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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As you might expect, the answer is a little bit complicated, and the determination of the right measure of damages is inherently fact-specific. That said, here are some of the major principles at play:

First, and as a threshold matter, the employee is entitled to recover the amount of salary and other benefits that (he, she) would have received under the contract – and here’s the important caveat – less certain deductions. (It’s the “fine print that always gets you, isn’t it.)

Those deductions allow the employer a set-off of those amounts that the employee, using his/her best efforts, either earned, or should have earned from other employment since the date that the agreement was ended. However, on this point the defendant bears burden of proving the amount the plaintiff could – or should – have earned through diligent efforts.

Additionally, although the newly-discharged employee is required to try to find similar employment, that does not mean that he/she is barred from starting his/her own business.  It is just that the damages will still be reduced by what plaintiff can reasonably be expected to earn from the venture during the unexpired term of the contract, Cornell v T. V. Development Corp., 17 NY2d 69, 268 NYS2d 29, 215 NE2d 349.

One final point is in order here: the expenses that were necessarily incurred by the employee in the course of seeking new gainful employment are recoverable – provided that the employee has conducted the job search in good faith, and with reasonable prudence, and skill.

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Six months later, ABC brings in its CFO’s son Peter into the company, who has just received his MBA. Within one week of Peter starting his job at ABC, Jim notices that 3 of ABC’s 25 store managers failed to forward him their monthly marketing proposals. Two months later, that number increased to 20 out of the 25. And now, he also learns from two of his favored vendors that Peter, whose title is now Senior Vice President, terminated ABC’s agreements with them – all without Jim’s knowledge, and that he circulated a confidential memorandum – which also bore the CEO and CFO’s signatures – directing that all sales and marketing efforts now be run through him, rather than Jim.

In the face of this embarrassment and the stripping of all his essential job duties, Jim feels compelled to resign. But he is concerned: the job market is much worse now than when he signed the contract, and if he quits, won’t he be automatically forfeiting his right to recover under the employment contract?

Fortunately for Jim, under New York law the answer is no. In New York, if an employee is hired to fill a particular position, any material change in (his, her) duties, or a significant reduction in rank may qualify as a breach of the employment contract. On the other hand, and in the interests of full disclosure, resignation is not without risk: although in this particular fact scenario it is unlikely, a jury may ultimately decide that the change in duties that the employee suffered were not in fact “significant,” and defeat the employee’s breach of contract claim.

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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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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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The underlying, earlier decision from which this more recent decision stems is even more important, because it serves an important reminder to attorneys litigating breach of contract and breach of employment agreement cases: make sure that your causes of action are not only supported with specific factual allegations, but that they are also separately and distinctly pled.

In short, since the Court found that the plaintiff had not particularized any specific violations of the Labor Law, but had only set forth enough facts to sustain a common law (as opposed to statutory) breach of contract claim, the plaintiff was not entitled to recover statutory damages under the Labor Law, and therefore, the Court dismissed the plaintiff’s claims seeking to recover liquidated damages and attorney’s fees based upon the defendants’ alleged violations of Labor Law § 198 (1-a), stating: “Breach of contract claims do not give rise to the relief afforded under Labor Law §198 (1-a). See Gottlieb v. Kenneth D. Laub & Co., Inc., 82 NY2d 457, 464 (1993); Pachter v. Bernard Hodes Group, 10 NY3d 609 (2008).”

One final note: since the plaintiff failed to allege enough factual particulars, his attempt to pierce the defendants’ corporate veil failed as well.

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In 101 Warren Street Associates LLV v. Prestige Homes Realty, LLC, the defendant real estate broker brought a prospective buyer for the plaintiff’s multi-million dollar residential condominium apartment, which at the time was still in the offering plan stages. According to the terms of the brokerage agreement, the broker was entitled to 4% of the sales price, as a result of which the seller advanced the defendant broker over $50,000, representing 20% of the anticipated commission on the sale of this unit.

