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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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, you ask, under what circumstances are those clauses enforceable?

Well, first, and as a threshold matter, the question as to whether the parties agreed to arbitrate should be decided by a court, not an arbitrator. That said, and while “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit” Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 131 (2d Cir.2003) (per curium), the preference for arbitration is so strong that, “under the FAA, ‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.’ “ JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 171 (2d Cir.2004) (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)).

So, what are the factors that a court looks to in deciding whether a case must go to arbitration?

The longstanding rule in New York is as follows:

“In deciding whether any part of an action should be directed to arbitration, [the] Court must determine: (i) whether the parties had an agreement to arbitrate; (ii) the scope of that agreement; (iii) if federal statutory claims are asserted, whether Congress intended those claims to be non-arbitrable; and (iv) if some, but not all, of the claims are subject to arbitration, whether to stay the balance of the proceedings pending arbitration. See JLM Indus., 387 F.3d at 169; Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 75-76 (2d Cir.1998).”

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In Fwan Management Co., LLC v. 420 West Broadway Corp., a New York County trial court dismissed the unjust enrichment claims of a shareholder in a real estate cooperative and proprietary lessee of commercial property space’s claims that he had been overcharged by the landlord. And the reason that his claims were dismissed, as noted in my earlier blog post, “What You Can Do Under NY Law if You Don’t Have a Valid Contract,” was based upon a straightforward application of New York law:

“Generally, an enforceable written contract precludes recovery in quasi contract with respect to events arising from the same subject matter. See Curtis Properties Corp. v. Greif Companies, 236 AD2d 237, 239 (1st Dep’t 1997). An unjust enrichment cause of action is ‘precluded by the fact that a simple breach of contract claim may not be considered a tort unless a legal duty independent of the contract-i.e., one arising out of circumstances extraneous to, and not constituting elements of, the contract itself-has been violated.’ Brown v. Brown, 12 AD3d 176, 176 (1st Dep’t 2004). However, a plaintiff may proceed on both breach of contract and quasi-contract theories where there is a genuine dispute as to the existence of a contract. Id

Since, in this case, there was no question that the issues were governed by express contractual language, the plaintiff’s unjust enrichment (i.e., “quasi-contract”) claims were correctly dismissed.

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And when you go back to look at the contract you realize that some of the most important things that you had negotiated somehow never made it into the written contract.

Under New York law, this is called the “parol evidence rule,” and here’s the general rule:

“Absent fraud or mutual mistake, where the parties have reduced their agreement to an integrated writing, the parol evidence rule operates to exclude evidence of all prior or contemporaneous negotiations between the parties offered to contradict or modify the terms of their writing. ( Fogelson v. Rackfay Constr. Co., 300 N.Y. 334, 90 N.E.2d 881; Thomas v. Scutt, 127 N.Y. 133, 27 N.E. 961.) Although at times this rule may seem to be unjust, “on the whole it works for good” ( Mitchill v. Lath, 247 N.Y. 377, 380, 160 N.E. 646) by allowing a party to a written contract to protect *** himself from ‘perjury, infirmity of memory or the death of witnesses.’ ( Thomas v. Scutt, 127 N.Y. 133, 142, 27 N.E. 961, supra; see, generally, Richardson, Evidence [10th ed.], §§ 601-634).

In other words, unless there is fraud involved, or both parties made the same mistake, you cannot enforce these additional terms that had been negotiated unless they were reduced to writing and made part of the contract. And while I hate to agree with the Court on this one, it is, in my view, the right result; otherwise, there would be almost nothing to prevent a party to a contract from being able to avoid his obligations by simply saying that the agreement was changed by some other conversation they had.

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In CBL Path, Inc. v. Lexington Insurance Co., the plaintiff was confronted with an obvious negligence situation – their laboratory mixed up test results, causing a woman to undergo what was otherwise an unnecessary double mastectomy. Although their malpractice policy carried limits of $1 million, the defendant, a subsidiary of AIG, apparently never contacted the claimant to conduct any pre-litigation settlement negotiations, and as a result, the claimant ultimately filed suit, which brought a great deal of negative publicity to CBL.

CBL then sued its insurer for damage to its business reputation, lost profits, as well as the lost business opportunities that were directly caused by the negative publicity that it suffered due to the filing of the underlying negligence action.

Ultimately, and predictably, the Court was constrained to dismiss the action, following New York’s legal precedent, which the Court summarized as follows:

“Since an award of damages exceeding the policy limits is punitive in nature, it “is not applied routinely for breach of contract; and bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract …

“Since courts are understandably reluctant to expose insurers to liability exceeding the policy limits, the bad faith must be for conduct that is clearly more than ordinary negligence, i.e., more than merely poor judgment.”

The Court then articulated the rare circumstance under which an insurer can be held liable in bad faith in New York:

“Naturally, proof that a demand for settlement was made is a prerequisite to a bad-faith action for failure to settle. [Additionally,] the plaintiff in a bad-faith action must show that the insured lost an actual opportunity to settle the . . . claim at a time when all serious doubts about the insured’s liability were removed.

“Bad faith is established only where the liability is clear and the potential recovery far exceeds the insurance coverage” (id. at 454 [internal quotations marks and citations omitted]; see also Smith v General Acc. Ins. Co., 91 NY2d 648, 653; Soto v State Farm Ins. Co., 83 NY2d 718, 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d 576, 578; cf. United States Fid. & Guar. Co. v Copfer, 48 NY2d 871, 873).”

