False Warranty in Commercial Contract Can be Basis of Fraud Claim

On October 21, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Wyle Inc. v. ITT Corp., 2013 NY Slip Op. 51707(U), addressing the availability of a fraudulent inducement claim based on a breach of warranty.

In Wyle, defendant ITT argued that a fraud claim based on a warranty in an agremeent "must be dismissed as duplicative of Plaintiffs' breach of contract claim." Justice Ramos disagreed, writing that:

generally "a cause of action for fraud does not arise when the only fraud charged relates to a breach of contract." However, "if a plaintiff alleges that it was induced to enter into a transaction because a defendant misrepresented material facts, the plaintiff has stated a claim for fraud even though the "same circumstances give rise to the plaintiff's breach of contract claim." "Unlike a misrepresentation of future intent to perform, a misrepresentation of present facts is collateral to the contract . . . and therefore involves a separate breach of duty."

A warranty in a contract, Justice Ramos explained, "is a misrepresentation of present fact and cannot be characterized merely as an insincere promise to perform." As far as the reasonableness of plaintiff's reliance on the warranty, Justice Ramos noted that

The Court of Appeals has held that in contract negotiations between sophisticated entities, the justifiable reliance prong of a fraud claim can be sufficiently alleged where the plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry.

The lesson is clear for both litigators and transactional lawyers. Warranties in a contract provide strong protection against unpleasant surprises after a deal is consummated and can be relied upon in subsequent litigation.