Claim For Fraudulent Inducement Where The Plaintiff Does Not Seek To Void Or Rescind The Subject Agreement Does Not Negate Contractual Jury Waiver Provision

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Posted on: Dec 22 2024

In International Business Machs. Corp. v. GlobalFoundries U.S. Inc., 2024 N.Y. Slip Op. 06425 (1st Dept. Dec. 19, 2024) (here), the Appellate Division, First Department was asked to consider whether a contractual jury waiver provision applied to a claim for fraudulent inducement where the plaintiff did not seek to void or rescind the subject contracts if it prevailed on its fraudulent inducement claim, but instead attempted to enforce the contracts and collect damages. As discussed below, the Court answered the question affirmatively, holding that the jury waiver provision was not vitiated by the fraudulent inducement claim.

The Right to A Jury Trial and Fraudulent Inducement

The New York Constitution provides for a right of trial by jury.[1] In effect, “a jury trial is guaranteed: ‘(1) in all those cases to which it would have traditionally been afforded under the common law before 1777, and (2) in all cases to which the Legislature by statute extended a right to a jury trial between 1777 and 1894.’”[2] The right is also codified in CPLR 4101, which provides in part that a jury trial is available in actions in which a party demands “a judgment for a sum of money only,” except when a jury trial has been waived.

Nevertheless, parties to a contract can agree to waive the right to a jury trial. Such jury waiver provisions are valid and enforceable.[3] This is so because the courts expect the parties who enter into an unambiguous agreement to be bound by the language they have chosen.[4]

The party challenging a jury waiver provision must show an “adequate basis to deny enforcement.”[5] The burden on the challenger is significant because “[t]he right to trial by jury is a fundamental one,” and “courts [will] indulge every reasonable presumption against waiver.”[6] Contractual jury-waiver provisions are, therefore, “always strictly construed and … should not be easily inferred or extended.”[7]

However, where a claim of fraudulent inducement challenges the validity of the agreement, a provision waiving the right to a jury trial arising out of the agreement may not apply.[8] The First Department has taken care to distinguish between actions where the primary claim is fraudulent inducement and the validity of the entire contract is being challenged on the basis of fraud,[9] and actions that do not challenge the validity of the contract but rather seek to enforce the underlying contract by obtaining damages for fraudulent inducement.[10]

Where fraudulent inducement is the plaintiff’s primary claim, “[i]t is of no consequence that the complaint does not contain the word ‘recission’ or expressly state that it challenges the validity of the … agreement” if it is otherwise demonstrated that it is the party’s intent.[11] Both Ambac and MBIA involved numerous material misrepresentations allegedly made to insurers concerning the origination and quality of hundreds of millions of dollars of mortgage loans underlying the securitizations they insured. These misrepresentations were the central issue in both actions, and the plaintiffs alleged breach of various representations and warranties only in the alternative to their fraudulent inducement claim. The First Department held that fraudulent inducement was the plaintiffs’ primary claim, and the extent of the fraud pleaded in the complaints allowed the plaintiffs’ challenge to the validity of the insurance agreements to be inferred.[12]

Significantly, where fraudulent inducement is asserted as a defense to a breach of contract action, New York courts have been quicker to infer an inherent challenge to the validity of the contract.[13]

As discussed below, IBM falls into the category of enforcement and damages – i.e., actions that do not challenge the validity of the contract but rather seek to enforce the underlying contract by obtaining damages for fraudulent inducement.

International Business Machines Corp. v. GlobalFoundries U.S. Inc.

IBM concerned a motion to strike a jury demand with regard to IBM’s claims for fraudulent inducement and promissory estoppel. As discussed, the Court held that the motion court properly granted defendant’s motion to strike the jury demand.

From 2013 to June 2015, plaintiff, IBM, and defendant, GlobalFoundries U.S. Inc., a manufacturer of semiconductors, engaged in discussions concerning a collaborative venture whereby IBM would transfer its microelectronics business, including technology, engineers and employees, to GlobalFoundries, along with a sum of $1.5 billion, and GlobalFoundries would develop, manufacture and supply next generation 14nm and 10nm high performance semiconductor chips for IBM.

On October 18, 2014, the parties signed a Master Transaction Agreement (“MTA”), which provided the framework for their relationship. Between July 2015 and March 2016, the parties entered into and amended several related agreements in connection with the MTA, including the Technology Cooperation Agreement (“TCA”), the Foundry Supply Agreement (“FSA”), the Albany Cooperation Agreement (“ACA”), and the 10HP Statement of Work (“10HPSOW”) (together, the “agreements”).

