United States District Court, Eastern District of New York
May 8, 2000
PACS INDUSTRIES, INC., PLAINTIFFS,
CUTLER-HAMMER, INC., DEFENDANTS.
The opinion of the court was delivered by: Spatt, District Judge.
MEMORANDUM DECISION AND ORDER
This case concerns allegations of fraud and breach of contract
by Plaintiff, Pacs Industries, Inc. ("Pacs"), against Defendants
Cutler-Hammer, Inc. ("Cutler"). Presently before the Court is
Cutler's motion for judgment on the pleadings pursuant to
The facts of this case can be briefly stated. In December 1994,
Pacs was awarded a contract for the installation of a power plant
in the Philippines. In March 1995, Pacs purchased a "busway," one
of the components necessary for the project, from Cutler for
$22,050. Cutler advertised the particular busway in its catalog
as being for "outdoor" use, and that it was waterproof.
Pacs took deliver of the busway and installed it in the
Philippines. In July 1996, the busway failed, allegedly due to
water seeping in through its seams. Pacs contends that the busway
was defective, and that it spent more than $124,000 in efforts to
remedy the defect. In addition, the contractor on the power plant
project withheld payment to Pacs because of the failure,
resulting in an additional $115,000 in damages to Pacs.
Pacs commenced this action against Cutler, alleging a claim for
breach of contract, and a second claim for fraud. The fraud claim
is premised on Cutler making misleading statements about the
suitability of the busway for outdoor use, and its knowledge that
Pacs intended to use the busways in an outdoor environment. Pacs
also seeks punitive damages based on these misrepresentations.
Cutler now moves for judgment on the pleadings, dismissing the
fraud cause of action on the grounds that it merely restates the
breach of contract claim. In addition, Cutler seeks to dismiss
the punitive damages claim and any claim for damages in excess of
the purchase price on the grounds that the sale contract
contained a clause limiting Cutler's liability to that amount.
As in a motion under Rule 12(b), a court ruling on a motion
under Rule 12(c) is to look only to the allegations of the
complaint and any documents attached to or incorporated by
reference in the complaint, Newman & Schwartz v. Asplundh Tree
Expert Co., 102 F.3d 660, 662 (2d Cir. 1996); to assume all
well-pleaded factual allegations to be true; and to view all
reasonable inferences that can be drawn from such allegations and
documents in the light most favorable to the plaintiff. Burnette
v. Carothers, 192 F.3d 52, 56 (2d Cir. 1999); Dangler v. New
York City Off Track Betting Corp., 193 F.3d 130 (2d Cir. 1999).
The issue to be considered by the Court is not whether a
plaintiff will ultimately prevail, but merely whether the
claimant is entitled to offer evidence to support the claims.
Id., citing Villager Pond, Inc. v. Town of Darien, 56 F.3d 375,
378 (2d Cir. 1995).
In addition to demonstrating the basic elements of fraud —
misrepresentation of a material fact, scienter, justifiable
reliance on those misrepresentations, and injury, Busino v.
Meachem, ___ A.D.2d ___, 704 N.Y.S.2d 690 (3d Dept. 2000);
Dero v. Gardner, 267 A.D.2d 830, 700 N.Y.S.2d 507 (3d Dept.
1999) — a plaintiff alleging a cause of action for fraud arising
out of a contractual dispute must also allege either: "(1) a
legal duty separate and apart from the contractual duty to
perform; (2) a fraudulent representation collateral or extraneous
to the contract; or (3) special damages proximately caused by the
fraudulent representation that are not recoverable under the
contract measure of damages." Bell Sports, Inc. v. System
Software Assocs. Inc., 45 F. Supp.2d 220, 227 (E.D.N.Y. 1999)
citing Bridgestone/Firestone, Inc. v. Recovery Credit Services,
Inc., 98 F.3d 13, 20 (2d Cir. 1996). In Bell Sports, this
Court recognized New York State law which provides that
a simple breach of contract is not to be considered a
tort unless a legal duty independent of the contract
itself has been violated. This legal duty must spring
from circumstances extraneous to, and not
constituting elements of, the contract, although it
may be connected with and dependent upon the
contract. Merely charging a breach of a "duty of
care," employing language familiar to tort law, does
not, without more, transform a simple breach of
contract into a tort claim.
