“Fraudulent inducement” is the legal description for when a person intentionally misrepresents facts in order to convince another person to do something, such as sign a contract. Fraudulent inducement is distinct from breach of contract, however, in that it relies on “misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract,” as a New York appeals court recently explained. Indeed, the court addressed a case where the defendant argued the plaintiff's fraudulent inducement claim merely duplicated the underlying breach of contract allegation.
Wyle Inc. v. ITT Corporation
EDO Corporation owned CAS, Inc., a defense contractor. CAS' government contracts were subject to price schedules negotiated with the General Services Administration (GSA). The GSA's inspector general periodically audited the price schedules and could adjust the rates downward, which of course would reduce CAS' profits.
ITT Corporation acquired EDO, and thus CAS, in 2007. In August 2010, ITT decided to sell-off EDO's CAS business to Wyle Inc for $235 million. Several months earlier, the GSA's inspector general informed ITT it planned to audit CAS. According to Wyle, ITT never informed it about the ongoing GSA audit, even though the parties' purchase agreement expressly required disclosure of any “Government Contract or Government Bid to which the Company is a party which, to the Company's knowledge, is as of the date hereof under audit by any Governmental Authority.”
Wyle completed its purchase of CAS in September 2010. Six months later, the GSA released its audit, which included a reduced rate schedule. Wyle subsequently sued ITT in the Manhattan Supreme Court, alleging breach of contract and fraudulent inducement. In effect, Wyle argued it would have paid less for CAS had ITT disclosed the ongoing GSA audit before completing the sale.
ITT argued the two claims were duplicative, that is the alleged fraudulent inducement was really part of the alleged breach of contract. ITT maintained any misrepresentations regarding the audit amounted to a “breach of contractual warranty” rather than fraud. The Supreme Court disagreed and refused to dismiss the fraudulent inducement claim. In a July 7 opinion, a divided panel of the Appellate Division, First Department, agreed with the trial judge. The majority said even if ITT failed to disclose the audit as required by the purchase agreement—i.e., the contractual warranty—Wyle could still pursue a separate fraudulent inducement claim, because the fraud relied on a misrepresentation of “present” facts rather than future performance. To hold otherwise, the majority said, would allow any party to avoid a fraud claim by incorporating any and all false statements into the language of the written contract.
One judge dissented. She argued “the majority misses the mark” in this case, because “the alleged misrepresentation was specifically addressed by one of the contract terms.” Furthermore, the remedy Wyle seeks from ITT is the same for both the breach of contract and fraudulent inducement, “namely, the difference between the price it paid and the price that it would have paid had ITT disclosed the [GSA] audit.” The dissenting judge would therefore have dismissed the fraud claim outright.
As this case illustrates, breach of contract and fraud are separate legal issues. Some cases may only involve one but not the other. If you need help understanding the difference, you should speak with an experienced New York business attorney. Contact our offices today if you have any questions.