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holding that a misrepresentation concerning a party's ability to perform a contract "in essence is merely a promise to perform under the contract . . . and is not actionable in fraud"
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98 Civ. 5101 (SHS).
July 13, 2004
OPINION ORDER
Dupont Flooring Systems, Inc. brought this action in 1998 to recover $1.1 million allegedly due to it by Discovery Zone, Inc. as a result of a breach of contract. Discovery Zone counter-sued on six causes of action alleging, inter alia, the destruction of its business and lost profits resulting from Dupont's failure to perform under the contract. Plaintiff now moves pursuant to Fed.R.Civ.P. 56 for summary judgment dismissing Discovery Zone, Inc.'s fifth counter-claim for destruction of business and second and sixth counter-claims sounding in fraud. For the reasons set forth below, plaintiff's motion is granted.
I. Background
Discovery Zone was a Delaware corporation that owned and operated more than 300 "pay-for-play children's entertainment centers" called "FunCenters." (Def. 56.1 State. ¶ 3). In March 1996, Discovery Zone went into Chapter 11 bankruptcy and emerged in 1997. (Def. 56.1 State. ¶ 36). In 1998, this action was initiated by plaintiff, and in 1999 Discovery Zone again went into Chapter 11 bankruptcy, and subsequently entered Chapter 7 liquidation.
Before entering bankruptcy in 1999 Discovery Zone filed counter-claims in this action seeking to recover $9 million in damages based on Dupont's alleged failure to perform adequately pursuant to a contract by which Dupont was to install flooring in certain of the FunCenters. In 2001, Discovery Zone amended its counter-claims to seek over $20 million in damages caused by the destruction of its business.
A. Discovery Zone's Emergence from Bankruptcy in 1997
Discovery Zone emerged from its first bankruptcy in 1997 with a plan to reopen remodeled FunCenters with certain features that had not been present in the original stores (Def. 56.1 State. ¶ 4; Fontak Aff. ¶ 16), including laser tag and karaoke facilities. Discovery Zone also planned to improve the quality of food served and increase food sales revenues by installing Pizza Hut franchises at the centers. (Not. Mot., Exh. F, ("Nicholson Depo."), p. 14). Discovery Zone also reduced the number of stores in its chain from 326 to 205. (Def. 56.1 State. ¶ 3). Because Discovery Zone's most lucrative season typically extended from Christmas day through April, Discovery Zone planned to remodel prior to December 25, 1997. (Def. 56.1 State. ¶¶ 3, 4, 36). Discovery Zone hired David Nicholson in 1997 as Vice President of Design and Construction to oversee the implementation of the renovation plans for the FunCenters. (Def. 56.1 State. ¶ 8).
The remodeling project was scheduled to take place in three phases. (Plt. 56.1 State. ¶ 9; Nicholson Depo. p. 49). The first phase was to include the installation of the "soft play" equipment. During the second phase, the FunCenters would be closed for the heavy construction. In the third and final phase — the phase that involved Dupont — the flooring and other incidentals would be completed. (Id.).
The third phase included Discovery Zone's plan to install a special type of rubber flooring manufactured by Gerbert Limited in three areas. (Def. 56.1 State. ¶¶ 5-7; Fontak Aff. ¶ 22, Exh. F, 93-94). The first area would be a laser tag room that would require drywall partitions extending to the ceiling and rubber flooring. (Def. 56.1 State. ¶ 5). The panels were to be moveable, and therefore installed on top of the flooring, so that the room could be reconfigured to create different courses for laser tag. (Def. 56.1 State. ¶ 6). Additionally, the same rubber flooring would be installed in both the "toddler area" and in the area for older children, known as the "cage." (Def. 561. State. ¶ 7).
B. Negotiations between Dupont and Discovery Zone
The negotiations between Dupont and Discovery Zone were initiated in October of 1997 when Nicholson called Ronald Cassin, Vice President of Dupont. (Def. 56.1 State. ¶ 8; Fontak Aff. 137). Discovery Zone claims that Cassin "falsely represented to Mr. Nicholson at that time that Dupont was a national organization of many years experience that could immediately address the flooring work at all of the Discovery Zone fun centers . . ." when in fact Dupont had only come into existence that year. (Def. 56.1 State. ¶ 8). Discovery Zone further alleges that Cassin sent Discovery Zone a list of forty-six national retail chains and falsely claimed that he had "national contracts" with those chains. (Def. 56.1 State. ¶ 9; Discovery Zone Aff. Opp., Exh. 3).
