The intersection between claims of fraud and breach of contract is heavily travelled by the courts. Courts often dismiss attempted fraud claims by finding that they are “duplicative” of the contract claim, allege the same damages, allege a mere breach of a contractual promise to do something in the future, and/or fail to allege a misrepresentation of present facts. See my Topic: Contract Breach, Not Fraud. On the other hand, contractual representations and warranties can form the basis of a fraud claim. See, e.g., my post.
Recent Cases Rejecting Fraud Vis-à-Vis Contracts
In the past few weeks, a series of appellate decisions have been rendered rejecting fraud claims that failed to allege more than breach of contract:
In Michael Davis Constr., Inc. v 129 Parsonage Lane, LLC, 2021 NY Slip Op 03028 (2d Dep’t Decided May 12, 2021), the Second Department affirmed the dismissal of fraud and negligent misrepresentation claims because they were based upon the same allegations as the breach of contract claim:
The Supreme Court properly granted that branch of the plaintiff’s motion which was to dismiss the defendant’s counterclaim alleging fraud in the inducement as duplicative of the counterclaim alleging breach of contract. “A cause of action premised upon fraud cannot lie where it is based on the same allegations as the breach of contract claim” (Heffez v L & G Gen. Constr., Inc., 56 AD3d 526, 527). General allegations that a party entered into a contract while lacking the intent to perform it are insufficient to support a claim of fraudulent inducement (see Fromowitz v W. Park Assoc., Inc., 106 AD3d 950, 951). Where the fraud claim is premised upon an alleged breach of contractual duties and does not concern representations which are collateral or extraneous to the terms of the contract between the parties, a fraud claim does not lie (see Oceanview Assoc., LLC v HLS Bldrs. Corp., 184 AD3d 843, 845). Here, the allegations which form the basis of the counterclaim alleging fraud in the inducement are the same as those underlying the counterclaim alleging breach of contract. The defendant’s allegation that the plaintiff fraudulently represented that it would install all soundproofing and thermal insulation on the project “amounted only to a misrepresentation of the intent or ability to perform under the contract” (Gorman v Fowkes, 97 AD3d 726, 727; see Renaissance Equity Holdings, LLC v Al-An El. Maintenance Corp., 121 AD3d 661, 664; Fromowitz v W. Park Assoc., Inc., 106 AD3d at 951-952). Moreover, while the defendant alleged that it remitted payment to the plaintiff in reliance on the representation that the work had, in fact, been performed, such postcontractual representation did not serve as an inducement to enter into the contract.
The Supreme Court properly granted that branch of the plaintiff’s motion which was to dismiss the counterclaim alleging negligent misrepresentation as duplicative of the counterclaim alleging breach of contract. A claim alleging negligent misrepresentation requires the party asserting the claim to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the other party to impart correct information; (2) that the information was incorrect; and (3) reasonable reliance on the information (see J.A.O. Acquisition Corp. v Stavitsky, 8 NY3d 144, 148). When both are alleged, a negligent misrepresentation claim will be found to be duplicative of a breach of contract claim where the pleading fails to allege facts that would give rise to a duty that is independent from the parties’ contractual obligations (see Board of Mgrs. of Beacon Tower Condominium v 85 Adams St., LLC, 136 AD3d at 684; Board of Mgrs. of Soho N. 267 W. 124th St. Condominium v NW 124 LLC, 116 AD3d 506, 507). Here, the allegations supporting the counterclaim alleging negligent misrepresentation are based solely on the contractual relationship between the parties (see Board of Mgrs. of Beacon Tower Condominium v 85 Adams St., LLC, 136 AD3d at 684; cf. AB Oil Servs., Ltd. v TCE Ins. Servs., Inc., 188 AD3d 624, 629).
In 320 W. 115 Realty LLC v All Bldg. Constr. Corp., 2021 NY Slip Op 03107 (1st Dep’t Decided May 13, 2021), the First Department ruled that plaintiff failed to allege a factual misrepresentation:
In support of the fraudulent inducement claim, plaintiff’s main allegations are that (1) defendants submitted an artificially low price, which they never intended to honor, in an effort to induce plaintiff to sign the contract, and (2) defendants did not intend to perform under the contract from the very start. However, a cause of action for breach of contract “cannot be converted into one for fraud by merely alleging that defendant did not intend to fulfill the contract” (Non-Linear Trading Co. v BraddisAssoc., 243 AD2d 107, 118 [1st Dept 1998]). Instead, an actionable claim for fraudulent inducement must allege the “representation of present fact, not of future intent” (Deerfield Communication Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954, 956 [1986] [internal quotation marks omitted]). Plaintiff has made no such allegations here.
