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Court Allows Fraud Claim To Stand With Breach of Contract Claim Despite Some Overlap in Claims

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  • Posted on: May 4 2022

By: Jeffrey M. Haber

As a general matter, a fraud claim is not duplicative of a contract claim where the plaintiff alleges misrepresentations of fact, as opposed to misrepresentations of a future intent to perform. In IS Chrystie Mgt. LLC v. ADP, LLC, 2022 N.Y. Slip Op. 02950 (1st Dept. May 3, 2022) (here), this general principle of law was one of the issues before the Court. In particular, the First Department was asked to determine whether post-contractual misrepresentations were collateral to the contractual obligations of the parties. As discussed below, the Court ruled that they were separate and apart from the contractual duties set forth in the parties’ agreement. 

IS Chrystie Mgt. LLC v. ADP, LLC

[Ed. Note: the background facts and arguments discussed below come from the decision of the motion court and the parties’ briefing before the Appellate Division, First Department.]

ADP arose out of a Master Services Agreement (“MSA”) pursuant to which ADP provided certain payroll processing services to plaintiff IS Chrystie Management LLC (“ISC”). ISC alleged that ADP willfully breached the MSA and, as a result, sustained $747,442.75 in direct and consequential damages.

ISC also asserted a fraud claim. The motion court dismissed the claim without prejudice to replead after ISC developed sufficient facts in discovery to support the claim.1 The court did so on the ground that ISC failed to demonstrate that ADP had a duty collateral to its contractual obligations that would form a basis for a gross negligence or fraud claim. In other words, the motion court found that the breach of contract claim, and fraud claim were duplicative.2 As noted by the motion court, since the limitation of liability provision did not apply to willful, criminal or fraudulent misconduct, if ISC prevailed on its breach of contract claim, “there’s no limitation of liability and [ISC would be] entitled to recover all of the damages that [it] seek[s].”

Following extensive discovery, ISC moved to amend its complaint to reinstate its tort claims.3 ISC alleged that ADP made misrepresentations regarding the (i) implementation of a benefits accrual policy; (ii) creation of a “spread of hours” setup; (iii) calculation of a commuter tax; and (iv) calculation of a residency tax. 

ADP maintained that the foregoing were services encompassed by the MSA. In particular, ADP argued that the services in question concerned payroll processing services that ADP provided pursuant to the MSA. ADP also argued that any damages ISC may have sustained by reason of the alleged fraud were the same damages it was pursuing on its breach of contract claim. Finally, ADP contended that ISC did not allege a breach of any duty collateral to or independent of the MSA because the relationship between the parties was purely contractual. 

The motion court denied the motion to amend, holding that ISC “failed to demonstrate that ADP had a duty beyond its contractual duties that would form a basis for a tort claim for gross negligence or fraud”. As it did on the motion to dismiss, the motion court found that ISC could “argue at trial that ADP’s breach of contract was willful, including the impact any such willful misconduct has on plaintiff’s right to recover the damages it seeks.”

On appeal, the Appellate Division, First Department modified the motion court’s order and reinstated ISC’s fraud claim.

The Court held that ISC’s fraud claim was not duplicative of the contract claim.4 The Court found that “[u]nlike Cronos Group Ltd. v XComIP, LLC (156 AD3d 54 [1st Dept 2017]),” on which both parties relied but reached different conclusions as to what the court held, “this [was] not a case where ‘the only fraud alleged’ was the defendant’s ‘unkept promise to perform certain of its preexisting obligations under the parties’ contract’ (id. at 64).”5 “Rather,” said the Court, “plaintiff alleges, ‘Whenever ADP’s services for Plaintiff[] proved to be deficient, ADP would purport to deal with the problem and then misrepresent to Plaintiff[] that the problem had been fixed, when … it had not.”6 Such an allegation, explained the Court, was a misrepresentation of present fact that was collateral to the MSA and, therefore, involved a separate duty.7 

[Ed. Note: In Cronos, the parties entered a contract governing the transmission of customer calls on the other party’s network.8 During the term of the contract, plaintiff learned that fraudulent calls had gone from its network to defendant’s network, thereby generating charges to plaintiff under the contract.9 When plaintiff advised defendant of the situation, defendant assured plaintiff that the charges would be reversed.10 However, defendant did not reverse the charges. Plaintiff alleged that defendant’s assurances were fraudulently made.11 