Subsequently, Nicholson and Cassin met in White Plains, New York. (Def. 56.1 State. ¶ 11). According to Dupont, at that meeting, Nicholson told Dupont that Discovery Zone had already hired architects, general contractors and suppliers, and that Dupont would only be responsible for installing "Gerbert rubber flooring" and vinyl tile, in coordination with those other parties. (Fontak Aff. Exh. M, "Master Flooring Installation Proposal").
According to Discovery Zone, at that meeting Dupont was told the scope of the renovation project and "the critical nature of having the work completed by December 22, 1997, the related advertising schedule, that time was of the essence in the performance of the work, the anticipated quantity of new flooring material involved, and the types of flooring involved." (Def. 56.1 State. ¶ 11). Discovery Zone claims that Dupont made further false representations about its ability to manage the project at the meeting in White Plains. (Id.; Def. 56.1 State. ¶ 38).
C. The Flooring Installation Contract
On October 26, 1997, Nicholson signed a flooring installation agreement prepared by Cassin. (Fontak Aff. Exh. M, "Master Flooring Installation Proposal"). The Master Flooring Installation Proposal ("Flooring Installation Plan") describes the duties that Dupont contracted to perform. In that agreement, Dupont agreed to "manage, supervise and perform all aspects of the flooring project including the demolition of the old flooring system and installation of the new flooring system, all in conjunction with Discovery Zone's General Contractors, Architect and Material Suppliers." (Def. 56.1 State. ¶ 13; Fontak Aff. Exh M.). The plan provided that Dupont would be involved in this work at 180 of the 205 Discovery Zone locations. (Fontak Aff. Exh. M).
The Master Flooring Installation Proposal establishes a "cost-plus" pricing method whereby Dupont was to be paid for the cost of labor, materials and installation plus an additional 10% for overhead and 22% for profit and Dupont was to submit an estimate particular to each location before beginning work. (Fontak Aff. Exh. M).
Subsequent to that agreement, Dupont sent out a memorandum to its branch offices stating that it needed to complete the work in the Discovery Zone FunCenters by December 22, 1997, and that all work would be completed within two weeks of commencement. (Def. 56.1 State. ¶ 15; Def. Aff. Opp., Exh. 5, 6).
On November 19, Discovery Zone, Dupont and other parties involved in the renovation of the FunCenters met in Chicago to discuss the project. (Def. 56.1 State. ¶ 16). Discovery Zone alleges that Dupont was further made aware at that meeting that Dupont controlled the construction schedule because it had to be the first party to complete its work before other elements of the project could be completed. (Id.). At that meeting, Dupont was also made aware of the importance of finishing the project before Christmas because Discovery Zone expected to have its highest revenues in the first quarter of the following year, and because Discovery Zone was scheduling an advertising campaign to coordinate with the start of the year, the FunCenter re-openings, and certain movie openings. (Def. 56.1 State. ¶ 17).
D. The Construction
Dupont hired David Alpy as Sales Account Manager to take charge of the installation program. (Def. 56.1 State. ¶ 18). Discovery Zone alleges that Alpy promised he would complete construction on 100 FunCenters by December 1997. (Id.). In December, general contractors had begun working on 109 FunCenters (Def. 56.1 State. ¶ 19), and those locations were available to Dupont and "over half had flooring material on hand at that time for Dupont." (Def. 56.1 State. ¶ 19). Thus, Discovery Zone alleges that Dupont could have begun flooring installation in at least fifty locations in December. However, Discovery Zone alleges that Dupont only began construction on twelve locations before 1998. (Def. 56.1 State. ¶ 19). By February 1998, Discovery Zone alleges that over 100 stores were available for Dupont to commence work, but that only twenty-two renovation projects had been commenced by Dupont. (Def. 56.1 State. ¶ 20).
The parties further agree that Discovery Zone was responsible for at least some of that delay. Nicholson of Discovery Zone testified that in December 1997, he felt "there were enough mitigating circumstances with respect to supply and with respect to drawings that [Dupont] could be excused for the lack of installed flooring at a lot of the Funcenters" prior to 1998. (Fontak Aff. Exh. H at 187).
Sometime in February 1998, Dupont halted work because of unpaid bills, and then discovered after an internal audit that the bill it had submitted to Discovery Zone was inflated by 10%. (Whitfield Aff. ¶¶ 41-42). Discovery Zone alleges that this temporary halt in the work caused further damages.
Dupont made representations in March and April of 1998 that all construction would be finished in May of that year. (Def. 56.1 State. ¶ 28). Those representations also turned out to be false because work had not even begun on forty-three locations in May 1998. (Def. 56.1 State. ¶ 29). Where work had begun, it was, according to Discovery Zone, "deficient at virtually all locations." (Def. 56.1 State. ¶ 29).
