Unlike its cousin, the fraud claim, negligent misrepresentation does not require a showing of malicious intent or recklessness by the defendant; rather, it requires that the plaintiff prove the following by a preponderance of the evidence:

(1) awareness by the defendant that his statement was to be used for a particular purpose or purposes;

(2) reliance by a known party or parties in furtherance of that purpose;

(3) some conduct by the defendants linking them to the plaintiffs and evincing defendants’ awareness of their reliance;

(4) that defendant’s statements or conduct exaggerated or misstated certain facts;

(5) that these misstatements resulted from the defendant’s negligence and/or lack of due diligence;

(6) that plaintiff relied on defendant’s misstatements; and,

(7) as a result, plaintiff suffered damages.

An important caveat bears mention, though.

As a New York Federal Court recently held in Five Star Development Resort Communities v. iStar RC Paradise Valley, “Under New York law, in order to state a claim for negligent misrepresentation, a plaintiff is required to allege that the speaker is bound to the other party ‘by some relation or duty of care’” outside a contract that may be between the parties.

Therefore, the Court continued, “In ordinary commercial contexts…it is 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.”  In other words, “[i]f the only interest at stake is that of holding the defendant to a promise, the courts have said that the plaintiff may not transmogrify the contract claim into one for tort.” JP Morgan Chase Bank, 350 F. Supp. 2d at 401 (quoting Hargrave v. Oki Nursery, Inc., 636 F.2d 897, 899 (2d Cir. 1980)).

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But is that fear grounded in reality?

The short answer under New York law, as you might well guess, is that it depends on whether you have a formal written severance agreement, and if so, what the agreement says. For example, in a July 1 decision in Coastal Sheet Metal Corp. v. Vassallo, New York’s Appellate Division, First Department held that the plaintiff’s former CEO had forfeited his right to his severance package because “the [trial] court’s finding that [defendant] breached his employment agreement by ‘violat[ing] the trust of his position’ negates [his] claim for severance, as a matter of law.”

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Under this exception to the rule, the employer is permitted to make the employee’s right to receive post-employment benefits contingent upon the employee’s agreement to abide by a non-compete agreement. The reason that this practice is permitted, according to New York’s highest court, is as follows:

“The doctrine rests on the premise that if the employee is given the choice of preserving his rights under his contract by refraining from competition or risking forfeiture of such rights by exercising his right to compete, there is no unreasonable restraint upon an employee’s liberty to earn a living ( see Kristt v. Whelan, 4 A.D.2d 195, 199, 164 N.Y.S.2d 239 [1st Dept.1957], affd. without op. 5 N.Y.2d 807, 181 N.Y.S.2d 205, 155 N.E.2d 116 [1958]; see also Post, 48 N.Y.2d at 88-89, 421 N.Y.S.2d 847, 397 N.E.2d 358). It assumes that an employee who leaves his employer makes an informed choice between forfeiting his benefit or retaining the benefit by avoiding competitive employment ( Kristt, 4 A.D.2d at 199, 164 N.Y.S.2d 239).”

Importantly – and the significance of this cannot be overstated – under the employee choice doctrine, a restrictive covenant (i.e., a “non-compete agreement”) will be enforceable without regard to reasonableness if an employee left his employer voluntarily.

Conversely, New York’s high court has articulated an almost equally important caveat to this rule: “An essential element to the doctrine is the employer’s ‘continued willingness to employ’ the employee ( Post, 48 N.Y.2d at 89, 421 N.Y.S.2d 847, 397 N.E.2d 358). Where the employer terminates the employment relationship without cause, ‘his action necessarily destroys the mutuality of obligation on which the covenant rests as well as the employer’s ability to impose a forfeiture’ ( id.).”

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There was one “small” problem, however: the technology didn’t work.

So, you would think that my acquaintance should have no problem recovering his downpayment for the exclusive license fee under New York law as a breach of implied warranty, right? Well, not so fast.

Under Uniform Commercial Code section 2-316, there are circumstances where a vendor can validly disclaim either a warranty that the goods are fit for a particular purpose, or are even fit at all. One of the most common examples of this is where the buyer purchases the goods “as is.”

The moral of the story is obvious: you should not sign such an agreement unless, and at a bare minimum (and I don’t recommend this), you have first assured that the product actually works.

