Merger Clause That Lacked Specificity Needed to Bar Fraud Claims

On July 15, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in Doctors Allergy Formula, LLC v. Valeant Pharm. Intl., 2019 NY Slip Op. 32064(U), holding that a merger clause lacked the specificity needed to bar fraud claims, explaining:

As a threshold issue, Valeant argues that plaintiffs fraud claims are repackaged contract claims barred by the Agreement's merger clause. As is well known, although inadmissible to construe an unambiguous contract, parole evidence of representations outside of the text of the contract may be admissible when a party alleges fraud. However, an exception to this rule is made where parties include in their contract a specific disclaimer of reliance on a particular prior outside representation.

In arguing that the merger clause bars plaintiffs fraud claim, defendant relies on PSW NYC LLC v Bank of Am., NA. (150 AD3d 601, 601 [1st Dept 2017]). However, as discussed by the First Department, in addition to the merger clause in the agreement in PSW NYC LLC, the parties also executed a mutual, unconditional, release and discharge of claims of every name and nature, known or unknown, suspected or unsuspected. There is no such release here. The facts of another case upon which defendant relies, HSH Nordbank AG v UBS AG (95 AD3d 185 [1st Dept 2012]), involve documents with more extensive anti-reliance language than the merger clause here, concern a sophisticated financial investment by a bank, in which there were disclosure documents about the risks involved, and the court determined that the submissions demonstrated that the plaintiff had essentially accepted the risk of the investment, or had the means to conduct an independent appraisal of the risks, but simply did not do so. In certain transactions and situations, courts may find that the nature and language of the involved agreement reflects the parties' intentions not to permit later claims of reliance upon representations to derail the transaction.

In this case, the merger clause is a general one, which does not track the alleged misrepresentations or contain a specific disclaimer of reliance on a particular representation, and does not bar the fraud claim.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule discussed here about whether a merger clause bars a fraudulent inducement claim. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.