’s [i.e., Footprint’s] obligations hereunder are intended to be the obligations of Owner and of the corporation which is the sole general partner of Owner only and no recourse for any obligation of Owner hereunder, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, shareholder, officer or director or Affiliate, as such, past, present or future of such corporate general partner or any other subsidiary or Affiliate of any such direct or indirect parent corporation or any incorporator, shareholder, officer or director, as such, past, present or future, of any such parent or other subsidiary or Affiliate.
The project experienced issues and problems and after it was 98% complete, Footprint terminated the contract “for cause.” Plaintiff then exercised the arbitration provision and commenced arbitration against Footprint for breach of contract. While the arbitration was still pending, plaintiff instituted an action in Supreme Court, New York County, against certain individuals connected to Footprint alleging various tort claims including fraud.
Plaintiff claimed in the lawsuit that as plaintiff’s work on the project progressed, defendants had become concerned about revenue from the plant and the ability to complete the project financially, so they lured plaintiff into continuing its work until it was about 98% complete, and then wrongfully claimed a for cause termination so that Footprint could tap a letter of credit that plaintiff was required to post, to complete the project with those funds.
Nonrecourse Provision
The New York County Commercial Division granted defendants’ motion to dismiss the entire complaint, ruling it was barred by the nonrecourse provision. Plaintiff appealed. In analyzing the nonrecourse provision, the First Department interpreted the contractual language and found that the provision encompassed the individual defendants and was not limited only to breach of contract claims. Thus, certain of the tort and statutory claims asserted by plaintiff were in fact barred. Defendants conceded, however, that a claim for fraud was not barred as such by the nonrecourse provision. As to that fraud claim, defendants argued that it was simply “a repackaged contractual cause of action” and that plaintiff failed to adequately allege detrimental reliance on defendants’ purported misrepresentations.
Fraud Allegations Are Insufficient
The main issue on the fraud claim was whether plaintiff adequately alleged “detrimental reliance” on defendants’ alleged misrepresentations. Plaintiff asserted that it adequately pleaded justifiable reliance because it had the right to suspend performance of and seek remedies under the contract once Footprint stopped paying it, but it continued working because of defendants’ misleading statements designed to keep plaintiff working on the project. In turn, defendants argued that plaintiff failed to adequately allege detrimental reliance on defendants’ misrepresentations because plaintiff was already contractually obligated to perform the unfinished work. The First Department agreed with defendants.
The First Department cited and relied upon the contract’s remedies provisions, finding that plaintiff did not have the right to stop its work unilaterally while there were any disputes, and so, plaintiff could not claim that any misrepresentations from defendants caused it to continue the work, because it was contractually bound to do so anyway:
Ultimately, the crux of the fraud claim in the amended complaint is that defendants fraudulently induced plaintiff to continue performing under the contract, and that is an insufficient basis on which to rest such a claim (see Megaris Furs v Gimbel Bros., 172 AD2d 209, 212 [1st Dept 1991] [“Simply put, one cannot be induced to tender a performance which is required as a part of a preexisting contractual obligation”; that is to say, “a plaintiff cannot claim to have been defrauded into doing what it already was legally bound to do” (internal quotation marks omitted)]).
Commentary
An essential element of the cause of action for fraud is justifiable detrimental reliance. As shown in Oaktree, that element not only requires plaintiff to show that it acted reasonably and prudently in relying on defendant’s misrepresentations, but that the reliance was in fact “detrimental.” That means there must be a causal connection between defendants’ misrepresentations and some harm or detriment to the relying plaintiff. The misrepresentations must have in fact caused harm. In Oaktree, the First Department found that plaintiff could not establish the required “detriment” because it was not any misrepresentations that caused plaintiff to continue to perform the contract, but in fact, the contract’s very provisions itself under which plaintiff was obligated to perform.