Id., quoting Clark-Fitzpatrick, Inc. v. Long Island Rail Road
Co., 70 N.Y.2d 382, 389, 521 N.Y.S.2d 653, 656-57,
516 N.E.2d 190 (1987).
Even reading the complaint in the light most favorable to Pacs,
the Court cannot discern any legal duty to Pacs that Cutler may
have violated that is independent of their contractual
relationship. Pacs alleges that Cutler made false statements
about its product in advertising materials that Pacs relied upon
in deciding to purchase the busway. However, even if the Court
assumes, without so holding, that these advertisements could
create a legal duty, Pacs still must demonstrate a violation of
that duty that does not turn on the breach of the contract. Id.
An essential elements of a cause of action for fraud is that a
plaintiff relied upon misrepresentations made by the defendant.
See Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 57,
698 N.Y.S.2d 615, 621, 720 N.E.2d 892 (1999) ("an act of deception,
entirely independent or separate from any injury, is not
sufficient to state a cause of action under a theory of [fraud] .
. ."). Here, the only reliance on the advertisements that Pacs
can point to is its purchase of the busway, which is part and
parcel of the breach of contract claim. Tannehill v. Paul
Stuart, Inc., 226 A.D.2d 117, 118, 640 N.Y.S.2d 505, 506 (1st
Dept. 1996) ("the wrongful act alleged in support of the fraud
claim does not differ from the purely contract-related allegation
that defendant did not intend to perform at the time it entered
into the agreement, and therefore fails to state a cause of
action"); Canstar v. J.A. Jones Const. Co., 212 A.D.2d 452,
453, 622 N.Y.S.2d 730, 731 (1st Dept. 1995) ("there is no
assertion that plaintiff allegedly breached any obligation
collateral to or separate and apart from the obligations it had
agreed to perform pursuant to the contract").
The two cases cited by Pacs in support of its fraud claim do
not compel a different conclusion. In both Channel Master Corp.
v. Aluminium Ltd. Sales, 4 N.Y.2d 403, 176 N.Y.S.2d 259,
151 N.E.2d 833 (1958) and Sabo v. Delman, 3 N.Y.2d 155,
164 N.Y.S.2d 714, 143 N.E.2d 906 (1957), the Court of Appeals
specifically noted that the plaintiffs' claims of fraud were not
accompanied by allegations of breach of contract. See Sabo, 3
N Y2d at 159, 164 N.Y.S.2d at 716, 143 N.E.2d 906 ("it is well
to bear in mind that the complaint before us neither asserts a
breach of contract nor attempts to enforce any promise made by
defendants"); Channel Master, 4 N.Y.2d at 408, 176 N.Y.S.2d at
263, 151 N.E.2d 833 ("The present action is in tort, not
contract, depending not upon agreement between the parties, but
rather upon deliberate misrepresentation of fact, relied on by
the plaintiff to his detriment"). Thus, neither Sabo nor
Channel Master support
the argument by Pacs that a party can maintain a cause of action
for fraud where the same transaction is alleged to also
constitute breach of a contract.
Accordingly, Cutler's motion for judgment on the pleadings
dismissing the fraud cause of action is granted.
Cutler also moves to dismiss that portion of Pacs' breach of
contract action that seeks damages in excess of the purchase
price of the busway, and any claim for punitive damages. Cutler's
argument is based on the limitation of liability agreement
contained in the contract of sale. Pacs does not dispute that the
limitation of liability provision exists, but argues that the
provision is unconscionable.