E. Lost Profit and Destruction of Business Damages
Discovery Zone claims that Dupont's failure to complete the flooring installations had disastrous consequences for it including causing unsafe conditions, unsatisfactory building inspections and costly changes to the construction plans. (Def. 56.1 State. ¶ 24). One of those changes was that the laser tag particle boards were installed directly into the floors, and therefore could not be moved, contrary to the project design. (Def. 56.1 State. ¶ 25). Another negative impact was that the Discovery Zone customer base was depleted by the ongoing unavailabity or incomplete state of FunCenters, and this allegedly caused damages to the reputation of the company. (Def. 56.1 State. ¶ 26).
Discovery Zone experienced an increase in income for the first quarter of 1998 (Def. 56.1 State. ¶ 32), which it attributes to the advertising campaign it had launched to coincide with the completion of renovations. After that first quarter, revenues began to decrease again. (Id.). Discovery Zone attributes that decrease to customer base erosion as customers realized that construction was not completed and that the FunCenters were in "deplorable condition." (Def. 56.1 State. ¶ 32). Discovery Zone's income did not increase again until the Spring of 1999. (Id.). Discovery Zone alleges that if Dupont had completed its work, Discovery Zone would have enjoyed increasing revenues, and would not have entered bankruptcy. (Def. 56.1 State. ¶ 33). Because the other contractors performed in a timely fashion, Dupont was to blame for construction delays. (Def. 56.1 State. ¶ 34).
Discovery Zone alleges that the damages can be calculated with reasonable certainty because in the Chapter 11 bankruptcy, Discovery Zone closed 105 "under performing" FunCenters, and that the 205 that remained open had successful track records prior to that bankruptcy.
Dupont submitted, as attachments to its motion for summary judgment, two documents prepared for Discovery Zone that indicate various causes of its financial failure. First is Discovery Zone's Form 10K for the year ending in December 1997, which was submitted to the Securities and Exchange Commission, and includes statements indicating that the profitability of Discovery Zone remained uncertain for the upcoming year: "The Company's future revenues will depend to a significant extent upon its ability to respond to changes in consumer tastes. The performance of individual FunCenters may be affected by a variety of local factors. . . ." (Plt. 56.1 State. ¶ 20). Among the factors that Discovery Zone listed as causing uncertainty were the tastes of local customers and the competition in the market for family leisure spending. (Id.).
Dupont also provided an investment solicitation memorandum, prepared by the investment bank Ladenburg Thalman Co. Inc., that listed factors that had affected Discovery Zone's profitability. (Not. Mot., Exh. J). That publication indicates that customers did not perceive Discovery Zone's services to be a good value, and attributes this to two factors: (1) competitors offered "pay-as-you-go" options, while Discovery Zone charged a flat-rate entrance fee, and (2) Discovery Zone increased its prices between twenty-five and forty percent in 1998. To address the negative public perception of Discovery Zone's pricing, the memorandum states that Discovery Zone planned to return to "more competitive pricing" and thereby rebuild attendance. (Not. Mot. Exh J., p. 30). The report also attributed the financial difficulties in 1998 to "significant cost overruns and store disruptions resulting from the inadequate planning and execution of the renovations. This, coupled with 25% to 40% increases in the price of general admissions in the renovated stores, resulted in negative attendance trends after the first quarter of 1998." (Id. p. 2). Also, Dupont has submitted to the Court with its summary judgment motion customer complaint records indicating that at least some of the disappointed customers complained about a variety of issues such as quality of food, length of the games, prices, and scheduling issues. (Fontak Aff. Exh. C).
F. Procedural History
As set forth above, Dupont brought this action to recover $1.1 million for unpaid flooring services provided by it to Discovery Zone. After Discovery Zone entered bankruptcy, the action was dismissed without prejudice by U.S. District Court Judge John Martin in April 1999. Discovery Zone was permitted to amend its Answer and Counter-Claims in 2001, and discovery proceedings recommenced in 2002. In 2003, this action was officially reopened.
In its Amended Answer and Counter-Claims, filed in 2001, Discovery Zone asserted new counter-claims seeking more than $20 million in damages for destruction of business and lost profits. Dupont now seeks summary judgment in its favor on those claims pursuant to Fed.R.Civ.P. 56.
II. Discussion
A. Summary Judgment Standard
Summary judgment may be granted "only when the moving party demonstrates that `there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (quoting Fed.R.Civ.P. 56(c)); accord Celotex Corp. v. Catrett, 477 U.S. 317, 322, (1986). The Court must "view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in its favor, and may grant summary judgment only when `no reasonable trier of fact could find in favor of the nonmoving party.'" Allen, 64 F.3d at 79 (citation omitted) (quoting Lund's, Inc. v. Chem. Bank, 870 F.2d 840, 844 (2d Cir. 1989)).
