A Fraud That is Collateral to The Contract and Not Barred By The Merger Clause 

• Posted on: Apr 11 2022

By: Jeffrey M. Haber

Over the years, this Blog has examined numerous cases (indeed, too many to link to) in which the plaintiff claims to have been fraudulently induced to enter into a contract with the defendant. Most of the cases were dismissed because the plaintiff failed to allege a misrepresentation of present fact, as opposed to a misrepresentation of future intent to perform under the contract. Today, we examine, International Business Machines Corp. v. GlobalFoundries U.S. Inc., 2022 N.Y. Slip Op. 02341 (1st Dept. Apr. 7, 2022) (here), a case in which the plaintiff successfully alleged a claim of fraudulent inducement in the context of a breach of contract case.

From 2013 to June 2015, International Business Machines Corporation (“IBM”) and GlobalFoundries U.S. Inc. (“GlobalFoundries”) engaged in discussions concerning a collaborative venture whereby IBM would transfer its microelectronics business, including technology, engineers, and employees, to GlobalFoundries, along with $1.5 billion, and GlobalFoundries would develop and manufacture IBM’s high performance semiconductor chips (“HP chips”) used in high performance computer servers and mainframes. On July 1, 2015, IBM and GlobalFoundries entered into numerous agreements to consummate the transaction. IBM paid $750 million to GlobalFoundries in connection therewith. 

Within three months, GlobalFoundries notified IBM that it did not intend to develop, manufacture, or supply one type of HP chip contemplated by the agreements. The parties continued to work together to address the issue. Notwithstanding, IBM paid GlobalFoundries the second and third monetary installments owed under the contracts in December 2016 and December 2017. 

In 2018, GlobalFoundries told IBM it would no longer proceed with developing the replacement type HP chips.

IBM claimed that on numerous occasions, and to induce it to enter into the contemplated transaction, GlobalFoundries told IBM that it had made a strategic decision and financial commitment to expand its presence, capacity, and investment in high performance semiconductor technology and chips. IBM alleged that those statements were false when made, and that without those assurances it would not have entered into the various contracts with GlobalFoundries.

GlobalFoundries moved to dismiss the fraudulent inducement cause of action. The motion court granted the motion.

The Appellate Division, First Department unanimously reversed. 

The Court held that IBM stated a cause of action for fraudulent inducement “in alleging that GlobalFoundries knowingly made material misrepresentations of present fact about its business plan and financial commitment that were untrue when made, and that IBM would not have entered into the agreements with GlobalFoundries had it not been for those misrepresentations.”¹ 

To state a claim for fraudulent inducement, a plaintiff must allege “a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.”² In the context of a contract case, the plaintiff must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract, in order to present a viable claim.³ Therefore, “to recover damages for tort in a contract matter, it is necessary that the plaintiff plead and prove a breach of duty distinct from, or in addition to, the breach of contract.”⁴

The Court also held that the alleged misrepresentations of present fact were collateral to the agreements and induced IBM to enter into them.⁵ A misrepresentation of present fact is collateral to a contract when the representation does not concern the terms of the parties’ agreement or a party’s performance obligations thereunder.⁶ 

Since the alleged misrepresentations were collateral to the parties’ agreements, the Court held that IBM’s fraudulent inducement claim did not duplicate its breach of contract claim.⁷ The Court found that “the fraud claim [was] not based upon promised performance of an obligation of GlobalFoundries under the contracts.”⁸ 

Moreover, the Court found that there was no duplication because IBM sought separate and distinct damages for each claim.⁹ Fraud damages are meant to redress a different harm than damages for breach of contract. The latter damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; the former damages are meant to indemnify losses suffered as a result of the fraud.¹⁰ Thus, where all the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed.

Finally, the Court held that the merger clauses and disclaimer provisions in the parties’ agreements did not preclude the introduction of parol evidence and, therefore, bar the fraudulent inducement claim. 

As to the former, the Court held that the “merger clauses [were] general, vague, and merely omnibus statements that the written instrument embodies the whole agreement between the parties.” Boilerplate merger clauses are given little weight by the courts. Only where the parties specify the agreements and matters being merged or integrated into their agreement will the courts preclude the introduction of parol evidence and bar the fraudulent inducement claim. 

As to the latter, the Court held that although the disclaimer provisions were “more specific regarding representation and warranty subject matters covered by each agreement, none of the disclaimers could reasonably be interpreted to address representations about GlobalFoundries’s business plan and strategies.” A party’s disclaimer of reliance on extra-contractual representations and omissions will not preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” 

Takeaway

International Business Machines is a good example of misrepresentations that were deemed to be collateral to the parties’ contract. As noted, the alleged misrepresentations concerned GlobalFoundries’ business plan and financial commitment to the transaction. They did not concern GlobalFoundries’ performance under the various agreements with IBM. Since the alleged misrepresentations were collateral to the various agreements, IBM’s fraud claim did not duplicate its breach of contract claim.

Perhaps most interesting about International Business Machines is the Court’s ruling with regard to the merger clauses in the various agreements. In many cases, we have seen the courts apply general, boilerplate merger clauses to bar a plaintiff’s fraudulent inducement claim. The First Department in International Business Machines seems to be reminding the lower courts that New York jurisprudence requires some degree of specificity as to what is being merged into an agreement. Whether this reminder will result in a more consistent application of the specificity requirement, however, remains to be seen.     

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

References

1. Slip Op. at *1 (citing, Wyle Inc. v. ITT Corp., 130 A.D.3d 438, 438-439 (1st Dept. 2015)).
2. GoSmile, Inc. v. Levine, 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed, 17 N.Y.3d 782 (2011).
3. Id.
4. Non-Linear Trading Co. v. Braddis Assoc., 243 A.D.2d 107, 118 (1st Dept. 1998) (internal quotation marks omitted).
5. Slip Op. at *1 (citing, Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986), and Laduzinski v. Alvarez & Marsal Taxand LLC, 132 A.D.3d 164, 168-169 (1st Dept. 2015)).
6. New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 316 (1985) (citation omitted); Orix Credit Alliance v. Hable Co., 256 A.D.2d 114, 115 (1st Dept. 1998).
7. Slip Op. at *1.
8. Id.
9. Id. (citing, Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 67-68 (1st Dept. 2017)).
10. MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 165 A.D.3d 108, 114 (1st Dept. 2018); Mañas v. VMS Assoc., LLC, 53 A.D.3d 451, 454 (1st Dept. 2008).
11. MBIA, 165 A.D.3d at 114.
12. Slip Op. at *1-*2 (citing, Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320 (1959), and Laduzinski, 132 A.D.3d at 169).
13. See Hobart v. Schuler, 55 N.Y.2d 1023, 1024 (1982) (deeming merger clause to be insufficient to bar parol evidence of fraudulent misrepresentation where clause stated “all representations, warranties, understandings and agreements between the parties are set forth in the agreement”); LibertyPointe Bank v. 75 E. 125th St., LLC, 95 A.D.3d 706, 706 (1st Dept. 2012) (concluding that merger clause was insufficient to bar claim for fraudulent inducement where it failed to reference particular misrepresentations allegedly made by former president). See also Danann Realty, 5 N.Y.2d at 320-21; Laduzinski, 132 A.D.3d at 169.
14. Slip Op. at *2.
15. Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty, 5 N.Y.2d at 323.
16. Id.