Contracts often contain provisions in which the parties waive their right to a jury trial of any disputes relating to the contract. On the other hand, fraud claims have a way of avoiding all or part of contractual promises and obligations. One remedy for fraudulent inducement, for example, is rescission—which if established could void an entire contract.
There has been a fair amount of dispute as to the circumstances under which a contractual jury waiver provision can be rendered unenforceable based upon a claim that the contract in which it was contained was induced by fraud. See,e.g., my post, Jury Waiver Issues Concerning Fraudulent Inducement Claims. Courts have continued to apply a different analysis to challenges of arbitration provisions and jury waivers based upon claims of fraud. See my article in NYLitigator Magazine, The Impact of Fraud Claims on Contractual Arbitration and Jury Waiver Provisions.
Although it may seem illogical, courts have rendered a jury waiver provision ineffective merely based upon a claim of fraudulent inducement of the contract containing the waiver, even before the fraud is established and based solely upon an allegation of fraud. I say this may seem illogical because the party seeking to avoid the jury waiver obtains that relief even before its claim of fraud is actually proven.
The Appellate Division, First Department, has had abundant opportunities to consider and address this issue, not entirely with consistent results. The main principle that courts apply is that a jury waiver provision can be rendered unenforceable if the party seeking to avoid it is primarily pursuing a claim or defense that challenges the validity of the contract rather than claims for breach of that contract. That is, a party should not be permitted to seek remedies under and pursuant to the same contract in which it is seeking to avoid the jury waiver clause.
The issue that has led to seeming inconsistent or unclear results is whether the remedies sought or defenses asserted amount to a challenge of the contract or enforcement of that contract. Even where rescission has not been explicitly alleged, for example, the First Department has “interpreted” the relief sought as a challenge to the contract, and therefore, rendering the jury waiver ineffective. See J.P. Morgan Sec. Inc. v Ader, 127 AD3d 506 (1st Dep’t 2015); Contractual Jury Waiver Ineffective in Fraudulent Inducement Rescission Claims.
A new decision of the First Department in International Business Machs. Corp. v GlobalFoundries U.S. Inc., 2024 NY Slip Op 06425 (1st Dep’t Decided Dec. 19, 2024), swings in favor of enforcing the jury waiver because the Court “interprets” the relief sought as primarily a claim for breach of the contract rather than challenging the contract.
IBM Case
In the IBM case, plaintiff IBM and defendant entered into a number of interrelated agreements, each of which contained rather broad jury waiver clauses, an example of which provided as follows:
“WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE.”
It was undisputed that IBM asserted both claims for fraudulent inducement and breach of contract. In fact, on a prior appeal, the First Department reversed the Commercial Division’s dismissal of the fraudulent inducement claim, finding: “The fraudulent inducement claim is not duplicative of the breach of contract claims, as the fraud claim is not based upon promised performance of an obligation of [defendant] GlobalFoundries under the contracts, and IBM seeks separate and distinct damages for each claim … .” International Bus. Machs. Corp. v Global Foundries US Inc., 204 AD3d 441, 442 (1st Dep’t 2022).
Nevertheless, in deciding whether IBM should be bound by the broad jury waiver provisions of the contracts, the First Department in effect disregarded the fraudulent inducement claim and concluded that the “primary” claim was breach of contract. Its analysis was as follows:
It is clear from IBM’s complaint that its primary claim is not fraudulent inducement but rather breach of the agreements. While we have previously determined that IBM sufficiently states a cause of action for fraudulent inducement, separate and distinct from its claims of breach of contract for the purposes of pleading (see International Bus. Machs. Corp. v Global Foundries US Inc., 204 AD3d 441, 442 [1st Dept 2022]), its single allegation that GlobalFoundries gave a pre-contractual representation and assurance that it had made a long-term strategic and financial commitment to the development of high-performance chips when, “upon information and belief, GlobalFoundries had internal deliberations prior to the July 2015 closing about not proceeding with the development of the 10nm chip” is distinguishable [*5]from the multiple allegations of fraud in cases such as Ambac and MBIA.
When alleging fraudulent inducement, a party may “elect to either disaffirm the contract by a prompt recission or stand on the contract and thereafter maintain an action at law for damages attributable to the fraud” (Big Apple Car v City of New York, 204 AD2d 109, 110-111 [1st Dept 1994]). Here, IBM has chosen to affirm the agreements and maintain an action at law for compensatory and consequential damages
“on the theory that the defendant'[s] fraud resulted in a subsisting contract which, on account of the falsity of the representations, is detrimental to them. Under these circumstances, the plaintiffs are not in a position to contend, as they might perhaps contend in an action for recission, that the stipulation waiving a jury trial perished with all the other rights and obligations under the [agreement]” (Leav, 268 App Div at 468).
“While a party alleging fraudulent inducement that elects to bring an action for damages, as opposed to opting for recission, may, under certain circumstances, still challenge the validity of the underlying agreement in a way that renders the contractual jury waiver provision in that agreement inapplicable to the fraudulent inducement cause of action” (Zohar, 158 AD3d at 594; see also Ader, 127 AD3d at 507-508), that is simply not the situation present here. IBM has repeatedly elected to affirm or stand on the contract after it knew or should have known of GlobalFoundries’ alleged fraud. In its complaint, IBM specifically alleges that “by September 2015, a mere two months after the closing, GlobalFoundries began to indicate that it did not intend to develop, manufacture or supply the 10nm High Performance chip” and that “[b]y December 2015, just five months after the closing, GlobalFoundries declared for certain that it would not develop, manufacture or supply the 10nm High Performance chip.”
In IBM’s own words, “[m]aking such a major shift in corporate priorities, and a major change in the allocation of billions of dollars in corporate resources, could not have happened entirely in the few months after the closing . . . It is not plausible that discussions and decision-making about such a material change in GlobalFoundries’ strategic and technological direction only began for the first time after July 1, 2o15.” Yet, IBM continued to perform under the agreements, and accept delivery of the 14nm chips, and in March 2016 agreed to amend the TCA, FSA, and both the 10HP SOW and the 14HPSOW. IBM’s claim that what occurred in 2015 and 2016 gave it only notice of a breach but not notice of fraud on the part of GlobalFoundries, which was not revealed until on or about August 2018, is disingenuous. In this scenario, “[p]laintiff[] merely seek[s] to enforce the underlying agreements by obtaining damages for fraudulent inducement, rather than rescind the agreements, and do[es] not challenge the validity of the agreements in any manner other than by [*6]making factual allegations of fraud in the inducement” (Zohar, 158 AD3d at 595). In Ambac, MBIA, and Countrywide there was nothing to indicate that the plaintiffs elected to affirm the underlying contracts after discovering defendants’ massive fraud.
The First Department therefore affirmed the Commercial Division’s striking of IBM’s jury demand.
Commentary
As shown by the First Department’s analysis in the above cases, how fraud claims and the remedies sought are characterized will directly impact the ultimate right to a jury trial. Although IBM did include a separate, free-standing claim for fraudulent inducement, the way the claims were presented lead the lower and appellate courts to conclude that breach of contract was the “primary” claim sought, and therefore, IBM was bound by its contractual waiver of a jury.