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Commercial Division Rejects Collateral Promise Argument as a Basis for a Fraudulent Inducement Claim

In a recent decision, Justice Anil Singh of the Commercial Division dismissed a counterclaim asserted by Visa against Wal-Mart for fraudulent inducement.  According to Justice Singh, Visa’s allegations failed to satisfy the collateral promise rule as its fraud claim did not concern misrepresentations of present material fact that were collateral to the contract.  Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., No. 652530/2016, 2017 BL 65006 (Sup. Ct. Feb. 27, 2017).

The dispute in Wal-Mart stemmed from an agreement for Wal-Mart to implement a chip-and-PIN protocol so that its customers could use Visa’s credit and debit cards.  Visa alleged that Wal-Mart breached the core terms of the agreement by requiring Visa cardholders to exclusively verify transactions using a PIN and by declining to give customers the option to verify their transactions simply through their signatures.  Specifically, Visa cited two provisions from the parties’ agreement through which it maintained Wal-Mart falsely represented that it would give cardholders the option of signature verification.  Visa argued that Wal-Mart did not intend to perform on these obligations at the time they were made. 

Justice Singh held that a claim for fraudulent inducement of a contract “can be predicated upon an insincere promise of future performance only where the alleged false promise is collateral to the contract the parties executed; if the promise concerned the performance of the contract itself, the fraud claim is subject to dismissal as duplicative of the claim for breach of contract.”[1]  The Court’s analysis then turned on whether the alleged false promise was “directly related to a specific provision of the contract.”[2]

In an attempt to bypass this standard, Visa urged the Court to instead follow a line of cases which maintains that “if a promise was made with a preconceived and undisclosed intention of not performing it, it constitutes a misrepresentation of ‘material existing fact.’”[3]  In reviewing these cases, the Commercial Division concluded that this line of cases applied the same standard as the collateral promise rule—i.e., a fraud claim can only be sustained where there is a misrepresentation of present material fact that is collateral to the contract.  As a result, Justice Singh granted Wal-Mart’s motion to dismiss the fraudulent inducement claim as it solely concerned allegations of misrepresentations involving specific provisions of the Agreement, as opposed to a collateral misrepresentation, and thus was duplicative of Visa’s contract claims.

By Ashley Ochs and Stephen P. Younger

[1] Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., No. 652530/2016, 2017 BL 65006, at *2 (Sup. Ct. Feb. 27, 2017).

[2] Id. at *2-3.

[3] Id. at *3 (citing Sabo v. Delman, 3 N.Y.2d 155 (1957)).