Estoppel/Ratification Principles Undermine Fraudulent Inducement Claim

• Posted on: Jan 26 2022

By: Jeffrey M. Haber

As readers know, we write about cases involving fraud. The articles we write almost always concern the specific elements of the claim, such as scienter and justifiable reliance. Rarely have we examined defenses to a claim of fraud. Today, we do so – we examine the doctrines of ratification and estoppel.

As a general matter, “[r]atification is the act of knowingly giving sanction or affirmance to an act that would otherwise be unauthorized and not binding.”¹ The elements of ratification are: (1) approval by act, word, or conduct; (2) with full knowledge of the facts of the earlier act, and (3) with the intention of giving validity to the earlier act. To prove intent, a party must show that the other party, after learning the facts and circumstances of the transaction or occurrence, either (1) continued to accept benefits under the transaction or occurrence or (2) conducted himself/herself so as to recognize the transaction or occurrence as binding.³ A ratification may be shown by an express act or word or may be inferred from a party’s course of conduct.⁴ Notably, an express ratification is not necessary; any act based on a recognition of the facts or occurrences as subsisting or any conduct inconsistent with an intention of avoiding them has the effect of ratification.⁵ Any retention of the beneficial part of the transaction affirms the transaction or occurrence and bars an action for rescission as a matter of law.⁶ Where a party affirms a contract through his actions and conduct after knowledge of the facts, the defense of waiver or ratification is established as a matter of law.⁷ 

Estoppel, at least for these purposes, refers to conduct such as ratification, election, acquiescence, or acceptance of benefits.⁸ It is a defense that prevents a party from accepting the benefit of a transaction or occurrence by asserting a right to the disadvantage of another which is inconsistent with the party’s prior position. Since the doctrine is based on equity, it applies when it would be unconscionable to allow a person to maintain a position inconsistent with one in which he/she acquiesced, or of which he accepted a benefit.⁹ In other words, a party may not accept the benefits of a transaction and then later take an inconsistent position to avoid any corresponding obligations or effects.

These principles were examined in JMM Consulting, LLC v. Triumph Constr. Corp., 2022 N.Y. Slip Op. 30150(U) (Sup. Ct., N.Y. County Jan. 19, 2022) (here).

JMM Consulting arose in connection with a consulting agreement (the “Agreement”) between the parties. Plaintiffs alleged that they entered into the Agreement, in which they acted in a consulting, advisory and employee capacity, and that Defendant wrongfully terminated the Agreement, and their employment thereunder, without cause.

In addition to the Agreement, the parties executed a promissory note (the “Promissory Note”), pursuant to which the Company was required to pay Plaintiff Licata monies representing deferred portions of his bonus. The bonus was intended to compensate Licata for the sums received by the Company from utility companies in connection with the projects he oversaw. Licata claimed that he was owed $2.4 million.

Defendant maintained that to maximize JMM’s fees, Licata manipulated the utility billings to inflate the amounts billed. The Company argued that Licata failed to pursue the utility billings, failed to maintain the required back up necessary to substantiate and collect on the amounts billed, and repeatedly made misrepresentations about the amounts that be collected. The Company contended that Plaintiffs’ conduct was done intentionally to avoid writing off invoices and reducing JMM’s fee. In connection with the foregoing, the Company asserted a counterclaim to rescind the Agreement and Promissory Note.

The Court dismissed the Company’s counterclaim for recission. The Court noted that there was no dispute that the Company made payments to JMM through July 2016. Notably, said the Court, “[s]everal payments were made after the Company discovered Mr. Licata’s alleged fraud with respect to the utility billings and the alleged violation of the non-solicitation and non-compete provision of the Consulting Agreement.” “Under these circumstances,” concluded the Court, “the Company cannot now assert that it was fraudulently induced to execute the Promissory Note and that … its ratified obligations are void.” In other words, the Court found that the Company had ratified the payment obligations under the Promissory Note and could not, therefore, claim that it had been defrauded.

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.

Footnotes

1. 21 N.Y. Jur. 2d, Estoppel, Ratification and Waiver § 94.
2. See generally Beutel v. Beutel, 55 N.Y.2d 957, 958 (1982).
3. Rothschild v. Title Guarantee & Tr. Co., 204 N.Y. 458 (1912).
4. Id. See also Provident Bay Rd., LLC v. NYSARC, Inc., 117 A.D.3d 1356, 1358 (3d Dept. 2014).
5. AD v. CR, 2018 N.Y. Slip Op. 50439 (Sup. Ct., Westchester County 2018).
6. See Chalos v. Chalos, 128 A.D.2d 498, 499 (2d Dept. 1987).
7. Id.
8. Markovitz v. Markovitz, 29 A.D.3d 460, 461 (1st Dept. 2006); Mahon v. Moorman, 234 A.D.2d 1, 2 (1st Dept. 1996).
9. Id.