Legal Memorandum: Fraud or Negligent Misrepresentation Actions

Issue: Under California law, may a person wrongfully induced to hold stock bring an action for fraud or negligent misrepresentation?

Area of Law: Business Organizations & Contracts, Corporate & Securities
Keywords: Action for fraud or negligent misrepresentation; Person wrongfully induced to hold stock; Stockholders
Jurisdiction: California
Cited Cases: None
Cited Statutes: None
Date: 08/01/2010


Under New York law, generally, a contract clause which specifically disclaims one party’s reliance on the representations of the other with respect to the transaction at issue usually negates the reliance element necessary to support a fraud claim, thus precluding a dissatisfied party from later challenging the transaction based on fraud or deceit.  See Dannan Realty Corp. v. Harris, 5 N.Y.2d 317, 322-23, 184 N.Y.S.2d 599, 603-04 (1959); Comi v. Breslin & Breslin, 257 A.D.2d 754, 683 N.Y.S.2d 345, 348 (3d Dept. 1999).  Therefore, in most cases, a contractual non-reliance provision will compel dismissal on the pleadings or summary judgment against a plaintiff who attempts to state a claim for fraud or deceit after executing a non-reliance agreement.  Dannan Realty Corp., 184 N.Y.S.2d at 603-04.  

There is one important exception to this general rule.  “Where a party to an agreement conceals a material fact which he or she is in good faith bound to disclose, such silence may constitute an actionable representation.”  Comi, 683 N.Y.S.2d at 349.   More to the point:

[E]ven where the parties have executed a specific disclaimer of reliance on a seller’s representations, a purchaser may not be precluded from claiming reliance on any oral misrepresentations if the facts allegedly misrepresented are peculiarly within the sellers’ knowledge.

Tahini Invs., Ltd. v Bobrowsky, 99 A.D.2d 489, 490, 470 N.Y.S.2d 431, 433 (2d Dept. 1984); see Steinhardt Group Inc. v. Citicorp, 272 A.D.2d 255,