As you may recall from my earlier articles, “Why Many (If Not Most) Business Fraud Claims Are Dismissed” and “How to Prove a Successful Business Fraud Claim Under NY Law,” it is very tough to prevail on a fraud claim in New York, because the pleadings (i.e., the allegations you make in your court papers) require a lot of specificity, and your evidentiary burden is greater than most cases.

Adding to this pressure is another question: how much time do the courts allow you to start an action based on fraud?  After all, in many cases, the fraud is concealed, and you don’t learn about it until much later. So when does the clock start to run?

Fortunately, New York’s legislature foresaw this difficulty, and allowed for the possibility that some frauds may be hidden. Therefore, they articulated the rule as follows:

§ 213. Actions to be commenced within six years

The following actions must be commenced within six years:

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8. an action based upon fraud; the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it.

Bear in mind, however, that this two-year extension of time for the discovery only applies to cases involving actual fraud, but does not apply to cases involving constructive fraud, which is still limited to a six-year statute of limitations. See, e.g., Orr v. Kinderhill Corp., C.A.N.Y.1993, 991 F.2d 31. An example of this would include a lawsuit brought by creditors to set aside conveyances made without fair consideration.

For additional information on constructive fraud, please see “Constructive Fraud: A Lesser-Known, But Powerful Tool in New York to Recover Money That You’re Owed.”

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Strange as it may sound, there are times that you can reap the benefit of a contract’s provisions even if you had nothing to do with the contract at the time it was signed. And this is exactly what happened in Corbett v. Firstline Security, Inc., et al.

In this case, the plaintiff sued to recover damages against her alarm company following a burglary.  At one point during the contract period, Firstline was acquired by ADT, a large home security alarm company. The Court’s decision which dismissed the claims against the defendants is significant for two (2) reasons:

1. The Court held that “courts applying New York law will enforce a shortened statute of limitations when it is reasonable and agreed to by contract.” (The Court also noted that reducing the claim period to one year is not unreasonable as a matter of law.) See, e.g., Cab Associates v. City of New York, 32 A.D.3d 229, 323, 820 N.Y.S.2d 21 (N.Y. 2006); and,
2. As a general rule, a party may not invoke the provisions of a contract to which it is not an original party. There are limited exceptions to this rule, however,  which include the following theories: (1) assumption;  (2) piercing the corporate veil or alter ego; (3)  incorporation by reference; (4) third-party beneficiary theories; or, (5) waiver [or] estoppel. Arthur Andersen LLP v. Carlisle, 129 S.Ct. 1896, 1902, 173 L.Ed.2d 832 (2009).

Here, the Court held that “assumption” was applicable.  Since the original Alarm Services Contract with Firstline Security Inc. specified that any lawsuit be brought within one year of the event that causing loss, damage or liability, ADT was also entitled to the benefit of that contractual provision, rendering plaintiff’s claim untimely.

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As you may be aware, different types of claims have amounts of times that they may be sued upon under New York law. This is commonly referred to as a “statute of limitations.” Some of the more common examples of this include a breach of contract claim (6 years) and negligence (3 years). (Note:  malpractice is professional negligence, and therefore is also usually governed by a 3-year statute of limitations, although there are some categories of malpractice, such as medical, podiatric and dental malpractice, that have shorter limitations periods.)

But there are a few important exceptions to this rule, such as where the plaintiff is an infant, or under a disability. Another important exception to this rule is the continuous representation doctrine, which states, in essence, that the time on the statute of limitations does not start to  run so long as there is “a mutual understanding of the need for further representation on the specific subject matter underlying the malpractice claim” (McCoy v Feinman, 99 NY2d 295, 306; see Zorn v Gilbert, 8 NY3d 933, 934).

In a recent case, New York’s Appellate Division, Second Department held that a Forbes 500 company’s accounting malpractice claims against the firm that had been hired to perform their audits would be allowed to continue even though some of the audits had been performed more than 3 years before the malpractice claims were brought (and therefore appeared to be time-barred). The reason?

Because “[w]hen undertaking the [plaintiff's] audits for the fiscal years 1998 through 2001, [the defendant audit firm] contemplated that its work and representation on each audit year would continue beyond the issuance of the audit opinion” and that “[t]his contemplation is evidenced by [the defendant's] opinions on prior years’ financial statements, income statements and cash flow contained in each audit opinion.” In other words, since the defendant audit firm was still representing the plaintiff company with respect to those prior audits, the statute of limitations did not begin to run.

Clearly, the plaintiff in this case acted wisely by assuring that their underlying agreement with the audit firm reflected the defendant’s ongoing obligation to correct prior audits, and thereby saved their claim from a rapid defeat.

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