When and whether tort claims impermissibly duplicate breach of contract claims is a question ubiquitous in commercial litigation in New York. A plaintiff's ability to assert a tort claim beside a breach of contract claim is no small matter. For one, a plaintiff can seek punitive damages in tort. A plaintiff's ability to assert intentional tort claims is also significant in the context of secondary liability, as one cannot sue for aiding and abetting a breach of contract or for civil conspiracy to breach a contract.

To promote commercial certainty and avoid a deluge of unnecessary litigation, it is important to have clear, easily applicable standards that govern when and whether tort claims duplicate contract claims impermissibly.

To that end, nearly 40 years ago, the New York Court of Appeals—citing precedent from the nineteenth century—explained that "[i]t is a well-established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated," and such "legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract." Clark-Fitzpatrick v. Long Island Rail Road, 70 N.Y.2d 382, 389 (1987) (citations omitted); accord Dormitory Authority of the State of N.Y. v. Samson Construction, 30 N.Y.3d 704, 711 (2018).

In the context of fraud claims, it is often said that, to be actionable, a misrepresentation must be one of "present fact," and it must be "collateral" or "extraneous" to the contract. See, e.g., American Media v. Bainbridge & Knight Laboratories, 135 A.D.3d 477, 478 (1st Dep't 2016) (citations omitted); The Hawthorne Group v. RRE Ventures, 7 A.D.3d 320, 323-24 (1st Dep't 2004). The Court of Appeals also recently emphasized that tort claims should be dismissed as duplicative when they allege the identical harm and seek the same damages as alleged under a breach of contract theory. See IKB International S.A. v. Wells Fargo Bank, N.A., 40 N.Y.3d 277, 292 (2023).

Although these principles may be "well-established," they continue to elude consistent understanding and application. One area where this issue arises with some frequency is when a plaintiff alleges both breach of contract and fraudulent inducement claims based on allegedly fraudulent representations and warranties expressed in a contract.

In 2015, in Wyle v. ITT, 130 A.D.3d 438, 439-441 (1st Dep't 2015), the First Department attempted to harmonize a number of cases addressing this question:

  • J.E. Morgan Knitting Mills v. Reeves Brothers, 243 A.D.2d 422, 423 (1st Dep't 1997) (fraud claim based on "false" "warranty" "properly dismissed as duplicative" of breach of contract claim because it "is not collateral to the contract");
  • Varo v. Alvis, 261 A.D.2d 262, 265 (1st Dep't 1999) (fraud claim based on "false" "warranty" dismissed as duplicative because it "does not arise out of collateral facts");
  • ESBE Holdings. v. Vanquish Acquisition Partners, 50 A.D.3d 397, 398 (1st Dep't 2008) (fraud claims dismissed as duplicative "since they arose directly from the written provisions" of the agreements);
  • First Bank of Americas v. Motor Car Funding, 257 A.D.2d 287, 291-92 (1st Dep't 1999) (upholding fraud claim based on false warranty) (other citations omitted)).

Over an impassioned dissent, the majority in Wyle upheld the fraud claim, finding that allegedly fraudulent warranties contained in the contract could form the basis for both a claim of fraud and a claim for breach of contract. See Wyle, 130 A.D.3d at 442. In doing so, the court reasoned that the alleged false warranty—which, again, was included in the contract itself—was, in fact, "collateral" to the contract.

Since deciding Wyle in 2015, the First Department has reaffirmed its holding on multiple occasions, and the Third Department has cited Wyle approvingly. See U.S. Tsubaki Holdings v. Estes, 194 A.D.3d 590, 591-92 (1st Dep't 2021); VXI Lux Holdco v. SIC Holdings, 194 A.D.3d 628, 630 (1st Dep't 2021); Doller v. Prescott, 167 A.D.3d 1298, 1301 (3d Dep't 2018).

Although the result in Wyle makes sense—and it should be the law in New York (absent an express provision in the governing contract by which the parties have disclaimed the right to assert claims of fraud based on allegedly false representations and warranties)—the First Department's reasoning has done little to promote widespread understanding.

Before proceeding further, it is important to appreciate that sophisticated contracting parties typically wish (a) to reduce their entire agreements to writing, and (b) to disclaim reliance on prior written or oral representations (and even omissions). As such, most standard commercial agreements include broad "merger" or "integration" clauses, as well as provisions making plain that the parties have not been induced to enter the agreement by anything other than the representations and warranties expressed in the agreement itself.

Thus, in entering such agreements, sophisticated parties generally evince an intention to forgo the right to sue for fraud based on anything beyond the four corners of the contract. Still, that does not mean that a representation and warranty in the agreement itself may not be fraudulent, and it would make little sense to preclude a party from claiming fraud—and being able to wield the considerable threat of punitive damages—simply because the fraudulent statement happens to appear in the contract itself.

Memorializing one's fraud in an agreement does not strip it of its fraudulent character; if anything, it makes the fraud even more brazen. For this reason, among others, rigid adherence to a rule that a tort claim must allege harm and damages distinct from those recoverable under contract should be eschewed in the context of claims alleging the existence of fraudulent contractual warranties.

A key distinction also exists between claims for breach of contractual representations and warranties and claims for breach of other contractual provisions—a distinction the First Department recently tried to articulate in VXI Lux Holdco. Whereas typical contractual promises pertain to promises of future performance (e.g., A agrees to sell B his car upon B paying A $10,000), a representation and warranty is an affirmative statement of then-existing fact. Thus, in assessing whether a representation or promise supports a claim of fraud, it makes more sense to ask whether the promise or representation is a statement of fact (regardless of whether it is expressed in the contract) or a promise of future performance, not whether the promise or representation is "collateral" or "extraneous" to the contract, which can create unnecessary confusion.

One final point: As noted above, sophisticated contracting parties should be free to agree expressly in their contracts that breaches of contractual representations and warranties cannot and will not permit the non-breaching party to sue for fraud, but only for breach of contract.

Originally published by New York Law Journal.

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