Dannan Realty Corp. v. Harris
157 N.E.2d 597 (N.Y. 1959)
Burke, J.
The plaintiff in its complaint
alleges, insofar as its first cause of action is concerned, that it was induced
to enter into a contract of sale of a lease of a building held by defendants
because of oral representations, falsely made by the defendants, as to the
operating expenses of the building and as to the profits to be derived from the
investment. Plaintiff, affirming the contract, seeks damages for fraud.
At Special Term, the Supreme Court
sustained a motion to dismiss the complaint. On appeal, the Appellate Division
unanimously reversed the order granting the dismissal of the complaint.
Thereafter the Appellate Division granted leave to appeal, certifying the
following question: "Does the first cause of action in the complaint state facts
sufficient to constitute a cause of action?"
The basic problem presented is whether the plaintiff can possibly establish from
the facts alleged in the complaint (together with the contract which was annexed
to the complaint) reliance upon the misrepresentations (Cohen v. Cohen, 1 A D 2d
586, affd. 3 N Y 2d 813).
We must, of course, accept as true
plaintiff's statements that during the course of negotiations defendants
misrepresented the operating expenses and profits. Such misrepresentations are
undoubtedly material. However, the provisions of the written contract which
directly contradict the allegations of oral representations are of equal
importance in our task of reaching a decisive answer to the question posed in
these cases.
The contract, annexed to and made a
part of the complaint, contains the following language pertaining to the
particular facts of representations: "The Purchaser has examined the premises
agreed to be sold and is familiar with the physical condition thereof. The
Seller has not made and does not make any representations as to the physical
condition, rents, leases, expenses, operation or any other matter or thing
affecting or related to the aforesaid premises, except as herein specifically
set forth, and the Purchaser hereby expressly acknowledges that no such
representations have been made, and the Purchaser further acknowledges that it
has inspected the premises and agrees to take the premises 'as is' * * * It is
understood and agreed that all understandings and agreements heretofore had
between the parties hereto are merged in this contract, which alone fully and
completely expresses their agreement, and that the same is entered into after
full investigation, neither party relying upon any statement or representation,
not embodied in this contract, made by the other. The Purchaser has inspected
the buildings standing on said premises and is thoroughly acquainted with their
condition."
Were we dealing solely with a general
and vague merger clause, our task would be simple. A reiteration of the
fundamental principle that a general merger clause is ineffective to exclude
parol evidence to show fraud in inducing the contract would then be dispositive
of the issue (Sabo v. Delman, 3 N Y 2d 155). To put it another way, where the
complaint states a cause of action for fraud, the parol evidence rule is not a
bar to showing the fraud -- either in the inducement or in the execution --
despite an omnibus statement that the written instrument embodies the whole
agreement, or that no representations have been made. (Bridger v. Goldsmith, 143
N. Y. 424; Angerosa v. White Co., 248 App. Div. 425, affd. 275 N. Y. 524;
Jackson v. State of New York, 210 App. Div. 115, affd. 241 N. Y. 563; 3
Williston, Contracts [Rev. ed.], §811A.)
Here, however, plaintiff has in the
plainest language announced and stipulated that it is not relying on any
representations as to the very matter as to which it now claims it was
defrauded. Such a specific disclaimer destroys the allegations in plaintiff's
complaint that the agreement was executed in reliance upon these contrary oral
representations (Cohen v. Cohen, supra). The Sabo case (supra) dealt with the
usual merger clause. The present case, as the Cohen case, additionally, includes
a disclaimer as to specific representations.
This specific disclaimer is one of
the material distinctions between this case and Bridger v. Goldsmith (supra) and
Crowell-Collier Pub. Co. v. Josefowitz (5 N Y 2d 998). In the Bridger case, the
court considered the effect of a general disclaimer as to representations in a
contract of sale, concluding that the insertion of such a clause at the
insistence of the seller cannot be used as a shield to protect him from his
fraud. Another material distinction is that nowhere in the contract in the
Bridger case is there a denial of reliance on representations, as there is here.
Similarly, in Crowell-Collier Pub. Co. v. Josefowitz (supra), decided herewith,
only a general merger clause was incorporated into the contract of sale.
