Choice of Law in Contractual Fraud Claims: New York vs. Delaware

The core elements of a prima facie case of contract-related fraud are generally consistent from state to state.  But within the basic elements of this cause of action are distinctions between states that become particularly salient in the context of sophisticated business transactions.  Choice of law provisions among contracting parties may therefore play an important role in contractual fraud claims.  As New York and Delaware are often designated in contractual choice of law provisions, the differences between these states are particularly relevant.  In this regard, case law demonstrates that it is likely more difficult to establish a prima facie case of contract-related fraud in New York than in Delaware.

The elements of a cause of action for fraud in New York are:

1. Representation was made of a material fact.
2. Representation was untrue.
3. Party making the representation knew it was untrue.
4. Representation was made with the intent to deceive and for  the purpose of inducing the recipient to act upon it.
5. Recipient justifiably relied on the representation.
6. By relying on the untrue statement, the recipient suffered damages.1

Under New York law, the plaintiff needs to establish all of these elements by clear and convincing evidence.2

The elements of a cause of action for fraud in Delaware are:

1. A false representation was made, usually one of fact.
2. Party making the representation had knowledge or belief that the representation was false, or made the representation with the requisite indifference to the truth.
3. Representation was made with the intent to induce the recipient to act, or refrain from acting.
4. Recipient acted or did not act in justifiable reliance on the representation.
5. Recipient suffered damages as a result.3

Notably, under Delaware law, the plaintiff needs to establish all elements by a preponderance of the evidence.4

Therefore, the critical difference between the two states—and a key reason that it may be more difficult to pursue this claim in New York— is the higher burden of proof in New York.  Other distinctions between the elements further demonstrate this point. Namely,

1. New York requires the representation to be a material fact. Delaware does not have this qualification.
2. New York requires that the defendant have knowledge of the falsity of the representation.  In Delaware, an indifference to truth may suffice.

As a result, parties should think carefully when they decide their choice of law provisions, as they can have a significant effect on future claims.


1 See, e.g., DynCorp v. GTE Corp., 215 F. Supp. 2d 308, 326 (S.D.N.Y 2002); Brown v. Lockwood, 76 A.D.2d 721, 730 (2d Dep’t 1988); Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 153 (2d Cir. 1995).

2 See, e.g., Chopp v. Welbourne & Purdy Agency, Inc., 135 A.D.2d 958, 959 (3d Dep’t 1987); Mix v. Neff, 99 A.D.2d 189, 183 (3d. Dep’t 1984).

3 See Lord v. Souder, 748 A.2d 393, 402 (Del. 2000); Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983).

4 See In re Enstar Corp., 593 A.2d 543, 550 (Del. Ch. 1990); Triton Construction Co. v. E. Shore Elec. Servs., Inc. No. 3290-VCP, 2009 WL 1387115, at *26 (Del. Ch. 2009).

 

Topics:  Contract Formation, Fraud, Unconscionable Contracts

Published In: Business Torts Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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