A common theme in commercial litigation is the assertion of a breach of contract claim and a fraudulent inducement claim. Where both claims are asserted, more times than not, the fraud claim is dismissed under the duplication of claims doctrine – a principle of law that stands for the proposition that a fraud claim cannot stand side-by-side with a breach of contract claim when there is “a valid and enforceable written contract [that] govern[s] a particular subject matter” and the recovery sought arises out of the same facts and circumstances.¹ However, where “a legal duty independent of the contract itself has been violated[,]” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can be litigated with “a simple breach of contract” claim.² 

Today, we examine Offenbach v. Ohlbaum, 2023 N.Y. Slip Op. 02979 (1st Dept. June 6, 2023) (here), a case in which the duplication of claims doctrine served as the basis for the dismissal of a fraud claim asserted by one plaintiff but not the fraud claim asserted by the other plaintiff.

In early 2012, Plaintiff and Defendant Gary Ohlbaum (“Defendant” or “Ohlbaum”) met to discuss a film that Plaintiff was producing by the name of “Original Provisionals.” Following numerous meetings and discussions, along with the exchange of information about the film, its expected costs, etc., Defendant agreed to invest in the film. 

To memorialize their agreement, the parties entered into a subscription agreement (the “Subscription Agreement”). Pursuant to the Subscription Agreement, among other things, the parties formed Plaintiff, Original Provisionals LLC (the “Company”), and Defendant received membership interests in the Company. In exchange for the membership interests, Defendant agreed to “contribute” $2,532,790.00 “to the capital of the Company.” Notably, the Subscription Agreement contained a merger clause, pursuant to which the terms therein constituted the entire agreement between the parties.

The parties further agreed that funding for the project would commence when Defendant approved the cash flow projections for the film. As alleged, Defendant never delivered the subscription payment despite months and years of promises to do so. According to Plaintiffs, Defendant never intended to fund the film. 

Plaintiff sued, alleging, among other things, breach of the Subscription Agreement and fraud.

On summary judgment, the motion court denied Plaintiffs’ motion for summary judgment on their claims for breach of contract, fraud, and intentional infliction of emotional distress and granted Defendant’s cross-motion to dismiss the claims pursuant to CPLR §§ 3211 and 3212. 

The First Department modified the motion court’s order to deny Defendant’s cross-motion as to the breach of contract claim as asserted by the Company, and to grant the Company’s motion for summary judgment as to the breach of contract claim, and otherwise affirmed.

The Court held that “Defendant was entitled to dismissal of [Offenbach’s] breach of contract claim … because Offenbach was not a party to the subscription agreement, which obligated defendant to provide funding to plaintiff Original Provisionals LLC (the Company) for its film project in exchange for an interest in the Company.”³ The Court explained that “Offenbach executed the subscription agreement on behalf of Original Provisionals, and nothing indicated that Offenbach was an intended third-party beneficiary of the agreement.”⁴ 

[Eds. Note: “[A] third party may sue as a beneficiary on a contract made for [its] benefit. However, an intent to benefit the third party must be shown, and, absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts.”⁵ Thus, “[p]arties asserting third-party beneficiary rights under a contract must establish (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for [their] benefit and (3) that the benefit to [them] is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate [them] if the benefit is lost.”⁶ “One is an intended beneficiary if one’s right to performance is appropriate to effectuate the intention of the parties to the contract and either the performance will satisfy a money debt obligation of the promisee to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.”⁷] 

The Court also held that the motion court “should not have dismissed the breach of contract claim as asserted by the Company.”⁸ The Court explained that dismissal was not appropriate because the “plain terms of the subscription agreement” provided that “defendant agreed to pay $2,532,790 in exchange for membership in the Company.”⁹ The Court noted that “[i]t [was] undisputed that the Company performed under the subscription agreement, but defendant failed to pay the specified amount due thereunder.”¹⁰

The Court rejected Defendant’s attempt to inject extra-contractual evidence into the interpretation of the Subscription Agreement.¹¹ The Court explained that defendant’s “statements that the parties’ actual agreement was different than that reflected in the contract, even if true, [was] immaterial because the contract specifically state[d] that it constitute[d] the entire agreement between the parties and could only have been amended by a writing executed by the parties.”¹² 

Turning to the Company’s fraud claim – i.e., that it was fraudulently induced to enter into the Subscription Agreement by Defendant’s misrepresentations that he would provide the promised financing – the Court held that it “was properly dismissed as duplicative of the breach of contract claim.¹³ 

However, Offenbach’s fraud claim was a different story. “Because Offenbach ha[d] no claim for breach of the subscription agreement,” said the Court, “her cause of action for fraud should not have been dismissed as duplicative of the breach of contract claim.”¹⁴ “Nevertheless,” said the Court, “Offenbach’s fraud claim should be dismissed” because she “failed to allege or show that she suffered damages separate from those recoverable by the Company under the subscription agreement.”¹⁵ The Court explained that the “fraud alleged by Offenbach individually is that defendant promised but failed to pay the subscription agreement amount to the Company and subsequently misrepresented that payment was forthcoming.”¹⁶ 

Takeaway

In the First Department, the Court has dismissed fraud claims in which the damages sought by the fraud claim are the same as those sought by the breach of contract claim. This is so even where the plaintiff successfully demonstrates that the alleged misrepresentation is collateral to the contract at issue.¹⁷ This Blog wrote about this scenario here, here, and here. 