As has frequently occurred in this economy, the buyer backed out of the deal, indicating that they could no longer afford the $6.8 million unit. Nevertheless, when the seller sought the return of its advance to the broker, though, the broker refused, noting that the seller did receive partial payment for the apartment as part of a settlement agreement it reached with the prospective buyer.

In holding that the seller was entitled to a refund of its advance (and that the broker was liable for breach of contract), the New York County trial court held as follows:

“Here, it is undisputed that the closing, scheduled for April 1, 2009, did not take place because the Buyer was unable to purchase the Unit. Paragraph 2(e), requires reimbursement if there is a failure to convey for any reason, requiring Broker to reimburse Seller with all amounts previously paid to it pursuant to the Brokerage Agreement.

“It is well established that a broker only earns its commission when it procures a buyer ready willing and able to purchase on terms agreed to by the seller. Eastern Consolidated Properties v. Lucas, 285 AD2d 421 (1st Dept. 2001); Prime City Real Estate Co., Inc. v. Hardy, 256 AD2d 80 (1st Dept. 1998). Consequently, the Broker did not earn its commission since it did not produce a Buyer that was ready, willing, and able to purchase the Unit. Accordingly, the Broker was not entitled to the commission because it did not earn it and therefore is not entitled to keep the percentage of the commission paid in advance.”

Fortunately for the broker, the Court did not award the seller its attorneys’ fees (which it could have).

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According to the plaintiff in the Suffolk County case of Kimelstein v. Kimelstein, he was wrongfully frozen out of his 50% interest in a property that he and brother had acquired jointly through a non-party corporation.  More specifically, he contends that pursuant to an oral agreement he made with his brother in 2007, the plaintiff agreed to forgo his interest in the non-party corporation and sell his interest in the Defendant corporation as well as the real property it owned for the sum of $350,000, in exchange for his brother’s promise to make weekly payments in the amount of $850, until such time as Defendants were able to refinance the real property, after which the balance of the $350,000 would become due.

As I’m sure you can guess, the defendants stopped making payments, and now, they moved to dismiss the lawsuit on the grounds that the plaintiff’s claim is barred under New York’s Statute of Frauds because the claim pertains to real estate and there was no written contract.

Although the Court was constrained to dismiss the plaintiff’s breach of contract claims, the Court was clearly troubled by the facts of this case, and therefore allowed the plaintiff’s equitable claims for unjust enrichment and the imposition of a constructive trust to survive, stating:

“Plaintiff’s allegations that he was a family member, that Defendant promised him $350,000 to forego his interest in the property owned by L&J as well as the corporation, that Plaintiff spent time and money over seven years investing in L&J, are sufficient to withstand a motion to dismiss …

“Plaintiff has alleged that Defendants received valuable benefits, including his contributions over the years to the corporate entities and toward the purchase of the real property; that he has given up any claim to ownership of stock in at least one of the corporations and that it would be inequitable for the individual Defendant to hold title to both without affording plaintiff some sort of compensation.”

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In a case that they brought in Federal Court in Upstate New York, Opto Generic Devices Inc. (“OGD”) sued Air Products & Chemicals Inc. (“ACC”) for breach of contract and for consequential damages, asserting that it lost profits when the defendant did not buy its products. In this case, the defendant admitted that the parties had entered into a series of agreements that delineated the scope of work to develop certain products for plaintiff, and included a $400,000 agreement for license rights to these products. In light of the ongoing working relationship between the parties, and the exchange of nearly $1,000,000 between them with regard to the development of this product, the plaintiff was caught off guard when the defendant never actually bought the finished product.

But the plaintiff had one “small” problem with their case – while the contract set forth the parties’ responsibilities as to patent prosecution and maintenance, commercial rights and licenses (i.e., it was a development contract), there was absolutely no provision requiring ACC to buy any OGD products. Consequently, I can’t say I’m surprised that the Court dismissed this aspect of their breach of contract action.

You know the old saying about what happens when you assume something …

It’s just another example of the costs of failing to reduce your agreements to writing.

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