Rescissory Damages Unavailable Absent Privity

On September 14, 2023, Justice Jennifer G. Schecter of the New York County Commercial Division issued a decision after trial in Han v Kwak, Index No. 654281/2018, 2023 NY Slip Op 33207(U), entering “judgement in favor of defendant Robert Kwak despite evidence clearly and convincingly proving that he defrauded her.” The Court held that the claims for recission or rescissory damages against defendant Kwak could not stand because he was not “her contractual counterparty.”

The Court explained:

There is a threshold problem with plaintiffs claim for rescission based on Kwak's fraud that is fatal to her case. Han cannot obtain rescission or rescissory damages from Kwak because he is not her contractual counterparty. Plaintiff was cautioned about the importance of this issue at trial and was directed to provide authority in her post-trial brief demonstrating that privity is not required to obtain rescissory relief. She did not do so. Rather, as explained below, she merely provides authority for the uncontroversial proposition that damages may be sought from a nonsignatory that fraudulently induces entry into a contract (see Uniflex, Inc. v Olivetti Corp. of Am., 86 AD2d 538 [1st Dept 1982], accord John Blair Communications, Inc. v Reliance Capital Group, L.P., 157 AD2d 490,492 [1st Dept 1990] ["Privity is not an element of intentional fraud"]; see also Allenby, LLC v Credit Suisse, AG, 134 AD3d 577, 581 [1st Dept 2015]). A legal claim for fraud seeking out-of-pocket damages, however, is very different from an equitable claim for rescission (Sokolow, Dunaud, Mercadier & Carreras LLP v Lacher, 299 AD2d 64, 71 [1^st Dept 2002]; see Empire Outlet Builders LLC v Construction Resources Corp. of New York, 170 AD3d 582, 583 [1st Dept 2019]; see also VisionChina Media Inc. v Shareholde Representative Servs., LLC, 109 AD3d 49, 56 [1st Dept 2013]).

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning claims for rescission or rescissory damages, or limitations on damages following trial.