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Source: www.nyfraudclaims.com

Contractual disclaimers play an important role in fraud claims. The more specific the disclaimer, the more likely it will bar subsequent fraud claims.  A new Fourth Department decision adds an interesting twist to avoid a specific contractual disclaimer: The Court found it was unclear if the disclaimer barred fraud claims based upon alleged misrepresentations made, and events that occurred, after the disclaimer was given.  It therefore reinstated the complaint at the pleadings stage.

In Pike Co., Inc. v Jersen Constr. Group, LLC, 2017 NY Slip Op 01116 (4th Dep’t Feb. 10, 2017), a subcontractor on a construction project at the State University College at Plattsburgh asserted a fraud claim against the general contractor.  The subcontractor entered into a subcontract with the general contractor to perform masonry work after the “concrete foundations were installed, structural steel was in place, metal framing was erected and the concrete floors had been poured.”

Contractual Disclaimer of Reliance on Representations

In the subcontract, the subcontractor “accept[ed] responsibility for the inspection of conditions that could affect the Subcontract Work at the Project site, and based on that inspection, and not in reliance upon any opinions or representations of [the general contractor], its officers, agents or employees, acknowledge[d] its responsibility to satisfactorily perform the Subcontract Work without additional expense to [the general contractor].”

The Alleged Fraud

Notwithstanding this specific contractual disclaimer, the subcontractor alleged that before it began work on the project, the general contractor was informed by at least one of its other subcontractors that its substrate work was not “accurate, flat or level,” i.e., was deficient. Nevertheless, the subcontractor alleged, the general contractor represented to the subcontractor that the substrate work “had been erected in accordance with the contract requirements and was plumb, level, and true and that [the general contractor] had performed a professional survey of the structural steel to confirm the same.” The subcontractor further alleged that the general contractor’s representations to the subcontractor “were false,” and that the general contractor “concealed and recklessly withheld from [the subcontractor] knowledge that the substrate was not dimensionally accurate, flat or level.”  The subcontractor alleged that the general contractor made those false representations “in order to deceive [the subcontractor] and induce [it] to commence installation upon the substrate.” The subcontractor further alleged that it relied on the general contractor’s representations and would not have commenced installation of the masonry work had the general contractor not misrepresented that the substrate had been installed in accordance with the contract requirements.  Finally, the subcontractor alleged that it suffered damages as a result of its reliance on the general contractor’s false representations.

The court below dismissed the subcontractor’s fraud claim based upon the specific disclaimer quoted above in which the subcontractor acknowledged its own responsibility for inspecting the site and that it had not relied upon any representation from the general contractor concerning conditions at the site.

The Fourth Department reversed and reinstated the fraud claim.  The Fourth Department first noted the established law on disclaimers:  “Generally, ‘[a] claim for fraud is barred by the existence of a specific disclaimer and failure to exercise reasonable diligence’ (Steinhardt Group v Citicorp, 272 AD2d 255, 256), and a disclaimer clause will preclude a fraud claim only where the clause ‘specifically disclaims representations concerning the very matter to which the fraud claim relates’ (Agristor Leasing-II v Pangburn, 162 AD2d 960, 961; see Basis Yield Alpha Fund [Master] v Goldman Sachs Group, Inc., 115 AD3d 128, 137; see generally Danann Realty Corp. v Harris, 5 NY2d 317, 320-321).”

Misrepresentations After the Disclaimer Concerning Subsequent Events

Nevertheless, the Fourth Department ruled that the disclaimer was “ambiguous” because it was unclear whether the disclaimer precluded the subcontractor from relying on any opinions or representations of the general contractor concerning work performed by others after the subcontractor executed the subcontract, and thus, the disclaimer did not “conclusively establish[] a defense” to the fraud claim.

Thus, the Fourth Department found an interesting way around a specific disclaimer of reliance on representations that were directly related to the alleged fraud – the clause did not clearly address subsequent representations about events that occurred after the contract was entered into.

Fraud Not Duplicative of Contract Claim

The Fourth Department also found that the fraud claim was not duplicative of the subcontractor’s breach of contract claim because the alleged fraud was based upon representations that the general contractor made that were separate and distinct from the general contractor’s obligations under the subcontract.

Curing Pleadings Deficiencies with Affidavits

Finally, the Fourth Department allowed the subcontractor to cure insufficiencies in its pleading under CPLR 3016(b) with “affidavits submitted in opposition to the motion ‘to remedy pleading problems’ (Sargiss v Magarelli, 12 NY3d 527, 531 [2009]).”

The Court of Appeals decision cited by the Fourth Department here (Sargiss) offers a useful summary of the law regarding CPLR 3016(b):

When a plaintiff brings a cause of action based upon fraud, “the circumstances constituting the wrong shall be stated in detail” (CPLR 3016 [b]). “The purpose of section 3016 (b)’s pleading requirement is to inform a defendant with respect to the incidents complained of,” thus, “[w]e have cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud” (Pludeman v Northern Leasing Sys., Inc., 10 NY3d 486, 491 [2008] [internal quotation marks and citation omitted]). What is “[c]ritical to a fraud claim is that a complaint{**12 NY3d at 531} allege the basic facts to establish the elements of the cause of action,” and although under CPLR 3016 (b) “the complaint must sufficiently detail the allegedly fraudulent conduct, that requirement should not be confused with unassailable proof of fraud” (id. at 492). “Necessarily, then, section 3016 (b) may be met when the facts are sufficient to permit a reasonable inference of the alleged conduct” (id.). On a CPLR 3211 motion to dismiss, a court may consider affidavits to remedy pleading problems (Leon v Martinez, 84 NY2d 83, 88 [1994]).