FRAUD CLAIMS AND BREACH OF WARRANTY CLAIMS AGAINST MANUFACTURER

Posted on February 25, 2024February 25, 2024 by David Adelstein

A recent case touches upon two issues that are noteworthy when considering fraud claims and breach of warranty claims against a manufacturer. Below contains a discussion on these claims.

Independent Tort Doctrine

“Florida’s independent tort doctrine provides that a party may not recover in tort for a contract dispute unless the tort is independent of any breach of contract.” MidAmerica C2L Inc. v. Siemens Energy, Inc., 2024 WL 414620, *6 (M.D.Fla. 2024). This means tort allegations and claims MUST be separate and distinct from performance under the contract. Id. (citation omitted).

In MidAmerica C2L, a plaintiff sued a manufacturer relating to sophisticated equipment for a coal gasification plant. The parties entered into different agreements for the equipment and a license where the plaintiff could use the manufacturer’s patented technology for its coal gasification plants. A dispute arose and the plaintiff sued the manufacturer under various legal theories. The manufacturer moved for summary judgment.

Two claims asserted against the manufacturer were grounded in fraudulent misrepresentation theories dealing with monetary damages and rescission of the contract. Both claims dealt with allegations that the manufacturer knew of defects in its equipment, had superior knowledge of the defects, had a duty to disclose the defects, and failed to do so. However, both fraud claims were a restatement of the SAME facts supporting the plaintiff’s breach of contract claims against the manufacturer. The trial court dismissed these claims because of the independent tort doctrine as the same material facts alleged in the fraud claims were alleged in the breach of contract claims.

Rescission

The trial court further found that the plaintiff’s request for rescission was not proper because “[the plaintiff] does not argue, much less demonstrate, that legal remedies are inadequate” to support the equitable relief of rescission. MidAmerica C2L, supra, at *6. The plaintiff attempted to counter by arguing that recission should be warranted because there was a lack of consideration for the contracts. This, however, was shot down because “Florida does not recognize the [equitable] claim of recission based on lack of consideration.” MidAmerica C2L, supra, at *7. Florida law would recognize damages if there was a failure of consideration. Id. (citation omitted).

Breach of Warranty

Additionally, there was a worthwhile discussion on the plaintiff’s claim for breach of warranty of fitness for particular purpose against the manufacturer. Although New York (not Florida) law governed this claim, it is still an important discussion for consideration, particularly since the analysis would be analogous under numerous jurisdictions.

The contract, as common, contained a warranty disclaimer which included a disclaimer for breach of the implied warranty of fitness for a particular purpose.

The elements for breach of implied warranty of fitness for a particular purpose are: (1) the seller, at the time of contracting, has reason to know the particular purpose for which the goods are required, (2) the seller has reason to know that the buyer is relying on the seller’s skill and judgment to select suitable goods for the specified purpose, and (3) the buyer did in fact rely on that skill or judgment. That said, a written disclaimer of a warranty of fitness for purpose precludes a party from relying on a representation that is specifically disclaimed in the agreement.

MidAmerica C2L, supra, at *3.

The warranty disclaimer should put the kibosh on this claim, right? Well, the plaintiff argued that the warranty disclaimer is unconscionable and, thus, should be waived. Under New York law, to argue unconscionability, the plaintiff must show the contract is both procedurally and substantively unconscionable when the contract was made. MidAmerica C2L, supra, at *4 (citation omitted). Regarding both procedural and substantive unconscionability, the court explained:

“[P]rocedural unconscionability considers whether there has been a lack of meaningful choice to accept a challenged provision by evaluating anumber of factors, including ‘(1) the size and commercial setting of the transaction; (2) whether there was a lack of meaningful choice by theparty claiming unconscionability; (3) the experience and education of the party claiming unconscionability; and (4) whether there was disparity inbargaining power.’ ” “[S]ubstantive unconscionability involves an analysis ‘of the substance of the bargain to determine whether the terms wereunreasonably favorable to the party against whom unconscionability is urged.’ ” “Procedural and substantive unconscionability have been described asoperating on a ‘sliding scale,’ meaning that ‘the more questionable the meaningfulness of choice, the less imbalance in a contract’s terms should be tolerated and vice versa.’ ”

MidAmerica C2L, supra, at *4 (internal citations omitted).

