Danann Realty v. Harris

NY: Court of Appeals
5 NY 2d 317, 157 NE 2d 597 (1959)

ELI5:

Rule of Law:

A specific disclaimer clause in a contract, which explicitly states that a party is not relying on particular, enumerated representations, will defeat a subsequent claim of fraudulent inducement based on those same representations.

Facts:

During negotiations for the sale of a lease of a building, the defendants orally represented specific figures for the building's operating expenses and profits.
The plaintiff alleged these oral representations were false.
The plaintiff and defendants subsequently entered into a written contract for the sale of the lease.
The contract contained a clause stating the seller made no representations regarding 'expenses, operation or any other matter' except as specifically set forth therein.
The same clause included the purchaser's express acknowledgment that no such representations had been made and that the agreement was entered into 'after full investigation, neither party relying upon any statement or representation, not embodied in this contract'.

Procedural Posture:

The plaintiff sued the defendants in the New York Supreme Court, the state's trial court of first instance.
At Special Term, the Supreme Court granted the defendants' motion to dismiss the complaint for failure to state a cause of action.
The plaintiff, as appellant, appealed to the Appellate Division of the Supreme Court, an intermediate appellate court.
The Appellate Division unanimously reversed the order of the trial court, reinstating the plaintiff's complaint.
The Appellate Division then granted the defendants leave to appeal to the Court of Appeals of New York, the state's highest court, certifying a specific question for its review.

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Issue:

Does a specific disclaimer clause in a written contract, stating the purchaser has not relied on any representations regarding specific matters like operating expenses, preclude a cause of action for fraudulent inducement based on alleged oral misrepresentations about those same matters?

Opinions:

Majority - Burke, J.

Yes, the specific disclaimer precludes the fraud claim. A specific disclaimer of reliance on representations about a particular subject matter within a contract bars a subsequent cause of action for fraudulent inducement based on those same representations. While a general merger clause is ineffective to exclude parol evidence of fraud, the specific disclaimer in this contract is different. The plaintiff has, in the plainest language, stipulated that it was not relying on any representations as to the very matter—operating expenses—about which it now claims it was defrauded. This specific disclaimer destroys the essential element of reliance required for a fraud claim. To hold otherwise would make it impossible for two parties dealing at arm's length to agree that the buyer is not relying on specific representations from the seller, effectively condoning the plaintiff's own misrepresentation within the contract that it was not relying on such statements.

Dissenting - Fuld, J.

No, the disclaimer should not preclude the fraud claim. A party who has induced a contract by means of fraud cannot shield themselves from liability by inserting any form of exculpatory clause into the contract, regardless of its specificity. The fundamental legal principle that 'fraud vitiates every transaction' should control, and public policy prohibits a party from contracting for immunity against the consequences of their own fraud. The clause in this contract, though seemingly specific, is an all-embracing boilerplate provision. The court's long-standing precedent establishes that whether representations were made and relied upon are questions of fact that should be determined at trial, not dismissed based on clever contract drafting intended to shield a wrongdoer.

Analysis:

This decision establishes a crucial distinction between a general merger clause and a specific disclaimer of reliance in contract law. The court held that while a general clause cannot bar a fraudulent inducement claim, a specific disclaimer negates the essential element of reliance. This precedent provides a clear mechanism for sellers to protect themselves against claims of reliance on oral representations by having buyers explicitly disclaim reliance on specific subjects. It places a significant burden on buyers to either verify representations independently or ensure they are incorporated into the final written agreement, thereby narrowing the fraud exception to the parol evidence rule.

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