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Why Proving Justifiable Reliance in a New York Fraud Claim Isn't Easy


As we discussed previously in our article, "How to Prove a Successful Business Fraud Claim Under New York Law," there are several elements that a plaintiff needs to prove in order to prevail on a fraud claim. One of those elements is that the plaintiff "justifiably relied" to his detriment on the (mis)statements made by the defendant.

Sounds easy enough - right?

Not quite. Especially in the commercial arena.

And here's why: when you're dealing with sophisticated business entities, there are typically clauses contained within the contracts between the two sides involved that require each side to do its own investigation of the deal, and specifically disclaim liability for any reliance the other side may have. Indeed, New York's courts have frequently dismissed fraud claims - at the initial pleadings stage - under precisely these circumstances. See, e.g., HSH Nordbank AG v. UBS AG, __AD3d__, 2012 WL 997166 (March 27, 2012) ("In view of the specific and detailed disclosures and disclaimers set forth above, it was unjustifiable and unreasonable as a matter of law for HSH to place any reliance on UBS's alleged extracontractual representations concerning a contemplated "alignment of interests" between the two parties, or concerning UBS's intended "trading strategy" and "motive and economic interest in the deal").

On the other hand, the Court of Appeals has held that even when the parties are sophisticated business entities, where "a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred." DDJ Management, LLC v. Rhone Group L.L.C., 15 NY3d 147, 154 (2010)."  The question of what constitutes reasonable reliance is always nettlesome because it is so fact intensive." Id. at 155 (citing Schlaifer Nance & Co. v. Estate of Warhol, 119 F3d 91, 98 (2nd Cir. 1997)).

The upshot of the foregoing is that before investing in a business venture, you absolutely must do your own due diligence. If you don't, New York's courts are unlikely to help you to recover your losses. In fact,  your best chance of success is limited to those instances where the defendant deliberately concealed material facts from you - which even if true - is certainly no easy thing to prove.