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So what does a plaintiff have to prove in order to win one of those cases?

Although the list is short, as a practical matter marshaling this proof is not simple:

The plaintiff must prove “that the employer made a regular practice of making severance payments and that the plaintiff detrimentally relied on the severance policy, Skarren v Household Finance Corp., 296 AD2d 488, 745 NYS2d 556; Hirschfeld v Institutional Investor, Inc., 260 AD2d 171, 688 NYS2d 31; see Gallagher v Ashland Oil, Inc., 183 AD2d 1033, 583 NYS2d 624; see also Spencer v Christ Church Day Care Center, Inc., 280 AD2d 817, 720 NYS2d 633 (in order to recover for accumulated vacation time, at will employee must establish regular practice of paying employees unused vacation and reliance upon that practice in accepting or continuing position).”

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But here’s the bad news: since demonstrating that you actually lost profits based upon the other side’s conduct – and if so, how much – is inherently somewhat speculative, how can you prove such damages under New York law? As you may have guessed, this is not such an easy task.

Here’s the general rule:

“In order to recover loss of future profits as damages for breach of contract under New York law, ² the plaintiff must establish the existence and the amount of lost profits with reasonable certainty, and that the lost profits were within the contemplation of the parties at the time the contract was made. Schonfeld v. Hilliard, 218 F.3d 164, 173 (2d Cir. 2000) (citing Kenford Co., Inc. v. Erie County, 67 N.Y.2d 257, 261 (1986) (“Kenford I”)) …

“To meet this burden, the plaintiff must establish (1) the existence of the lost profits with reasonable certainty, and (2) that the alleged loss is capable of proof with reasonable certainty. Kenford I, 67 N.Y.2d at 261. “[T]he damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.” Id; see also 3497 Austin Boulevard Assoc. LLC v. M.K.D. Capital Corp., No. 04 Civ. 8596 (NRB), 2007 WL 1575265, at *2 (S.D.N.Y. May 30, 2007) (“Projections of future profits which are made on the basis of a ‘multitude of assumptions’ that require ’speculation and conjecture’ with few known factors do not provide the requisite certainty for recovery.”).

But what about in the case of a new, or start-up business? Does the same rule apply to them?

In short, yes, but the following should be borne in mind: since such businesses lack a track record, the courts have stated that  “evidence of lost profits from a new business venture receives greater scrutiny because there is no track record upon which to base an estimate.” Schonfeld, 218 F.3d at 172.

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Reading this decision, I can’t say I’m surprised; simply put, the plaintiff had absolutely no proof to support its claims other than rank speculation.

As the Appellate Court stated:

“This argument has no support in the record, which indicates that Tapestry approached defendant about joining its company after plaintiff rejected the partnership proposal. There is no evidence, other than plaintiff’s speculation, that defendant was negotiating during the two companies’ ultimately fruitless discussions (see Abrahami v UPC Constr. Co., 224 AD2d 231, 233 [1996] [fraud must be proven by clear and convincing evidence; "loose, equivocal or contradictory" evidence will not suffice] …

“The court properly dismissed the claim alleging that defendant acted as a faithless employee because there is no evidence that defendant was negotiating for his new position with Tapestry during the pendency of the business discussions between Tapestry and plaintiff. Nor is there any support for plaintiff’s contention that defendant was making use of confidential information while negotiating his employment with Tapestry.”

In fact, after reading this decision, and given how emphatic the appellate court’s opinion is, I can’t help but wonder: why did the plaintiff even bother appealing (or even bringing the claim in the first instance)?

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So, here’s the rule, as recently summarized by a New York County trial court:

“The requirements for formation of an enforceable contract are:

(1) at least two parties with legal capacity to contract;

(2) mutual assent to the terms of an agreement with reasonably certain terms; and,

(3) consideration (i.e., payment).

(4 NY Prac., Com. Litig. in New York State Courts § 59:12 [2d ed.], quoting Cobble Hill Nursing Home, Inc. v Henry and Warren Corp., 74 NY2d 475, 482 [1989]).

But what on earth does that mean?

The first prong is relatively straightforward: I can’t sell you a property that I don’t own, nor can I sell you that property if I lack the mental capacity to make the sale (no jokes, please).