Regardless of the plaintiff’s unconscionability argument, the trial court still dismissed the claim. The court found that this argument was simply based on the allegation that the manufacturer preyed on the plaintiff’s lack of bargaining power. Besides, the plaintiff failed to identify any record evidence to remotely support its theory of unconscionability. “The Court finds that [the plaintiff] failed to plead unconscionability in the [complaint], and even if it had preserved this theory of recovery, there is no genuine issue of material fact relating to the applicability of the [warranty] disclaimer and the lack of unconscionability.” MidAmerica C2L, supra, at *5.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

NEGLIGENT INSPECTION CLAIM AGAINST SUPERVISING DESIGN PROFESSIONAL / CONSULTANT

Posted on July 2, 2023July 2, 2023 by David Adelstein

Can a negligence argument be created against consulting design professionals or entities that are involved in the inspection of a trade’s work? The recent opinion in Bautech USA, Inc. v. Resolve Equipment, Inc., 2023 WL 4186395 (S.D.Fla. 2023) contains an interesting fact pattern that touches upon this issue. While the case dealt with a motion to dismiss, it contains a number of issues that may be discussed in follow-up postings.

Here, a prime contractor was hired by Broward County, Florida to install offshore reef mitigation units. The contractor entered into a subcontract with a concrete fabricator to fabricate the reef mitigation units. The contractor also separately hired consultants to inspect the units. The contractor and its consultants rejected the units even after the fabricator implemented design revisions. The fabricator was then terminated and not paid for contract work plus revisions it implemented to finished units. The fabricator sued the contractor and the contractor’s consultants for non-payment under many (ten) different theories of liability claiming it was damaged to the tune of millions of dollars.

In one claim, the fabricator asserted the consultants along with the contractor’s parent entity (that had involvement in the project) were negligent in their inspection of the fabricated units. The contractor and consultants moved to dismiss the negligent inspection claim under the independent tort doctrine and because they argued they did not owe a duty of care to support a negligence claim. The trial court denied this argument. The grounds in which the trial court denied these arguments are important because these grounds create strategic considerations when asserting a negligent claim for economic damages under a negligent inspection theory or negligence theory that the supervising consultants breached their duty of care.

A. Independent Tort Doctrine

With respect to the argument the independent tort doctrine barred the negligent inspection claim, the trial court denied this argument because there wasn’t a contract between the parties, expressing:

To start, the independent tort doctrine does not bar [the fabricator’s] negligence claim against [contractor’s parent entity]. Under Florida law, “a breach of contract, alone, cannot constitute a cause of action in tort….It is only when the breach of contract is attended by some additional conductwhich amounts to an independent tort that such breach can constitute negligence.” To apply, “the [independent tort] doctrine requires contractualprivity between the parties.” Because [fabricator] does not allege that a contract exists between it and [the contractor’s parent entity], the independent tort doctrine is inapplicable and certainly does not bar a tort claim against this Defendant.

Bautech, USA, supra, at *4 (internal citations omitted).

B. Duty of Care

With respect to the argument the Defendants (contractor’s parent entity and consultants) did not owe a duty of care, the trial court denied this argument expressing:

Next, [the fabricator] has identified a source for [the contractor’s parent’s entity] duty in tort — it is the same theory as for [the contractor’s consultants]. [Fabricator] alleges [contractor’s consultants], “each acting as agent/consultants for the County, owed [Plaintiff] a duty, as subcontractorand direct manufacturer of the [u]nits, to fairly, truthfully and properly report the status of the [p]roject to the County and others, in accordance withthe requisite standard of care required by the law.” [Fabricator] then alleges that because [contractor’s parent entity] “also provided personnel forthe inspection of the [u]nits[,]” it “owed the same duties” to [Fabricator] as [the contractor’s consultants].

Bautech, USA, supra, at *5 (internal citations omitted).

Defendants argued they owe no duty of care to inspect as such duty of care is ONLY owed by supervising design professionals, which none of them are, and this duty nevertheless does not extend to subcontractors: “Defendants argue that [fabricator] cannot state of a claim for negligent inspection because Florida appellate courts have declined to extend supervising professionals’ tort duty to subcontractors.” Bautech, USA, at *5. The trial court denied this argument because the precedent relied on by Defendants was a 1993 Florida Supreme Court case that has been overruled and the other case relied on was actually consistent with Florida’s Supreme Court’s leading 1973 opinion dealing with negligence claims against supervising design professionals, A.R. Moyer, Inc. v. Graham, 285 So.2d 397 (Fla. 1973), by considering numerous factors to determine whether such a duty of care by a supervising design professional exists.