Moreover, the complaint there additionally alleged that further
misrepresentations were made after the agreement had been signed, but while the
contract was held in escrow and before it had been finally approved.
Consequently, this clause, which
declares that the parties to the agreement do not rely on specific
representations not embodied in the contract, excludes this case from the scope
of the Jackson, Angerosa, Bridger and Crowell-Collier cases (supra). (See
Foundation Co. v. State of New York, 233 N. Y. 177.)
The complaint here contains no
allegations that the contract was not read by the purchaser. We can fairly
conclude that plaintiff's officers read and understood the contract, and that
they were aware of the provision by which they aver that plaintiff did not rely
on such extra-contractual representations. It is not alleged that this provision
was not understood, or that the provision itself was procured by fraud. It would
be unrealistic to ascribe to plaintiff's officers such incompetence that they
did not understand what they read and signed. (Cf. Ernst Iron Works v. Duralith
Corp., 270 N. Y. 165, 171.) Although this court in the Ernst case discounted the
merger clause as ineffective to preclude proof of fraud, it gave effect to the
specific disclaimer of representation clause, holding that such a clause limited
the authority of the agent, and hence, plaintiff had notice of his lack of
authority. But the larger implication of the Ernst case is that, where a person
has read and understood the disclaimer of representation clause, he is bound by
it. The court rejected, as a matter of law, the allegation of plaintiffs "that
they relied upon an oral statement made to them in direct contradiction of this
provision of the contract." The presence of such a disclaimer clause "is
inconsistent with the contention that plaintiff relied upon the
misrepresentation and was led thereby to make the contract." (Kreshover v.
Berger, 135 App. Div. 27, 28.)
It is not necessary to distinguish
seriatim the cases in other jurisdictions as they are not, in the main, in point
or, in a few instances, clash with the rule followed in the State of New York.
The marshaling of phrases plucked from various opinions and references to
generalizations, with which no one disagrees, cannot subvert the fundamental
precept that the asserted reliance must be found to be justifiable under all the
circumstances before a complaint can be found to state a cause of action in
fraud. We must keep in mind that "opinions must be read in the setting of the
particular cases and as the product of preoccupation with their special facts"
(Freeman v. Hewit, 329 U.S. 249, 252). When the citations are read in the light
of this caveat, we find that they are generally concerned with factual
situations wherein the facts represented were matters peculiarly within the
defendant's knowledge, as in the cases of Sabo v. Delman (supra) and Jackson v.
State of New York (supra).
The general rule was enunciated by
this court over a half a century ago in Schumaker v. Mather (133 N. Y. 590, 596)
that "if the facts represented are not matters peculiarly within the party's
knowledge, and the other party has the means available to him of knowing, by the
exercise of ordinary intelligence, the truth or the real quality of the subject
of the representation, he must make use of those means, or he will not be heard
to complain that he was induced to enter into the transaction by
misrepresentations. (Baily v. Merrell, Bulstrode's Rep. Part III, p. 94;
Slaughter v. Gerson, 13 Wall. 383; Chrysler v. Canaday, 90 N. Y. 272.)"
Very recently this rule was approved as settled law by this court in the case of
Sylvester v. Bernstein (283 App. Div. 333, affd. 307 N. Y. 778). In this case,
of course, the plaintiff made a representation in the contract that it was not
relying on specific representations not embodied in the contract, while, it now
asserts, it was in fact relying on such oral representations. Plaintiff admits
then that it is guilty of deliberately misrepresenting to the seller its true
intention. To condone this fraud would place the purchaser in a favored
position. (Cf. Riggs v. Palmer, 115 N. Y. 506, 511, 512.) This is particularly
so, where, as here, the purchaser confirms the contract, but seeks damages. If
the plaintiff has made a bad bargain he cannot avoid it in this manner.
If the language here used is not sufficient to estop a party from claiming that
he entered the contract because of fraudulent representations, then no language
can accomplish that purpose. To hold otherwise would be to say that it is
impossible for two businessmen dealing at arm's length to agree that the buyer
is not buying in reliance on any representations of the seller as to a
particular fact.