Whether a provision is unconscionable presents an issue of law
for the court. Laidlaw Transportation Inc. v. Helena Chemical
Co., 255 A.D.2d 869, 871, 680 N.Y.S.2d 365, 367 (4th Dept.
1998). Among the factors that courts consider in determining
whether a provision is unconscionable is whether the provision is
clear and conspicuous, whether the party agreeing to the term was
experienced in the field, whether the party had a meaningful
choice in accepting or rejecting the term, and whether it would
be unreasonable to enforce the term as it exists. See e.g.
Suffolk Laundry Services v. Redux Corp., 238 A.D.2d 577, 579,
656 N.Y.S.2d 372, 374 (2d Dept. 1997); Scott v. Palermo,
233 A.D.2d 869, 872, 649 N.Y.S.2d 289, 291 (4th Dept. 1996). However,
where businessmen contract in a commercial setting, a presumption
of conscionability arises. 164 Misc.2d 656, 659, 625 N.Y.S.2d 798,
800 (Sup.Ct. Albany Cty. 1995).
Here, the presumption of conscionability exists, as both Pacs
and Cutler were corporate entities negotiating, by all
appearances, in an arm's-length commercial sale. While Pacs
superficially alleges that the limitation of damages provision
was unconscionable, it offers no facts or allegations to support
that assertion. Nevertheless, it appears from the face of the
complaint that Pacs had some "meaningful choice" in deciding
whether to purchase from Cutler, since the complaint alleges that
the failure of Cutler's busway caused the power plant contractor
to replace it with a busway made by a different manufacturer.
Moreover, the Court sees nothing inherently unreasonable about
allocating the general risk of consequential damages to the buyer
in this situation. The cost of the busway was relatively small,
and the potential consequential damages resulting from the
failure of such an item in a complex facility such as a power
plant would likely expose Cutler to liability far in excess of
its potential profit on the device. In addition, the complaint
indicates that Cutler merely manufactured the device, and that
Pacs took responsibility for installing it, raising the potential
that the busway might become damaged during installation. Under
these circumstances, the Court sees nothing inherently
unreasonable about Cutler's requirement that the purchasers
assume the risk of consequential loss.
Therefore, the Court finds that, as a matter of law, the
limitation of liability provision in the sales contract is not
unconscionable, and Cutler's motion to dismiss any claim for
damages on the first cause of action in excess of the purchase
price of $22,050 is granted.
Finally, as to Cutler's motion to dismiss the claim for
punitive damages, the general rule in New York State is that
punitive damages are not recoverable for an ordinary breach of
contract. Rocanova v. Equitable Life Assurance Society,
83 N.Y.2d 603, 613, 612 N.Y.S.2d 339, 342, 634 N.E.2d 940 (1994).
Because this Court has dismissed Pacs' fraud claim, the exception
stated in Rocanova to the general rule for contract claims that
also involve independent torts, id., does not apply. Moreover,
even if a claim for punitive damages could be maintained on Pacs'
contract claim, the bare allegations that Cutler misrepresented
the capabilities of its busway in its promotional materials does
to the level of "gross," "morally reprehensible," or "of such
wanton dishonesty as to imply a criminal indifference to civil
obligations" as a matter of law. New York University v.
Continental Ins. Co., 87 N.Y.2d 308, 315-16, 639 N.Y.S.2d 283,
287, 662 N.E.2d 763 (1995). Accordingly, Cutler's motion to
dismiss the claim for punitive damages is granted.
For the foregoing reasons, Cutler's motion for judgment on the
pleadings pursuant to Fed.R.Civ.P. 12(c) on Pacs' cause of action
sounding in fraud is GRANTED, Cutler's motion for judgment
dismissing Pacs' cause of action for breach of contract to the
extent that it seeks damages in excess of $22,050 is GRANTED, and
Cutler's motion to dismiss Pacs' claim for punitive damages is
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