The second prong means that both parties reach a “meeting of the minds,” i.e., they both understand what their respective obligations are, and agree to do it. As a practical and legal matter, this is referred to as an “offer and acceptance,” both of which must be clearly made. Importantly, New York’s courts have long held that “assent may be implied when a party has conducted himself in such a manner that his assent may fairly be inferred.”

The  upshot is this: if there is a clear offer by one side, and the other party to the purported agreement starts acting on it in a way that clearly demonstrates their belief that there is an agreement, then guess what?

You’ve got an enforceable contract under New York law.

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In Malaty v. Malaty, the plaintiff Naguib Malaty sued his brother to compel the turnover of the defendant’s interest in a Brooklyn property that was supposedly purchased with plaintiff’s money, and for money damages in breach of conract and breach of fiduciary duty that the defendant purportedly owed to plaintiff’s two corporations.

Plaintiff had a few “minor” problems with his claim, however. First, he had no proof that his corporations were actually legitimate (based upon the evidence adduced at trial, the Court opined that these corporations for tax evasion purposes); Second, he had no written agreement memorializing the defendant’s agreement to transfer ownership of the subject property to plaintiff, as a result of which his claim was barred by New York’s Statute of Frauds.

In dismissing this branch of the plaintiff’s claim, the Court cited the underlying theory behind New York’s Statute of Frauds, which is over 100 years old:

“The purpose of the Statute of Frauds is sufficiently indicated by its title. It is a statute against frauds. It was designed to prevent litigation over oral agreements, where the terms are always dependent upon the uncertain and varying memory of witnesses. This evil was to be remedied by the reduction of the terms of the contract to writing, so that the parties might not misunderstand the particulars of the contract which they were making; that no one might be induced to enter a court of justice to vex the peace of his opponent without clear and definite evidence of the terms of the contract which formed the ground of action, equally accessible to both parties and to the court; and that perjury might not be invited to sustain a claim which never had any real existence.”

I find the irony in this decision amusing. The plaintiff figured that in attacking his brother’s integrity, no one would bother to question his own, and in so doing, lost sight of the fact that he could be setting himself up for an IRS audit and investigation.

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If your ability to purchase a property hinges upon which your ability to get needed financing (which is often the case), you’d better make sure that this is memorialized in the contract. Otherwise, you could end up like the defendant in Abart Holdings LLC v. Bayou Properties, Inc., and lose your entire deposit when a court finds you in breach of your real estate contract.

In this New York County case, the plaintiff-seller moved for summary judgment on that branch of its claim seeking a  finding that it was entitled to keep the deposit the defendant buyers had placed into escrow as damages for the defendants’ failure to abide by their contract, and close on the property.

In granting the plaintiff seller’s motion, the Court noted that the only reasons proffered by the buyers for failing to close as had been agreed were two-fold, and neither were convincing: (1) that the plaintiff had failed to deliver certain documents at the closing; and, (2) that the defendants had not received the funding that was needed to close, and that had always been understood as a pre-condition, or in legal terms, a condition precedent, to the deal.

And here’s why the defendants’ arguments failed: First, the defendants did not raise the plaintiff’s purported failure to deliver these documents as an issue at the closing, and therefore, this issue was waived; Second -and this is important – since the parties never expressly made the defendants’ ability to secure financing a condition precedent to closing, the Court would not do so now. In support of its holding, the Court summarized the law governing conditions precedent as follows:

“A condition precedent is ‘an act or event, other than the lapse of time, which, unless the condition is excused, must occur, before a duty to perform a promise in the agreement arises.’” (Oppenheimer & Co., Inc v. Oppenheim, Appel, Dixon & Co., 86 NY2d 685, 690 [1995]). “[N]onoccurrence of the condition may yet be excused by waiver, breach or forfeiture.” (Id at 691). ” “Courts will interpret doubtful language as embodying a promise or constructive condition rather than an express condition.”( Id). “If the language is in any way ambiguous, the law does not favor a construction which creates a condition precedent. A contractual duty will not be construed as a condition precedent absent clear language showing that the parties intended to make it a condition precedent.” (Ashkenazi v. Kent S. Assoc., LLC, 51 AD3d 611, 611-612 [2d Dept 2008]).

The lesson to be gleaned from this case is clear: if there are conditions that you need fulfilled before you can close on a property, make sure they are memorialized in the contract and/or at the closing.

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