Broken Promises: Successfully Pleading a Viable Claim for Fraudulent Inducement

By Michael A.H. Schoenberg, Esq.

Sadly, sometimes parties negotiating a contract feel the need to exaggerate, bend the truth, or even outright lie about the current state of affairs in an effort to convince the party on the other side of the deal to sign the contract. When this happens, the party making the (mis-) representation often finds him or herself facing a number of claims for the damages caused, including a claim that he or she fraudulently induced the other party to enter into the contract.

But not every misrepresentation states a viable fraudulent inducement claim. To state such a claim under New York law, courts require that alleged misrepresentation “be one of then-present fact, which would be extraneous to the contract and involve a duty separate from or in addition to that imposed by the contract.” See Hawthorne Croup v RRE Ventures, 7 AD3d 320 (1st Dept 2004); J.M. Bldrs & Assoc., Inc. v Lindner, 67 AD3d 738 (2d Dept 2007).

It simply is not enough for a plaintiff to claim that the defendant did not have an intention to perform his or her obligations under the contract when it was signed. Nor is it enough to base a fraudulent inducement claim on representations of opinions, even if the opinion relates to a fact, unless the opinion is somehow guaranteed.

On September 21, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Bryan v. Slothower, 2018 NY Slip Op. 32396(U), in which the plaintiff alleged that the defendant fraudulently induced him to enter into a settlement agreement that the defendant never intended to perform. Just Sherwood’s analysis offers a concrete example of how New York courts apply the law of fraudulent inducement as he ultimately dismisses the plaintiff’s claim:

Plaintiff argues that Slothower’s alleged preconceived intent not to perform is sufficient to sustain the fraud in the inducement claim, citing White v Davidson (150 AD3d 610, 611 [1st Dept 2017]). In White, the First Department held the plaintiff had pleaded a cognizable claim for fraudulent inducement based on . . . misrepresentations that the defendant had promised or claimed (1) their record label was highly successful and that they had previously successfully represented famous recording artist; (2) they would promote plaintiff’s music to radio broadcasting venues; (3) they would organize marketing events to promote plaintiff’s single; (4) they would organize a radio tour; and (5) they would promote the re-release of the single around Valentine’s Day 2015. The court found that these misrepresentations were collateral to the agreement at issue and therefore could support the claim asserted. The representation at issue here, that defendant would pay plaintiff, is not collateral to the contract. It is a term of the agreement.

Plaintiff also relies on Neckles Builders, Inc. v Turner (117 AD3d 923, 924 [2d Dept 2014]). In that case, the Second Department stated that “where the gravamen of the alleged fraud does not arise from the mere failure of a promisor to perform his or her obligations under a contract, but arises from a promisor’s successful attempts to induce a promise to enter into a contractual relationship despite the fact that he promisor harbored an undisclosed intention not to perform under the contract, a proper cause of action sounding in fraud may be stated.” Here, the heart of the alleged fraud is defendant’s failure to perform while still obtaining a release. The alleged misrepresentation of Slothower’s intent to perform under the Settlement Agreement cannot sustain a fraudulent inducement claim.

Pleading facts sufficient to state a fraud claim can be difficult, especially given the heightened pleading standard under CPLR 3016, because the very nature of the claim involves some level of concealment of the truth. Plaintiffs faced with this pleading problem often grasp onto the circular assertion that a fraud must exist because the defendant never intended to perform his obligations as evidenced by the defendant’s failure to perform his obligations. As Justice Sherwood makes clear, such an assertion does not make out a fraudulent inducement claim. The complaining plaintiff should instead stick to a claim for breach of contract, or any number of other possible claims, which have a significantly lower pleading burden.

Ruskin Moscou Faltischek, P.C. is the preeminent Long Island business law firm.