In Ambac Assur. Corp. v Segregated Account of Ambac Assur. Corp., 2021 NY Slip Op 02978 (1st Dep’t Decided May 11, 2021), the First Department ruled that the fraud claim failed because it alleged the same damages as the contract claim:
Countrywide established that the damages Ambac seeks in connection with its fraud claim are essentially the same as those it seeks under its breach of contract claim (see Avnet, Inc. v Deloitte Consulting LLP, 187 AD3d 430, 432 [1st Dept 2020]; MaÑas v VMS Assoc., LLC, 53 AD3d 451, 454 [1st Dept 2008] [fraud claim is duplicative of contract claim where both seek redress for the same “species” of harm]).
The proposed damages for fraud and breach of contract in Ambac’s supplemental expert report now before the Court are essentially two ways of calculating the same thing — payments that Ambac made on account of the nonconforming loans. The distinctions that Ambac attempts to draw between the fraud damages and the breach of contract damages, which are largely attributable to interest payments, are legally irrelevant. The different treatment of interest does not save separate measures of damages from being duplicative (MBIA Ins. Corp. v Credit Suisse Sec. [USA] LLC, 165 AD3d 108, 114-115 [1st Dept 2018]; Financial Guar. Ins. Co. v Morgan Stanley ABS Capital I Inc., 164 AD3d 1126, 1128 [1st Dept 2018]).
In Principia Partners LLC v Swap Fin. Group, LLC, 2021 NY Slip Op 03267 (1st Dep’t Decided May 20, 2021), the First Department affirmed the dismissal of what it found to be duplicate fraud claims:
The fraud causes of action against Swap and the Syncora entities directly were properly dismissed as duplicative of the breach of contract claim (see Matter of Daesang Corp. v NutraSweet Co., 167 AD3d 1, 18 [1st Dept 2018]). The complaint failed to allege a legal duty to plaintiff separate and apart from the duty to perform under the contract or that a fraudulent misrepresentation was collateral or extraneous to the contract, and plaintiff sought only contract damages.
Fraud Claim Based on Contractual Representations and Warranties Survives
In U.S. Tsubaki Holdings, Inc. v Estes, 2021 NY Slip Op 03273 (1st Dep’t Decided May 20, 2021), the First Department reversed the Commercial Division’s decision dismissing various fraud claims. In rejecting defendants’ argument that the fraud claims simply duplicated the breach of contract claims, the First Department found that the representations and warranties contained in a purchase and sale agreement (PSA) could form the basis for the factual misrepresentations. The First Department found these contractual representations saved the fraud claims not only against the defendants who were parties to that PSA but also against individuals who were not bound by the contract:
Plaintiffs’ fraud claims are not duplicative of their contract claim. Plaintiffs allege misrepresentation of numerous present facts, in the form of defendants’ alleged breaches of various of the April 2018 Purchase and Sale Agreement’s (PSA) representations and warranties (see Wyle Inc. v ITT Corp., 130 AD3d 438, 439 [1st Dept 2015]; First Bank of Ams. v Motor Car Funding, 257 AD2d 287, 291-292 [1st Dept 1999]). For example, the Seller Defendants warranted that the Company’s accounting was accurate, but plaintiffs allege that those financials were fraudulently inflated. The Sellers warranted that the Company was in compliance with employment laws, but plaintiffs allege that the Company routinely engaged in timesheet fraud. The Sellers warranted that the Company had disclosed all audits and material contracts, but plaintiffs assert that defendants failed to disclose a pending Canadian tax audit and a $300,000 contract with a limited liability company owned by Larry. Moreover, the fraud claims are asserted against a distinct set of defendants from the contract claims. The Non-Seller Defendants were not parties to the PSA and thus plaintiffs do not sue them for breach of contract.
As I have commented often, it is important for the contracting parties to provide in the contract itself how potential fraud claims may be affected by such representations and warranties. Here, the PSA explicitly provided that the purchaser had the right to sue for fraud. The First Department found this significant:
More fundamentally, the PSA specifically gave plaintiff U.S. Tsubaki Holdings, Inc., the right to sue for fraud. The PSA cannot be said to bar (as duplicative) a cause of action which the PSA itself guarantees. Likewise, the PSA’s various disclaimers cannot bar the fraud claim which, again, the PSA itself guarantees.
Commentary
One of the most litigated and disputed issues involving fraud claims is whether the claim amounts to more than a breach of contract. The cards are often stacked against the plaintiff in such situations. Care must be given to identifying the factual representations upon which the fraud is based. Simple contractual promises to do something in the future will not be sufficient. And where the damages alleged are simply identical to the claimed contract damages, the fraud claim will fail as well. However, contractual representations and warranties can form the basis of fraud claims apart from the contract in which they are contained.