The Court held that plaintiff’s fraud claim “falls short under the principle that a fraud claim is not stated by allegations that simply duplicate, in the facts alleged and damages sought, a claim for breach of contract, enhanced only by conclusory allegations that the pleader’s adversary made a promise while harboring the concealed intent not to perform it.”12 According to the Court, the only fraud alleged by plaintiff was defendant’s “unkept promise to perform certain of its preexisting obligations under the parties’ contract … for which [plaintiff] seeks exactly the same damages as are sought under the rubric of the claim for breach of contract.”13 In fact, noted the Court, “it is clear from the complaint itself that [plaintiff] understood [defendant]’s assurances to be promises of future conduct.”14 The Court explained that the fraud claim “adds to the contract cause of action only the allegation that [defendant] gave [plaintiff] insincere oral assurances that [defendant] would perform the very same act (reversal of the charges for the fraudulent calls) that [plaintiff] contends, in the contract claim, that [defendant] was already contractually obligated to perform under the parties’ written agreement.”15 The Court concluded that “the allegedly false promise at issue in the fraud claim was … a promise to perform under the parties’ contract, not any promise collateral or extraneous to that contract.”16

The Court also held that the damages sought by the fraud claim were not entirely the same as those of the breach of contract claim.17 

As it explained during oral argument on defendant’s CPLR 3211 motion to dismiss, defendant’s substandard performance under the parties’ contract resulted in plaintiff’s overpaying its employees. If defendant had admitted that its system was not working, plaintiff “would have terminated [the contract] … [and] wouldn’t have … overpaid [its] employees for that period of time post the supposed fix.” Plaintiff does not seek this item under its contract damages.18

Takeaway

A fraud claim, which arises from the same facts, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement, is duplicative of a contract claim. Often the fraud claim is asserted in connection with pre-contractual representations. Sometimes, however, a fraud claim will be asserted in connection with post-contractual representations, as in IS Chrystie Mgt. In either circumstance, the issue to be determined is whether the misrepresentation is one of an existing fact or a naked promise of future performance (i.e., a promise to perform under the contract without an accompanying undisclosed intention to break that promise when it comes time to perform). As the Court in IS Chrystie Mgt. made clear, whether the representation is made before or after the contract is entered is not dispositive.19 

IS Chrystie Mgt. also shows that the courts look to the damages sought to ascertain whether they are the same. If they are, then the fraud claim will be dismissed. In IS Chrystie Mgt., plaintiff successfully alleged damages that were somewhat different.


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. In the complaint, ISC asserted two additional causes of action: (i) gross negligence; and (ii) breach of the implied covenant of good faith and fair dealing.
  2. A fraud claim will be deemed duplicative of a breach of contract claim where (1) the fraud claim arises out of the same facts as the breach of contract claim; (2) the fraud claim seeks the same damages as the breach of contract claim; and (3) the fraud claim fails to identify a duty collateral to or independent of the contract. If one or more of the foregoing factors is missing, the fraud claim will be deemed sufficiently separate to stand on its own. Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 119 (1969); Strasser v. Prudential Sec., Inc., 218 A.D.2d 526 (1st Dept. 1995).
  3. ISC also moved for summary judgment, as did ADP. ADP’s motion was based on the limitation on liability provisions in the MSA. The MSA contained two clauses governing damages. The first clause, Section 6A entitled “Limit on Monetary Damages”, capped direct damages pursuant to a defined formula. The provision did not apply to “ADP’s willful, criminal or fraudulent misconduct.” The second clause, Section 6B entitled “No Consequential Damages”, barred consequential damages without any stated exception. The Court denied summary judgment based on issues of fact related to, inter alia, whether ADP’s conduct qualified as “willful misconduct” and the impact of any such misconduct on the application of the two damages clauses.
  4. Slip Op. at *1 (citing, BML Props. Ltd. v. China Constr. Am. Inc., 174 A.D.3d 419 (1st Dept. 2019)).  
  5. Id
  6. Id.
  7. Id. (quoting, Wyle Inc. v. ITT Corp., 130 A.D.3d 438, 440-441 (1st Dept. 2015) (emphasis and internal quotation marks omitted)).
  8. 156 A.D.3d at 57.
  9. Id. at 58-59.
  10. Id.
  11. Id. at 62.
  12. Id.
  13. Id. at 64.
  14. Id. at 70.
  15. Id. at 64-65.
  16. Id. at 65.
  17. Slip Op. at *1 (citing, MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 165 A.D.3d 108, 114 (1st Dept. 2018)).
  18. Id.
  19. We have previously written about the application of the doctrine to pre-contractual representations (e.g., here and here) and post-contractual representations (e.g., here).
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