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A Party Alleging Fraudulent Inducement to Enter a Contract May Both Seek to Avoid Terms of the Contract (Here a Jury-Waiver Clause) and Rely on the Contract in Defense of Breach of Contract Allegations/Criteria for Negligent Misrepresentation Cause of Action Explained in Some Depth (Criteria Not Met Here)

The First Department, over a dissent, determined a party claiming it was fraudulently induced to enter a contract is entitled to a jury trial despite the jury-trial waiver in the contract. Because a party alleging fraudulent inducement can either seek rescission or stand on the contract and seek damages, the party may both seek to avoid terms in the contract (here the jury-waiver clause) and rely on the contract as a defense to breach of contract allegations. The court also found that the counterclaim for negligent misrepresentation was properly dismissed because the existence of a confidential or fiduciary or other special relationship (approaching privity), which would justify reliance on representations, was not demonstrated.  The criteria for negligent misrepresentation was described in some depth:

…[A]contractual jury waiver provision is inapplicable to a fraudulent inducement cause of action that challenges the validity of the underlying agreement … . …  In cases where the fraudulent inducement allegations, if proved, would void the agreement, including the jury waiver clause, the party is entitled to a jury trial on the claim … .

…”[A] defrauded party to a contract may elect to either disaffirm the contract by a prompt rescission or stand on the contract and thereafter maintain an action at law for damages attributable to the fraud” … . As a result, a party alleging fraudulent inducement that elects to bring an action for damages, as opposed to opting for rescission may, under certain circumstances, still challenge the validity of the agreement … .

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“A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information” … . In commercial cases “a duty to speak with care exists when the relationship of the parties, arising out of contract or otherwise, [is] such than in morals and good conscience the one has the right to rely upon the other for information” … . Reliance on the statements must be justifiable, and “not all representations made by a seller of goods or a provider of services will give rise to a duty to speak with care” (id.). “Rather, liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified” (id.). In order to impose tort liability in a commercial case, “there must be some identifiable source of a special duty of care” … . …[A] special duty will be found “if the record supports a relationship so close as to approach that of privity” … . Generally, however, an arm’s-length business relationship between sophisticated parties will not give rise to a confidential or fiduciary relationship that would support a cause of action for negligent misrepresentation … . J.P. Morgan Sec. Inc. v Ader, 2015 NY Slip Op 03071, 1st Dept 4-14-15

 

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