Accordingly, the order of the
Appellate Division should be reversed and that of Special Term reinstated,
without costs. The question certified should be answered in the negative.
Fuld, J. (dissenting)
If a party has actually induced
another to enter into a contract by means of fraud -- and so the complaint
before us alleges -- I conceive that language may not be devised to shield him
from the consequences of such fraud. The law does not temporize with trickery or
duplicity, and this court, after having weighed the advantages of certainty in
contractual relations against the harm and injustice which result from fraud,
long ago unequivocally declared that "a party who has perpetrated a fraud upon
his neighbor may * * * contract with him in the very instrument by means of
which it was perpetrated, for immunity against its consequences, close his mouth
from complaining of it and bind him never to seek redress. Public policy and
morality are both ignored if such an agreement can be given effect in a court of
justice. The maxim that fraud vitiates every transaction would no longer be the
rule but the exception." (Bridger v. Goldsmith, 143 N. Y. 424, 428.) It was a
concern for similar considerations of policy which persuaded Massachusetts to
repudiate the contrary rule which it had initially espoused. "The same public
policy that in general sanctions the avoidance of a promise obtained by deceit",
wrote that state's Supreme Judicial Court in Bates v. Southgate (308 Mass. 170,
182), "strikes down all attempts to circumvent that policy by means of
contractual devices. In the realm of fact it is entirely possible for a party
knowingly to agree that no representations have been made to him, while at the
same time believing and relying upon representations which in fact have been
made and in fact are false but for which he would not have made the agreement.
To deny this possibility is to ignore the frequent instances in everyday
experience where parties accept * * * and act upon agreements containing * * *
exculpatory clauses in one form or another, but where they do so, nevertheless,
in reliance upon the honesty of supposed friends, the plausible and disarming
statements of salesmen, or the customary course of business. To refuse relief
would result in opening the door to a multitude of frauds and in thwarting the
general policy of the law."
. . .
It was held that even this explicit
disavowal of reliance did not bar the plaintiff from recovery. In answering the
argument that the provision prevented proof either of misrepresentation by the
defendant or reliance on the part of the plaintiff, the Appellate Division, in
an opinion approved by this court, wrote: "A party to a contract cannot, by
misrepresentation of a material fact, induce the other party to the contract to
enter into it to his damage and then protect himself from the legal effect of
such misrepresentation by inserting in the contract a clause to the effect that
he is not to be held liable for the misrepresentation which induced the other
party to enter into the contract. The effect of misrepresentation and fraud
cannot be thus easily avoided" (pp. 119-120).
Although the clause in the contract
before us may be differently worded from those in the agreements involved in the
other cases decided by this court, it undoubtedly reflects the same thought and
meaning, and the reasoning and the principles which the court deemed controlling
in those cases are likewise controlling in this one. Their application, it seems
plain to me, compels the conclusion that the complaint herein should be
sustained and the plaintiff accorded a trial of its allegations.
It is said, however, that the
provision in this contract differs from those heretofore considered in that it
embodies a specific and deliberate exclusion of a particular subject. The quick
answer is that the clause now before us is not of such a sort. On the contrary,
instead of being limited, it is all-embracing, encompassing every representation
that a seller could possibly make about the property being sold and, instead of
representing a special term of a bargain, is essentially "boiler plate."
plaintiff, alleging that the defendant fraudulently misrepresented the value of
the property, sought damages. Again, despite the explicit statement that such a
representation had not been made and the specific disavowal of reliance thereon,
the court upheld the plaintiff's right to bring the action (p. 376).
. . .
The rule heretofore applied by this
court presents no obstacle to honest business dealings, and dishonest
transactions ought not to receive judicial protection. The clause in the
contract before us may lend support to the defense and render the plaintiff's
task of establishing its claim more difficult, but it should not be held to bar
institution of an action for fraud. Whether the defendants made the statements
attributed to them and, if they did, whether the plaintiff relied upon them,
whether, in other words, the defendants were guilty of fraud, are questions of
fact not capable of determination on the pleadings alone. The plaintiff is
entitled to its day in court.