Needless to say, I find this rule disturbing, because it tacitly allows insurers to ignore their fiduciary duties to their insureds – without any fear of adverse consequence. To borrow an old phrase, “There ought to be a law …”

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On a practical level, that means that there are some important facts that must be in place before a New York court will bar a lawsuit, and compel the parties to pursue arbitration; one such fact is that the party seeking to compel arbitration must actually be a party to the underlying contract – or at the very least,  a tacitly acknowledged third-party beneficiary of the contract (i.e., that the contract was entered into for their benefit).

And, according to a New York Federal judge in a May 20 opinion, that was exactly what was missing in Miness v. Ahuja. In that case, the plaintiff sold to defendants several nursing homes that had been owned by his family. As part of the purchase agreement, the defendants agreed to retain plaintiff as a consultant for a period of two years, providing that the nursing homes met certain performance criteria.

After defendants terminated plaintiff – well before the expiration of the two-year period, plaintiff sued, and defendants predictably sought to dismiss the case on the grounds that it was barred by a mandatory arbitration clause that was in the agreement.

There was one “little” problem with this argument, however; the entities that signed the agreement with the plaintiff were not the same ones that were sued. The defendants’ operating companies – which had signed the employment agreement – were not parties to the lawsuit, and therefore, the Court held, lacked standing to enforce the arbitration provision of the contract, stating:

“[T]he only signatories to the Miness Employment Agreement are Miness and the Operating Companies. The Operating Companies are not parties in this action, and thus cannot invoke its provisions in this case. As for the defendants, none are party to the Miness Employment Agreement, and unless they are explicit third party beneficiaries of the contract, they cannot enforce its terms. See Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009) (“A non-party to a contract governed by New York law lacks standing to enforce the agreement in the absence of terms that ‘clearly evidence an intent to permit enforcement by the third party’ in question,” quoting Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38, 45, 495 N.Y.S.2d 1, 485 N.E.2d 208 (1985)). Here, there is nothing in the Miness Employment Agreement that suggests that the defendants have a right to enforce the contract as third parties.”

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In 175 Mulberry Realty v. Kam Cheung Construction, the parties had apparently agreed to settle their long-standing breach of contract action. The only thing that remained to finalize the agreement was the signing and filing of the settlement agreement and the stipulation of both parties discontinuing the lawsuit.

Then the plaintiff changed his mind.

When the defendant sought to enforce the unsigned settlement agreement, the Court refused to go along with it. What bothers me most is how this case got to this point: either the parties had never really reached an agreement, in which case the defendant’s attorneys dropped the ball, or the plaintiff simply reversed course and reneged.

Since the defendant went so far as to draft a whole settlement agreement based upon the terms that had been agreed upon, I suspect that the latter is closer to the truth. And if that is indeed the case, shame on the plaintiff’s attorney for helping a client break his word.

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But what on earth does that mean?

It’s actually rather tricky; in fact, New York’s courts have expressly acknowledged that there is an inherent conflict between the implied good faith in a contract on the one hand, and not allowing plaintiffs to use this implied promise as a sword to create new contractual responsibilities that completely negate the rights that were specifically established by the contract itself.

Perhaps the simplest way to explain this concept – which is concededly more than a bit vague – is that the implied covenant of good faith and fair dealing is breached when the defendant acts to prevent the plaintiff’s ability to perform his end of the contract, or to assure that the benefits of the contract are withheld from the plaintiff. To better illustrate the application of this concept, here’s a few examples from actual cases that were litigated in New York’s courts:

Case #1:         Where a landlord interfered with its tenant’s ability to meet its lease obligation to make repairs, a New York court properly held that the landlord has breached the implied covenant of good faith and fair dealing in their lease agreement. Chemical Bank v. Stahl, 272 AD2d 1, 712 NYS2d 452.

Case #2:           Likewise, in a wrongful termination and breach of contract case, where a consultant who performed work for a corporation in exchange for the option to purchase shares that were exercisable in installments and intrinsically linked to specific events and was then fired without cause, which caused her to forfeit her option (meaning she was not paid at all for her work), her breach of implied covenant of fair dealing was allowed to survive dismissal. Zuckerwise v. Sorceron Inc., 289 AD2d 114, 735 NYS2d 100.

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As a threshold matter, it is important to distinguish between two related, but distinct, causes of action – interference with prospective advantage, and interference with contract.

Interference With Contract – in order to succeed on this claim, the plaintiff must prove that the defendant, with knowledge of the existence of a contract between plaintiff and a third party (i.e., someone else), intentionally and without justification induces one of the contracting parties to breach the contract.

Interference With Prospective Advantage – as its title suggests, this claim does not involve an actual contract, but only a prospective contract. Consequently, the plaintiff’s burden of proof on this claim is higher: here, the plaintiff must prove that the defendant “intentionally, knowingly, and by wrongful means” prevented another (person, entity) from entering into a contract that would have been entered into if not for the defendant’s interference.  is responsible to the other party to the contract for any damage caused by (his, her, its) conduct. Lest you think this is easy, New York’s Pattern Jury Instructions defines “wrongful means” as follows:

“[W]hen physical violence, fraud, misrepresentation or undue economic pressure is used or when civil actions or criminal prosecutions are improperly brought.”

A heavy burden of proof indeed.

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