In Offenbach, although plaintiff’s fraud claim was not duplicative of the breach of contract claim, her fraud claim was, nevertheless, duplicative of the Company’s breach of contract claim because the damages that she sought were the same as those allegedly incurred by the Company.

In addition to the Court’s examination of Plaintiffs’ fraud claims, it is important to note its holding with respect to Defendant’s attempt to inject parol evidence into the analysis. 

As a general matter, when parties negotiate an agreement in a clear and unambiguous document, their writing will be enforced according to its terms. Evidence outside the four corners of the document as to what the parties really intended (i.e., parol evidence) is generally inadmissible. Among the reasons for this rule is to give “stability to commercial transactions,” and other types of commercial interactions.¹⁸ As the New York Court of Appeals observed, such a rule can safeguard “against fraudulent claims, perjury, death of witnesses … [and] infirmity of memory.…”¹⁹ 

Notwithstanding, questions about the enforceability of promises and commitments that were made at the time of contract formation are often injected into a contract dispute. These questions are typically raised in connection with the meaning and effect of a contract, where one party advances the extra-contractual statements of the other (e.g., in correspondence, emails and text messages; telephone calls; or in-person meetings) to support a claim or defense.

One way in which parties address such disputes before they happen is to include a “merger clause” or “integration clause,” in their contract or agreement. A merger clause provides that the contract represents the complete and final agreement between the parties. 

In New York, the courts have required the parties to specify the agreements and matters being merged or integrated into their agreement.²⁰ Without such specificity, the courts have allowed parol evidence to be used to explain the parties’ intent, especially in cases involving claims of fraudulent inducement.²¹ 

In Offenbach, the merger clause at issue was specific enough for the Court to prevent Defendant from using extra-contractual statements to show that “the parties’ actual agreement was different than that reflected in the [Subscription Agreement].”²² In that regard, as shown by the Court’s analysis, the subject matter of the Subscription Agreement was the investment of money in exchange for membership interests in the Company. Any other description of the parties’ agreement, whether oral or in writing, was specifically “replaced” by the terms of the Subscription Agreement.²³

Footnotes

1. Clark-Fitzpatrick v. Long Is., 70 N.Y.2d 382 (1987).
2. Dormitory Auth. v. Samson Constr. Co., 30 N.Y.3d 704 (2018) (citation omitted).
3. Slip Op. at *1.
4. Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 181-182 (2011).
5. Dormitory Auth., 30 N.Y.3d at 710 (internal quotation marks omitted); Airco Alloys Div. v. Niagara Mohawk Power Corp., 76 A.D.2d 68, 79 (4th Dept. 1980).
6. Matter of Coalition for Cobbs Hill v. City of Rochester, 194 A.D.3d 1428, 1436 (4th Dept. 2021) (internal quotation marks omitted); Mendel v. Henry Phipps Plaza W., Inc., 6 N.Y.3d 783, 786 (2006).
7. Cole v. Metropolitan Life Ins. Co., 273 A.D.2d 832, 833 (4th Dept. 2000) (internal quotation marks omitted); see generally Salzman v. Holiday Inns, 48 A.D.2d 258, 261 (4th Dept. 1975), mod. on other grounds, 40 N.Y.2d 919 (1976).
8. Slip Op. at *1.
9. Id. (citations omitted).
10. Id.
11. Id.
12. Id.
13. Id. (citing, Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 62-63 (1st Dept. 2017)).
14. Id. at *1-*2 (citing, Richbell Info. Servs. v. Jupiter Partners, 309 A.D.2d 288, 305 (1st Dept. 2003)).
15. Id. at *2 (citing, Financial Guar. Ins. Co. v. Morgan Stanley ABS Capital 1 Inc., 164 A.D.3d 1126, 1127 (1st Dept. 2018)).
16. Id.
17. E.g., Salamone v. EIP Global Fund LLC, 2021 N.Y. Slip Op. 02372 (1st Dept. 2021).
18. W.W.W. Assoc. v Giancontieri, 77 N.Y.2d 157, 162 (1990).
19. Id.
20. See Hobart v. Schuler, 55 N.Y.2d 1023, 1024 (1982) (deeming merger clause to be insufficient to bar parol evidence of fraudulent misrepresentation where clause states “all representations, warranties, understandings and agreements between the parties are set forth in the agreement”); LibertyPointe Bank v. 75 E. 125th St., LLC, 95 A.D.3d 706, 706 (1st Dept. 2012) (concluding that merger clause is insufficient to bar claim for fraudulent inducement where it fails to reference particular misrepresentations allegedly made by former president).
21. Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320-21 (1959) (holding that fraudulent inducement claim premised upon representations as to building’s operating expenses and expected profits was barred by merger clause that specifically disclaimed plaintiff’s reliance on representations regarding building’s “physical condition, rents, leases, expenses, [and] operation”); Laduzinski v. Alvarez & Marsal Taxand LLC, 132 A.D.3d 164, 169 (1st Dept. 2015) (holding that merger clause was mere boilerplate that was “too general to bar plaintiff’s claim since it makes no reference to the particular misrepresentations allegedly made here by [defendants].”) (internal quotation marks and citation omitted) (alteration in original).
22. Slip Op. at *1.
23. The merger clause in the Subscription Agreement was not a typical, boilerplate provision. It specifically identified “[c]orrespondence, memoranda, and oral or written agreements that originated before the date of [the] Agreement” as being “replaced in total by [the] Agreement.”