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Successfully Asserting a Claim for Fraud in a New York Lawsuit Involving a Commercial Contract

In countless commercial contract cases, New York courts have dismissed plaintiffs’ causes of action for fraud that are solely premised on assertions that a defendant entered into a contract without intending to perform its obligations.  These types of claims are deemed to be merely duplicative of a claim for breach of contract.  See, e.g., Yenrab, Inc. v. 794 Linden Realty, LLC, 68 A.D.4d 755 (2nd Dept. 2009).  In other words, a defendant’s intent to breach a contract does not transform a claim for breach into one for fraud.

But there are also many decisions in which courts have held that a complaint’s allegations adequately alleged both breach of contract and fraud.  Earlier this month, in the case of Silverboys, LLC v. Skordas, which involved plaintiffs’ claims that a general contractor charged them for products and services that were not delivered, Judge Scarpulla of the New York County Supreme Court issued a decision allowing plaintiffs to proceed with their cause of action for fraud.  The plaintiffs presented the court with a complaint that offered specific allegations of material and intentional misrepresentations by defendants to extract payments that defendants had not earned.  Among other things, plaintiffs alleged that defendants conspired with a third party to provide lesser quality materials than were specified in the contract without revising their budget quote. Based on these allegations of inflated invoices, as well as allegations that defendants used these inflated billings to provide kickbacks to a third party, Judge Scarpulla held that plaintiffs’ allegations of fraud were independent of their breach of contract cause of action.

The decision in Silverboys is well-reasoned.  But it is easy to imagine another judge finding that the allegations of providing inferior equipment merely stated a claim for breach of contract.  In sum, although the legal standard is easy enough to enunciate, there is no bright line that separates an actionable claim for fraud from one that, at its core, merely alleges breach of contract.

In the context of lawsuits involving commercial insurance policies, courts have sustained insurers’ fraud claims based on allegations that their issuance of a policy or the amount of premiums charged were based on an insured’s material misrepresentations of fact.  For example, in the case Minico Ins. Agency LLC v. AJP Contr. Corp., 2017 NY Slip Op 32970(U), Judge Murphy of the Nassau County Supreme Court allowed the carrier’s claim for fraud to proceed based on its allegations that the insured had willfully misrepresented the amount of its gross sales to induce the carrier to provide a lower premium.

It is not feasible to estimate the percentage of cases in New York in which plaintiffs are allowed to proceed with fraud claims that also involve claims for breach of contract.  But the decisions discussed above, and in other cases, provide guidance.  Among other things, it is essential to plead facts that allow for the inference that a defendant’s misrepresentations of fact were willful and were intended to induce reliance on the part of the plaintiff.

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