By: Alexander A. Miuccio Published: May 2017

Court Reinstates Subcontractor's Fraud Claim Against Contractor

It is a general rule of law that a party induced by fraud to enter into a contract may, upon discovery of the fraud, elect either to rescind the contract or continue his performance and seek recovery for any damages he may have suffered as a result of the fraud.

In the recent case of Pike Company, Inc., v Jersen Construction Group, LLC, a subcontractor claimed that the general contractor made intentionally false statements in order to induce the subcontractor to enter into the contract.

Background

Pike was the general contractor for a construction project at SUNY Plattsburgh. Pike entered into a subcontract with Jersen under which Jersen would perform masonry work after the “concrete foundations were installed, structural steel was in place, metal framing was erected and the concrete floors had been poured.” Before Jersen began work on the project, Pike was informed by at least one of its other subcontractors that its substrate work was not “accurate, flat or level,” and was deficient. Nevertheless, prior to entering into the subcontract, Pike represented to Jersen that the substrate work “had been erected in accordance with the contract requirements and was plumb, level, and true and that [Pike] had performed a professional survey of the structural steel to confirm the same.”

Pike commenced a lawsuit against Jersen, and Jersen asserted a counterclaim for fraud and breach of contract. In support of its fraud claim, Jersen alleged that Pike’s representations to Jersen were false, and that Pike “concealed and recklessly withheld from Jersen knowledge that the substrate was not dimensionally accurate, flat or level.” Additionally, Jersen alleged that Pike made those false representations “in order to deceive Jersen and induce Jersen to commence installation upon the substrate.” Jersen further alleged that it relied on Pike’s representations and would not have commenced installation of the masonry work had Pike not misrepresented to Jersen that the substrate had been installed in accordance with the contract requirements. Jersen suffered damages as a result of its reliance on Pike’s false representations.

Pike moved to dismiss Jersen’s fraud claim, arguing that it was barred by Section 1.8 of the contract, which provides that “[Jersen] accepts responsibility for the inspection of conditions that could affect the Subcontract Work at the Project site, and based on that inspection, and not in reliance upon any opinions or representations of [Pike], its officers, agents or employees, acknowledges its responsibility to satisfactorily perform the Subcontract Work without additional expense to [Pike].” The trial court agreed and dismissed Jersen’s fraud claim, and Jersen appealed.

Decision

On the appeal, Jersen argued that Section 1.8 is a typical site investigation disclaimer, which “attempts to place the risk of changed conditions on the [sub]contractor by requiring it to investigate the site before bidding and to familiarize itself with all conditions under which the job will be performed”.  According to Jersen, this disclaimer language applied only to site inspections and representations that occurred before execution of the subcontract, and not to any representations made after execution of the subcontract. Jersen pointed out that Section 1.8 is written in the past tense and concerns conditions of the site, rather than referring to conditions of the work performed by others.

The appellate court reinstated Jersen’s fraud claim, holding that although fraud claims can be barred by the existence of a specific disclaimer and the corollary failure to exercise reasonable diligence, the subcontract was ambiguous as to whether the disclaimer clause in Section 1.8 precluded Jersen from relying on any opinions or representations concerning work performed by others after Jersen executed the subcontract. Accordingly, in light of the ambiguous language in Section 1.8, Pike could not conclusively establish its defense at the motion to dismiss stage that the clause “specifically disclaims representations concerning the very matter to which the fraud claim relates”.

Comment

The key factor in determining whether a fraud in the inducement claim can survive a contractual disclaimer is whether the disclaimer is sufficiently specific to match the alleged fraud. Here, the Pike court held that the disclaimer clause was not sufficiently explicit to match Jersen’s fraud claim. In other words, the boilerplate disclaimer provision was not a bar to the fraud in the inducement claim because it did not specifically disclaim reliance by Jersen on Pike’s representations concerning the substrate work. It is worth noting, however, that the denial of the motion to dismiss only preserved Jersen’s claim for the meantime; Jersen still has to prove the claimed fraud at trial.

© Welby, Brady & Greenblatt, LLP.
All Rights Reserved. By visiting this site, you agree to our Terms of Service. For more information please read our Privacy Policy Attorney Advertising