Jan 8, 2018Litigation & Dispute Resolution
Typically, where fraud claims arise in connection with contracts, the elements of the cause of action for fraud involve claims that misrepresentations of existing fact were made to induce a party to enter into the contract. Plaintiffs seeking to allege fraud get into problems when all they allege is that the defendant did not intend to fulfill contractual promises. Courts maintain that such an allegation amounts to nothing more than a breach of contract. See my previous posts for more on this. Similarly, if the plaintiff claims that there were misrepresentations after the contract was entered into, the necessary element of fraudulent inducement (or reliance upon the misrepresentations to enter into the contract) is missing because the contract had already been entered without the misrepresentations. A new decision of the Appellate Division Third Department discusses various aspects of fraud claims, including the issues of whether a present intent not to abide by contractual promises can amount to a fraud and whether misrepresentations during the course of the contract that the plaintiff relied upon to its detriment can constitute an independent claim for fraud. Luckow v RBG Design-Build, Inc., 2017 NY Slip Op 09221 (3d Dep’t Decided on December 28, 2017) involved a number of related construction contracts in connection with the design and construction of a large ski-house. Among the defendants was the interior designer (RBG) as well as its president. Along with other claims, plaintiffs asserted a claim of fraudulent inducement against the interior designer and its president. Plaintiffs claimed that they were fraudulently induced to enter into the design contract based upon alleged misrepresentations by the president. General and Conclusory Allegations Insufficient In rejecting the fraud claims against the interior design company, the Third Department affirmed the dismissal by the lower court, observing that plaintiffs had not adequately particularized the allegations (as required by NY CPLR 3016(b)). In this regard, the Court noted “the general statement that RBG misrepresented its degree of expertise and competence with regard to this project” was insufficient and that “the other allegations relate to statements of future intent that are not actionable.” Agents Personally Liable for Fraud They Commit The Third Department then addressed the fraud claims against the individual president – Rose. First, the Court acknowledged that officers of an entity are personally liable for fraud that they actively commit: “Although Rose, himself, is not a party to any relevant contract, ‘[i]n actions for fraud, corporate officers and directors may be held individually liable if they participated in or had knowledge of the fraud, even if they did not stand to gain personally’ (Polonetsky v Better Homes Depot, 97 NY2d 46, 55 ).” Insufficient Allegations Against the President The Court agreed with the lower court that alleged misrepresentations made by the president before the contract was entered into were insufficient to amount to fraud: In the first cause of action against Rose, plaintiffs allege that they were fraudulently induced to enter the contract based upon Rose’s allegedly false assertions that he was an “engineer, designer and builder” and that he would personally supervise all work. Plaintiffs also allege that Rose is not a licensed engineer. The record establishes that Rose has a degree in engineering, has been engaged in the construction field as a designer and builder for many years and has never told anyone he was licensed in any field. Thus, he did not make any false representations. As for his statement about supervising all work, the record indicates that he did oversee the project, so this also was not a false statement. In any event, to the extent that he did not supervise any of the work under the contract, this statement was a “nonactionable promise to perform a future act” and there is no indication that he did not intend to carry out that duty when he made the statement (Nastro Contr. v Agusta, 217 AD2d 874, 875 ). Misrepresentations After the Contract Forming Fraud Claim The Third Department thought differently of the second fraud cause of action against the president, reversing the lower court’s dismissal of that claim. In this claim, the plaintiffs relied upon alleged misrepresentations that were made by the president after the original design contract was entered into. Thus, the alleged misrepresentations could not serve to prove fraudulent inducement to enter into the contract. The Third Department nevertheless found the elements of a claim for fraud had been adequately alleged because plaintiffs claimed they made payments to the construction contractor for work in reliance upon representations that the defendant president made that the contractor was entitled to payment under the contract standards when, in fact, the work was not allegedly sufficient. The Third Department thus commented on this claim as follows: In the second cause of action against Rose, plaintiffs allege that Rose knew the construction work was either not performed or performed improperly, but he continued to bill plaintiffs for the nonconforming or incomplete work. The alleged misrepresentations were made after the contract was executed and could not have induced its formation. Nevertheless, these [*5]allegations are sufficient to state a cause of action for fraudulently inducing plaintiffs to pay bills that were purportedly inflated (see Kosowsky v Willard Mtn., Inc., 90 AD3d 1127, 1129 ). Rose testified that he billed for estimated percentages of completed work, plaintiffs could have asked him to explain the bills, and, if he made any billing errors, they were inadvertent. Plaintiffs submitted proof that Rose had billed for 85% of the contract costs (including increased amounts for changes based on unsigned change orders), but the subsequent contractor determined that the project was only 50% complete when plaintiffs terminated the contract. The record contains evidence indicating that the bills were vague and difficult to comprehend. [Plaintiff’s agent] averred that he did not fully understand the bills, but paid them in reliance on Rose’s assertion in those bills that certain percentages of the project had been completed. Under the circumstances, questions of fact exist as to whether Rose fraudulently induced payment of bills by [Plaintiff]’s agent for work that was not performed. Hence, it was error to grant summary judgment dismissing that cause of action against Rose. Commentary Legal points covered: General allegations of misrepresentations or representations concerning an alleged intent not to perform future contractual obligations will not suffice to allege a claim of fraud. Individual officers or other agents of an entity can be liable for the fraud they commit even if they do not personally benefit from the contract. Even representations given after the contract was entered into can form the basis of fraud claims if they were reasonably relied upon to plaintiff’s detriment and all of the other elements of fraud are adequately alleged.