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New York Law Journal

Simultaneously Viable Causes of Action for Breach of Contract and Fraud

By Leo K. Barnes Jr.*
*Mr. Barnes, a member of Barnes & Barnes, P.C., can be reached at lkb@barnespc.com

One of the cornerstone pleading tenets of commercial practice is that a plaintiff may not pursue a fraud cause of action simultaneously with a breach of contract cause of action as the fraud cause of action, when it is premised upon the same facts and circumstances as the breach cause of action, is simply duplicative. Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382, at 389, 521 N.Y.S.2d 653, at 656 (1987) (a breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated). Merely alleging scienter in a cause of action to recover for breach of contract (unless the representations alleged to be false are collateral or extraneous to the agreement) does not convert a breach cause of action into one sounding in fraud. See Lo v. Curis, 29 A.D.3d 525, 815 N.Y.S.2d 131 (2nd Dep’t 2006). In that same vein, even an allegation that a defendant maintained an unexpressed intention not to perform a contract is per se insufficient to state a prima facie cause of action for fraud. See, e.g., Meehan v. Meehan, 227 A.D.2d 268, 642 N.Y.S.2d 664 (1st Dep’t 1996); Hudson v. Greenwich I Assocs., 226 A.D.2d 119, 640 N.Y.S.2d 46 (1st Dep’t 1996); Hadari v. Leshchinsky,
242 A.D.2d 557, 662 N.Y.S.2d 85 (2nd Dep’t 1997).

But it is equally well settled that "a misrepresentation of material fact, which is collateral to the contract and serves as an inducement for the contract, is sufficient to sustain a cause of action alleging fraud". Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986); First Bank of Americas v. Motor Car Funding, 257 A.D.2d 287, 690 N.Y.S.2d 17 (1st Dep’t 1999). Thus, a fraud claim may be based on allegations that the defendant fraudulently induced the plaintiff to enter into a contract and a party who is fraudulently induced to enter into a contract may join a cause of action for fraud with one for breach of the same contract where the misrepresentations alleged consist of more than mere promissory statements about what is to be done in the future. Where a plaintiff alleges misrepresentations of present facts, rather than merely of future intent, that were collateral to the contract and which induced the allegedly defrauded party to enter into the contract, a fraudulent inducement claim is not duplicative of a breach of contract claim (see W.I.T. Holding Corp. v. Klein, 282 A.D.2d 527, 724 N.Y.S.2d 66 (2nd Dep’t 2001)). The same set of circumstances giving rise to a breach of contract claim may also form the basis of a cause of action for this type of fraud and, thus, a fraud claim which is not duplicative of a contract claim may be maintained (see Fresh Direct v. Blue Martini Software, 7 A.D.3d 487, 776 N.Y.S.2d 301 (2nd Dep’t 2004).

The key to a concurrent successful pleading is an allegation that fraudulent misrepresentations were made by defendant prior to, and as an inducement for it to enter into the subject contract. Plaintiff's fraudulent inducement claim is not premised upon the alleged breach of a duty arising under the contract, but, rather, is based upon representations that are extraneous to the terms of the parties’ Contract. The fraud allegedly perpetrated by defendant must have occurred prior to the plaintiff’s entering into the Contract, and must have arisen from circumstances separate and distinct from plaintiff's breach of contract claim (see Deerfield Communications Corp., supra, at 956). In those circumstances, plaintiff’s claim is based upon a legal duty distinct from and independent of the privity claim which founds the breach of contract cause of action. But, absent such an independent duty, where the plaintiff is essentially looking to enforce the bargain, the remedy is in contract, not in tort. Sommer v. Federal Signal Corp., 79 N.Y.2d 540, at 551-552, 583 N.Y.S.2d 957 (1992).

New York County Supreme Court Justice Fried’s 2008 decision in Gotham Boxing v. Finkel, 2008 W.L. 104155 (N.Y. Sup. 2008) provides great guidance on the issue. In Gotham Boxing, the Court ruled that a fraud claim can stand, and is not duplicative of a breach of contract action, when the fraud claim is premised upon an additional representation, omission or conduct extraneous to the contract. Justice Fried noted insightful observations:

The critical factual distinction between Graubard, in which the Court of Appeals upheld a fraud claim that was related to a contract claim, and Coppola, in which the First Department dismissed a fraud claim as duplicative, seems to be that in Graubard, the fraud claim was based on a particular oral assurance offered by the defendant, in addition to the promises recorded in the written agreement, and the fraudulent intent “was not asserted in conclusory fashion but was evidenced by defendant's conduct shortly after entering into the agreement.” Coppola, 288 A.D.2d at 42. In contrast, in Coppola, the plaintiff did not refer to any particular representation or conduct by the defendant other than that reflected in the terms of the agreement. …

So the rule, as I understand it, is that a cause of action for fraud will not arise if the alleged fraud restates the facts of the breach of contract claim; a fraud claim must be based on some additional representation, omission, or conduct, other than the contract itself, which was fraudulent when performed. To be sure, the distinction is a fine one. It seems to turn on whether the complaint alleges a particular statement, omission, or other conduct by the defendant, in addition to the text or statements that form the basis of the alleged contract. As Graubard shows, it does not seem to matter that the alleged fraudulent representation is virtually identical to the promise contained in the contract as long as it is made at a different time and place [emphasis added].

The lesson for plaintiffs while drafting a Complaint, or for defendants analyzing a CPLR 3211(a)(7) motion to dismiss a purportedly duplicative cause of action, is this: God is in the details. The detail a plaintiff provides (or fails to provide) regarding representations extraneous to a contract will serve as the keystone to pursue a fraud cause of action simultaneously with a breach of contract cause of action (or absent sufficient detail, found the defendant’s motion to dismiss). Drafting the factual background portion of the Complaint is not the time to be circumspect; rather, detailing all aspects of the fraud, and how the same was perpetrated upon a plaintiff by a defendant, is imperative to found a viable fraud cause of action.

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