Each agreement contained or was subject to a jury waiver provision. The MTA’s version of the provision read 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.

The FSA and ACA contained nearly identical provisions. The FSA specifically incorporated “any [Statement of Work] hereunder” into its jury waiver provision, which included the 10HPSOW. The TCA noted that “[e]ach party hereby waives any right to a jury trial.”

According to IBM, by September 2015, just two months after the July 2015 closing of the transaction, GlobalFoundries began to indicate that it did not intend to develop, manufacture or supply the 10nm high performance chip contemplated by the agreements. By December 2015, GlobalFoundries notified IBM that it did not intend to develop, manufacture or supply the 10nm chip and that it wanted to explore the possibility of amending the agreements to replace the 10nm chip promised with a more advanced 7nm chip. IBM refused at that time to release GlobalFoundries from its contractual obligations.

In March 2016, the parties amended the TCA, FSA, and 10HPSOW. Notably, those amended agreements, signed after the dispute as to GlobalFoundries’ commitment to the chips envisioned in the 2014 MTA began to emerge, still contained the broad jury waiver language quoted above. Following the execution of the amended agreements in March 2016, GlobalFoundries continued to represent to IBM that instead of developing the 10nm chip, it would develop a 7nm technology that would satisfy IBM’s technical specifications and needs. As alleged in the complaint, in September 2016, IBM notified GlobalFoundries by email that while it would cooperate with GlobalFoundries’ development plans for a 7nm chip, it expressly reserved all of its rights under all the agreements, including, but not limited to, its rights relating to the performance and development milestones under the TCA, the FSA, and the SOWs.

IBM paid GlobalFoundries the second ($500 million) and third ($250 million) monetary installments owed under the contracts in December 2016 and December 2017, respectively. By July 2018, GlobalFoundries had begun intimating to IBM that it might abandon development of the 7nm chip as well, and by August 2018 confirmed as much. Nonetheless, GlobalFoundries continued to develop, manufacture and supply the 14nm chip contemplated by the agreements.

On June 8, 2021, after receiving the last of the 14nm chips promised under the agreements from GlobalFoundries, IBM commenced the action, alleging claims against GlobalFoundries for fraudulent inducement, breaches of the MTA, TCA, FSA, 10HPSOW and ACA, and promissory estoppel. After the close of discovery on July 6, 2023, IBM filed its note of issue containing a demand for a jury trial. GlobalFoundries moved to strike the jury demand in its entirety. Initially demanding a jury trial on all claims, on appeal, IBM suggested entitlement to a jury trial only on its fraudulent inducement and promissory estoppel claims. GlobalFoundries moved to strike that jury demand. The motion court granted defendant’s motion. The First Department affirmed.

As an initial matter, the Court found that the jury waivers “to which these sophisticated parties agreed” were “very broad”.[14] In this regard, said the Court, “[t]he parties waived a jury ‘to the fullest extent permitted by applicable law’ and not just for claims at law but for all claims ‘now existing or hereafter arising … whether in contract, tort, equity or otherwise.’”[15] “The parties were crystal clear in their intent that there would be no jury in ‘any legal proceeding directly or indirectly arising out of, under or in connection with this agreement or any of the transactions,’” noted the Court.[16] Consequently, held the Court, “the contractual jury waivers here [were] broad enough by their terms to include IBM’s fraud claim.”[17]

The Court also found that IBM’s “primary claim [was] not fraudulent inducement but rather breach of the agreements.”[18] The Court explained that IBM’s “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’” demonstrated that IBM was not challenging the validity of the agreements.[19] This allegation, noted the Court, was “distinguishable from the multiple allegations of fraud in cases such as Ambac and MBIA.”[20]

“When alleging fraudulent inducement,” noted the Court, “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.’”[21] The Court found that

IBM ha[d] 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].”[22]

Further noted the Court, “‘[w]hile 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’, that [was] simply not the situation present here.”[23] The Court explained that “IBM ha[d] repeatedly elected to affirm or stand on the contract after it knew or should have known of GlobalFoundries’ alleged fraud.”[24] Under such circumstances, concluded the Court, “‘[p]laintiff[] merely [sought] to enforce the underlying agreements by obtaining damages for fraudulent inducement, rather than rescind the agreements, and [did] not challenge the validity of the agreements in any manner other than by making factual allegations of fraud in the inducement.’”[25] By contrast, said the Court, “[i]n Ambac, MBIA, and Countrywide[,] there was nothing to indicate that the plaintiffs elected to affirm the underlying contracts after discovering defendants’ massive fraud.”[26]

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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.