In fact, to find a duty under Moyer, “the core issue is the extent to which the Defendant[s] supervised the Plaintiff or had sufficient control over [its] work to be able to exercise ‘economic life or death’ over the Plaintiff[,]” rather than a myopic focus on an individual’s job title. Here, the Amended Complaint indicates [Defendants] had supervisory control over [fabricator] because these Defendants “unfairly and in bad faith rejected completed [u]nits that conformed entirely to the Subcontract requirements, often for noncontractual and non-material issues.” Moreover, [fabricator] alleges the three Defendants were closely involved in the manufacturing process. This is minimally sufficient to plead that [Defendants] owed a duty to [fabricator] as supervising engineers.

Bautech, USA, supra, at *6 (internal citations omitted).

If asserting a negligent inspection claim or negligence claim against design professionals / consultants, keep the A.R. Moyer case (cited above) in mind. Also, keep this opinion in mind to plead and support the negligence claim demonstrating the duty of care that must exist to support such a negligence theory.

PARTY CANNOT SKIRT OUT OF THE VERY FRAUD IT PERPETRATES

Posted on December 27, 2022December 27, 2022 by Edward Garber

An interesting case came out of Florida’s Fourth District Court of Appeal that touches upon two important points.

First, the independent tort doctrine does not apply when there is not a contract between the parties.

Second, an officer cannot escape fraud simply by claiming his or her actions were done as an officer of the company when he or she actively participated in the fraud.

Both of these points are best explained by initially going into the facts of this case. As you will see, the Court’s rationale relates to the premise that a party should not be able to skirt out of the very fraud it perpetrates.

Factual Background

Costa Investors, LLC v. Liberty Grande, LLC, 48 Fla.L.Weekly D7b (Fla. 4^th DCA 2022) involved the ultimate development and construction of four adjacent properties into the Costa Hollywood Hotel. The properties were purchased by a company called Liberty Grande. Its president / manager was also the president of Liberty Grande’s wholly owned subsidiary called Costa Hollywood Property. Liberty Grande transferred the properties to Costa Hollywood Property and the deed was signed by the president / manager.

Shortly after the properties were transferred to Costa Hollywood Property, a group of investors (EB-5 investors) entered into a loan agreement with Liberty Grande for the development of the Costa Hollywood Hotel. The investors were granted a security interest and mortgage in consideration for the loan. However, the real properties at-issue subject to the loan and security interest were the properties Liberty Grande previously transferred to its wholly owned subsidiary, Costa Hollywood Property. The loan agreement was signed by the president / manager.

Liberty Grande defaulted under its loan agreement with its investors. The investors learned that Liberty Grande’s president / manager’s representation that Liberty Grande owned the properties at the time of the loan agreement was untrue. The investors filed an affidavit in the official records with a copy of the loan agreement stating they entered into the loan agreement for the development of the properties.

Costa Hollywood Property sued the investors for slander of title due to the recording of the affidavit. The investors filed a third-party complaint against Liberty Grande and its president / manager. The investors claimed the president / manager committed fraud.

The president / manager moved for summary judgment arguing the fraud claim should be barred by the independent tort doctrine and because the president / manager was not a party to the loan agreement in his individual capacity. The trial court granted summary judgment for the president / manager. This was reversed on appeal.

Fourth District Court of Appeal’s Opinion on Two Important Points

First, the Fourth District Court of Appeal held that the independent tort doctrine did NOT apply in this context.

The independent tort doctrine is a general principle of law that provides “a plaintiff may not recover in tort for a contract dispute unless the tort is independent of any breach of contract.” “This principle only applies, however, to the parties to the contract.”

Here, as [the president / manager] stated below in his statement of undisputed facts and as is apparent from the loan agreement, he was only the signatory for Liberty [Grande]; he was not a party to the Agreement. Accordingly, the trial court’s reliance on the independent tort doctrine to determine that [the president / manager] was not liable was error.

Instead, the court should have analyzed the complaint to determine whether the evidence was sufficient to show that fraud occurred and whether [the president / manager] could be liable for fraud or negligent conduct when he actively participated in the fraud, even when he signed as a corporate officer.

Costa Investors, LLC, supra (internal citations omitted).

Second, the Fourth District Court of Appeal held that the president / manager was NOT excused from fraud simply because he signed the loan agreement in an officer (versus personal) capacity.

