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.

MISTAKES HAPPEN BUT COURTS NOT HERE TO REWRITE BAD CONTRACTS

Posted on August 23, 2020August 23, 2020 by Edward Garber

Mistakes happen. Mistakes even happen in the formation of a contract.

The two types of mistakes are mutual mistake and unilateral mistake. Both can give rise to the reformation or rescission of a contract, although through a clear and convincing standard of evidentiary proof.

With a mutual mistake, reformation of the contract is typically the recourse.

With a unilateral mistake, rescission is typically the recourse; reformation of the contract may be appropriate if there was fraudulent or inequitable conduct by the other party to the contract.

For more information on the legal doctrines known as mutual mistake or unilateral mistake, please check out this article.

If you are in a position where you believe these doctrines may apply, it is imperative that you consult and work with counsel to flesh out the facts to support the clear and convincing standard of evidentiary proof.

It is important to remember, however, that just because you have a bad contract or the other side got the better end of the bargain does NOT mean there was a mistake in the contract formation process. Courts are not here to rewrite bad contracts that a party recognized was a bad contract after-the-fact.

BASIS TO RESCIND A CONTRACT UNDER EQUITABLE REMEDY OF RESCISSION

Posted on July 18, 2020July 18, 2020 by Edward Garber

When a seller of residential real property fails to knowingly disclose defects that are not readily observable and materially affects the value of the real property, this gives rise to a fraudulent nondisclosure or concealment claim, otherwise known as a Johnson v. Davis claim. (See this article that discusses this claim.). This is not the easiest claim to prove because a seller rarely will concede they knew of a hidden defect that they failed to disclose. Thus, discovery is warranted to show they evidently knew but elected not to disclose because doing so would have impacted the sale or the value of the sale. If you believe you have a fraudulent nondisclosure claim, make sure to consult with counsel so that you understand your rights relative to the facts associated with the claim.

In a recent case, Rost Investments, LLC v. Cameron, 45 Fla. L. Weekly D1717a (Fla. 2d DCA 2020), a lessee/potential buyer of residential property entered into a lease with an option to purchase contract. The option to purchase needed to be exercised by the lessee. Immediately after entering into this contract, the lessee claimed the contract should be rescinded based on the lessor’s fraudulent nondisclosure of defects that materially affect the value of the real property and the seller’s refusal to complete warranty-type items on an intake sheet.

First, the lessee claimed that when they moved into the house, the lessor agreed it would repair certain items that were identified on an intake sheet – hot water in the showers, low water pressure, two remote controls for the garage, and the refrigerator needed to be replaced. The lessor did not.

Second, the lessee claimed there were latent defects with the property that the lessor knew about but failed to disclose.

After trial, the trial court granted rescission in favor of the lessee. The Second District Court of Appeals reversed.

Rescission of a contract is an equitable remedy if the party seeking rescission has no adequate remedy at law (such as with a breach of contract claim where monetary damages would be awarded for the breach). Rost Investments, supra (citation omitted).

“[A] party who voluntarily executes a document . . . is bound by its terms in the absence of coercion, duress, fraud in the inducement or some other independent ground justifying rescission.”

***

“While an agreement may be rescinded for fraud relating to an existing fact, as a general rule, rescission will not be granted “for failure to perform a covenant or promise to do an act in the future, unless the covenant breached is a dependent one.” “A covenant is dependent where it goes to the whole consideration of the contract; where it is such an essential part of the bargain that the failure of it must be considered as destroying the entire contract; or where it is such an indispensable part of what both parties intended that the contract would not have been made with the covenant omitted.”

Rost Investments, supra (internal quotations and citations omitted).

The Second District held that the items on the intake sheet that the seller did not address “were [not] so essential to the bargain that [the lessor’s] failure to attend to them destroyed the contracts.” These are items that could have been resolved with money damages through a breach of contract claim, i.e., an action at law. Hence, the lessor’s failure to fix these items did not serve as a basis for the lessee to rescind the contract.

Next, the fraudulent nondisclosure claim for latent defects did not apply because the lessee was leasing the house as the option to purchase the real property had not been exercised. The fraudulent nondisclosure claim applies to buyers of real property. While perhaps the lessee had an argument for fraudulent misrepresentation, the trial court found that the lessor’s nondisclosure of certain defects was not intentional and, without the intent, there was no basis for a fraudulent misrepresentation claim. (Notably, in a fraudulent nondisclosure claim that applies to buyers of real property, a seller’s state of mind is not at-issue– what is at-issue is that the seller had knowledge of a defect not readily observable that materially affects the value of the real property and did not disclose it.) See Rost Investments, supra, n.7.