“No Reliance” Clause Precludes Fraudulent Inducement Claim Based on Extra-Contractual Representations

• Posted on: May 29 2019

It has long been the law in New York that 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. Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419 (1st Dept. 2011). “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.” Basis Yield, 115 A.D.3d at 137.

On May 28, 2019, the Appellate Division, First Department, affirmed the dismissal of a fraudulent inducement claim because of the existence of an integration or merger clause and a “no representations” clause in which the defendants disclaimed liability for any extra-contractual representations.  DuBow v. Century Realty, Inc.,  2019 N.Y. Slip Op. 04116 (1st Dept. May 28, 2019) (here).

[Ed. Note: This Blog previously wrote about the issue here.]

DuBow v. Century Realty, Inc.

Background

Plaintiff, Kenneth DuBow (“DuBow”), worked for defendant, Century Realty, Inc. (“Century”), from 1990 until his termination in 2013.

In August 2007, DuBow entered into a one-page agreement with Century, whereby he would be entitled to a $10,000 bonus for each building he successfully redeveloped, as well as $150,000 in the event of the sale or exchange of the developed property (“2007 Agreement”).  The 2007 Agreement also stated that in the event DuBow was voluntarily terminated or if he retired, he would be entitled to receive up to $150,000 per building made payable over the course of eight years.  In the event Century terminated DuBow for cause, however, DuBow would receive no payments.

In 2012, Century decided to sell two of its properties. DuBow tried to purchase the properties using his accrued bonuses from the developed properties (approximately $2.7 million) as collateral to obtain a mortgage commitment necessary to purchase the buildings.

According to DuBow, on August 20, 2013, he was informed that he had been terminated for cause for allegedly stealing electricity in the Century-owned building where he resided.

Plaintiff was presented with a termination agreement and severance agreement, which he did not sign. After a series of negotiations, DuBow signed a severance agreement which provided that Century would sell the two buildings to him, allow him to stay in his Century apartment for six months’ rent free, pay him $50,000, and forgive the balance of a $1,214,000 loan made by Century to him (the “Settlement Agreement”). In exchange, DuBow signed a release of claims arising under New York’s employment laws, as well as claims arising out of the 2007 Agreement.

Plaintiff alleged that he never received the $2.7 million earned under the 2007 Agreement. Plaintiff also stated that he did not receive the payments provided for in the Settlement Agreement.

DuBow filed an action claiming breach of the 2007 Agreement, failure to pay wages under the New York Labor Law, fraudulent inducement into the Settlement Agreement, and breach of the implied covenant of good faith and fair dealing.

Defendants moved to dismiss the complaint.

On March 6, 2018, the motion court granted defendants’ motion under the Labor Law for failure to pay wages and denied it with regard to the breach of contract, fraudulent inducement and breach of the implied covenant of good faith and fair dealing claims.

Defendants moved for reconsideration, arguing that the Settlement Agreement precluded plaintiff’s fraudulent inducement claim because of the merger clause and no additional representations clause therein. Specifically, defendants argued that the Settlement Agreement contained a mutual representation by the parties (under the heading “Entire Agreement”) that the agreement before them was the entire agreement and that no prior written or oral modifications or understandings could be relied upon.

The motion court agreed with defendants. The court noted that the “Entire Agreement” section of the Settlement Agreement provided that the agreement constituted the complete understanding of the parties and superseded any and all agreements, understandings, and discussions, whether written or oral, between them with respect to the subject matter of the agreement. The section further provided that the parties were not relying on any promises or representations not contained therein. The final clause of the “Entire Agreement” section, included an express representation by the parties that they were solely relying on the document before them.

The motion court held that reliance on extra-contractual representations and omissions was, therefore, improper given the express, specific language of the Entire Agreement section of the Settlement Agreement.

The motion court also found the no additional representations clause in the “Entire Agreement” section to be dispositive. That clause provided that “no other promises or agreements shall be binding unless in writing and signed by the parties after the date of the agreement.” Thus, held the motion court, “nothing relied upon previously could have been given effect unless there was a writing signed by both parties made after the Settlement date.”

Accordingly, on reconsideration, the motion granted defendants’ motion to dismiss the fraudulent inducement claim.

The First Department’s Decision

On appeal, the First Department “unanimously affirmed” the motion court’s dismissal of the complaint. Slip Op. at *1.

The Court agreed with the motion court that the integration clause and no representations clause in the Settlement Agreement precluded plaintiff’s fraudulent inducement claim:

Given the “no representations” clause and the other language of the integration clause in a settlement agreement negotiated by the parties (Settlement Agreement), the [motion] court correctly dismissed the fraudulent inducement claim, which was based on an alleged promise that defendants would pay the tax liability for the loan to plaintiff they were forgiving.

Id., citing Pate v. BNY Mellon-Alcentra Mezzanine III, LP, 163 A.D.3d 429, 430 (1st Dept. 2018); WT Holdings Inc. v. Argonaut Group, Inc., 127 A.D.3d 544 (1st Dept. 2015).

Takeaway

DuBow underscores the cumulative effect of a merger clause and a no additional representations clause. While the merger clause at issue seems to be too general to be enforceable (i.e., it did not identify the specific representations and communications being integrated into the Settlement Agreement), the no additional representations clause underscored the parties’ agreement to be bound only by the terms of the Settlement Agreement.

Tagged with: Business Litigation, Commercial Litigation, Common Law Fraud, Disclaimer of Reliance, Fraud, Integration Clause, Merger Clause, No Additional Representations Clause