[1] N.Y. Const. Art. I, § 2.

[2] State v. Myron P., 20 N.Y.3d 206, 212 (2012) (quoting In re DES Mkt. Share Litig., 79 N.Y.2d 299, 304 (1992)).

[3] Uribe v. Merchants Bank of N.Y., 227 A.D.2d 141, 141 (1st Dept. 1996).

[4] Matter of Port 60 Put-Back Litig., 36 N.Y.3d 342, 355 (2020) (holding that “[f]reedom to contract prevails in an arm’s length contract made between sophisticated parties”); Nomura Home Equity Loan, Inc., Series 2006-FM2, by HSBC Bank USA, Nat. Assoc. v. Nomura Credit & Cap., Inc., 30 N.Y.3d 572, 581 (2017) (“[W]hen parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms.”).

[5] Fordham Univ. v. Mfrs. Hanover Trust Co., 145 A.D.2d 332, 333 (1st Dept. 1988).

[6] Camilleri v. Pena, 21 Misc. 3d 145(A), at *1 (App. Term 1st Dept. 2008); Waldman v. Cohen, 125 A.D.2d 116, 121 (2d Dept. 1987).

[7] Shapiro v. Marstone Distributors, Inc., 40 A.D.2d 878, 878 (2d Dept. 1972); Levy v. New York Majestic Corp., 3 A.D.2d 477, 479 (1st Dept. 1957).

[8] See, e.g., China Dev. Indus. Bank v. Morgan Stanley & Co. Inc., 86 A.D.3d 435, 436-437 (1st Dept. 2011); Wells Fargo Bank, N.A. v. Stargate Films, Inc., 18 A.D.3d 264, 265 (1st Dept. 2005).

[9] See, e.g., Ambac Assur. Corp. v. Countrywide Home Loans Inc., 179 A.D.3d 518, 520-521 (1st Dept. 2020); Ambac Assur. Corp. v. DLJ Mtge. Capital, Inc., 102 A.D.3d 487, 487-488 (1st Dept. 2013); MBIA Ins. Corp. v Credit Suisse Sec. (USA), LLC, 102 A.D.3d 488 (1st Dept 2013).

[10] See, e.g., Zohar CDO 2003-1 Ltd. v. Xinhua Sports & Entertainment Ltd., 158 A.D.3d 594, 594-595 (1st Dept. 2018); Leav v. Weitzner, 268 App. Div. 466, 468 (1st Dept. 1944).

[11] Ambac, 102 A.D.3d at 488; MBIA, 102 A.D.3d at 488.

[12] See also Countrywide, 179 A.D.3d 518.

[13] Federal Housecraft v. Faria, 28 Misc. 2d 155, 156 (App. Term, 2d Dept. 1961) (where a defense “challenges the validity of the writing wherein the jury waiver clause appears … the party resisting the contract should be afforded the privilege of a preliminary trial by jury on the defense of fraud”); see also J.P. Morgan Sec. Inc. v Ader, 127 A.D.3d 506, 508 (1st Dept. 2015); Bank of N.Y. v. Cheng Yu Corp., 67 A.D.2d 961, 961 (2d Dept. 1979) (in an action on a promissory note, jury waiver vitiated where defendant signed the guarantee but alleged he did not read or understand English and the contents of the agreement were misrepresented to him by the individual codefendant and a bank officer).

[14] Slip Op. at *3.

[15] Id.

[16] Id.

[17] Id.

[18] Id. at *4.

[19] Id.

[20] Id. at *4-*5.

[21] Id. at *5 (quoting Big Apple Car v. City of New York, 204 A.D.2d 109, 110-111 (1st Dept. 1994)).

[22] Id. (quoting Leav, 268 App. Div. at 468).

[23] Id. (quoting Zohar, 158 A.D.3d at 594, and citing Ader, 127 A.D.3d at 507-508).

[24] Id.

[25] Id. at *5-*6 (quoting Zohar, 158 A.D.3d at 595).

[26] Id. at *6.