“As a general rule, ‘a false statement of fact, to be a ground for fraud, must be of a past or existing fact, not a promise to do something in the future.’ ” “[F]raudulent (‘knowingly false’) representations . . . of a present fact . . . constitute[ ] fraud in the inducement.”

The agreement and Borrower’s Certificate, both signed by [the president / manager] on behalf of Liberty [Grande], made false statements of “existing fact.” Prior to [the president / manager] signing those documents on behalf of Liberty [Grande], he had previously transferred title to the [properties] from Liberty [Grande] to another one of his entities, Costa Hollywood Property. The agreement represented Liberty [Grande] as the owner of [the properties] which was an existing false statement of fact, and the agreement falsely purported to give [the investors] a security interest and mortgage on the [properties]. The Borrower’s Certificate, which [the president / manager] also signed on behalf of Liberty [Grande], made additional false statements of existing fact, including that “all ‘representations and warranties’ made by Liberty [Grande] in the loan agreement were “true and correct in all material respects.” Thus, [the president / manager] was not entitled to summary judgment based upon the court’s conclusion that [he] had not made any false statements of material fact.

The central question is whether [the president / manager] can be held individually liable for this fraud evidenced by the agreement and certificate when he signed as the corporate officer of Liberty [Grande]. We hold that he can.

***

Generally, courts have applied an “active participation theory” in holding officers and directors individually liable when they actively participated in the torts of the corporation. “Under the participation theory, the court imposes liability on the individual as an actor rather than as an owner . . . not predicated on a finding that the corporation is a sham and a mere alter ego of the individual corporate officer.” “Instead, liability attaches where the record establishes the individual’s participation in the tortious activity.”

***

[The president / manager] actively participated in the wrong, i.e., fraud and misrepresentation, by signing the agreement and Borrower’s Certificate purporting to show Liberty [Grande] as the owner of [the properties] when [he] had, on behalf of Liberty [Grande], previously transferred the title from Liberty [Grande] to another one of his entities. [The president / manager] actively participated in offering to [the investors] in the agreement a “security interest, Lien and mortgage” in the “assets that comprise the Project” including “the Land and Improvements thereon” in order to obtain loans from [the investors]. Under the active participation theory, [the president / manager] can be personally liable for his fraudulent statements even though he signed on behalf of Liberty [Grande]. Otherwise, [the president / manager] would be able to perpetrate this flagrant fraud and escape liability behind the shield of his representative character.

Costa Investors, LLC, supra (internal citations omitted).

THE INDEPENDENT TORT DOCTRINE (AND ITS IMPORTANCE)

Posted on October 1, 2022October 1, 2022 by Edward Garber

A non-construction raises an important legal principle. Here it is because it applies to construction disputes. It actually applies to many business-type disputes. It is based on what is widely referred to as the independent tort doctrine:

Florida law does not allow a party damaged by a breach of contract to recover exactly the same contract damages via a tort claim. “It is a fundamental, long-standing common law principle that a plaintiff may not recover in tort for a contract dispute unless the tort is independent of any breach of contract. A plaintiff bringing both a breach of contract and a tort claim must allege, in addition to the breach of contract, “some other conduct amounting to an independent tort.”

Bedoyan v. Samra, 47 Fla.L.Weekly D1955a (Fla. 3d 2022) (internal citations omitted).

The reason this principle–the independent tort doctrine–is important is because it has become common for parties to assert many causes of action against another party in the same lawsuit. Oftentimes, they deal with the SAME damages and underlying conduct. Sometimes, it is the “throw everything but the kitchen sink” approach. Thus, a party may assert a contract claim (or seek contractual damages) in conjunction with numerous tort claims (e.g., negligence, fraud, negligent misrepresentation, breach of fiduciary duty, etc.). Yet, when push comes to shove, the damages sought are no different than the contractual damages, i.e., it is all the same damages based on the same conduct. The damages do not derive from an independent tort (e.g, separate conduct) unrelated to a contractual breach, or contractual damages.

This case of Bedoyan is an example. Here, there was a partnership dispute that was tried. The plaintiff claimed the defendant breached their oral partnership agreement and breached fiduciary duties. The trial court granted defendant’s motion for a directed verdict on plaintiff’s breach of fiduciary duty claim. The plaintiff’s breach of fiduciary duty claim “was not independent from his allegation of breach of contract; the same conduct gave rise to both. As such, there are no damages for breach of fiduciary duty separate and apart from the breach of the contract, and the trial court correctly directed a verdict against [plaintiff] on this issue.” Bedoyan, supra.