Though the non-movant enjoys the benefit of all reasonable inferences drawn in its favor, to survive a motion for summary judgment, the non-movant may not rest upon the mere allegations in its pleadings but "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In short, a nonmoving party must set forth sufficient evidence supporting its version of "the claimed factual dispute . . . to require a jury or judge to resolve the parties' differing versions of the truth at trial." Id. at 249 (internal citations omitted).
A. Discovery Zone Has Not Shown It Is Entitled to Damages for the Destruction of its Business
This action is before this Court on diversity jurisdiction, and therefore the substantive law of New York will apply. Typically, in a breach of contract action where one party breaches a construction contract, the other party is entitled to "the market price of completing or correcting the performance." Bellizzi v. Huntley Estates, Inc., 3 N.Y.2d 112, 115-16, 143 N.E.2d 802, 164 N.Y.S.2d 395 (1957); Halsey v. Connor, 287 A.D.2d 597, 731 N.Y.S.2d 760, 761 (2d Dep't 2001). Here, Discovery Zone seeks additional damages because it alleges that Dupont is liable for the lost profits flowing from the destruction of Discovery Zone's entire business.
In order to recover damages for the destruction of business resulting from a contractual breach, a party must show three things: (1) "it must be demonstrated with certainty that such damages have been caused by the breach," (2) "the alleged loss must be capable of proof with reasonable certainty," and (3) "there must be a showing that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made." Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261, 493 N.E.2d 234, 502 N.Y.S.2d 131, 132 (1986) (Kenford I);see also Ashland Mgt. v. Janien, 82 N.Y.2d 395, 624 N.E.2d 1007, 604 N.Y.S.2d 912 (1993); Route 7 Mobil Inc. v. Machnick Builders Ltd. 296 A.D.2d 809, 810, 745 N.Y.S.2d 336, 338 (3d Dep't 2002). Discovery Zone fails to satisfy the requirements set forth in Kenford I as a matter of law.
1. Discovery Zone Cannot Demonstrate that Its Destruction of Business Damages Have Been Caused by Dupont's Breach
In order to recover damages due to the destruction of business, Discovery Zone must show that Dupont's failure to perform the flooring contract was the cause of Discovery Zone's damages. The harm must be "directly traceable" to the breach; the damages cannot be the result of other intervening causes. Kenford I, 67 N.Y.2d at 261.
The evidence submitted by both parties make it manifest that a farrago of factors contributed to construction delays, and Discovery Zone's eventual financial failure. Dupont was one of many contractors, as Discovery Zone concedes. Moreover, Discovery Zone was only able to provide to Dupont a maximum of fifty-five FunCenters that were ready for flooring installation before Christmas. (See e.g., Nicholson Aff., p. 17). Thus, Dupont was not solely responsible for the fact that the renovations had not been completed by Christmas of 1997, so that the advertising campaign could coordinate with the opening of the improved facilities.
In fact, Nicholson of Discovery Zone testified that he did not hold Dupont responsible for the failure to install flooring until sometime after January 1998 in part because of Nicholson's own failure to obtain construction permits. (Id.). He further testified at his deposition that he assigned Dupont less than 75% of the blame associated with the failure to complete construction on the approximately 100 stores that were made available to it. (Nicholson Aff. p. 17-18). Nicholson, and information contained in a document prepared by Discovery Zone, indicate that at least some blame lay with the manufacturer of the flooring materials, Gerbert. (Nicholson Aff. p. 17; Aff. Opp. Exh. 11). Customer complaints also indicate that a certain amount of the customer dissatisfaction that Discovery Zone alleges stemmed from the incomplete renovations was in fact caused by the nature and quality of services offered by Discovery Zone. (Fontak Aff. Exh C.).
Moreover, Discovery Zone itself perceived that its financial difficulties stemmed in part from price increases that were implemented in 1998 at the renovated centers as Ladenburg Thalman reported in the investment solicitation memorandum prepared in 1998: "Attendance rates at Discovery Zone's FunCenters have steadily declined over the last several years due to a number of factors, including Discovery Zone's inability to invest in new entertainment offerings and marketing and its inability to complete the renovation of its stores. Additionally, the Company believes that the increase in general admission prices has had a negative impact on overall admissions. Management believes that a reduction in the admission price should increase attendance levels which, in turn, would result in higher food, game and retail purchases." (Fontak Aff., Exh. J, p. 6).
In similar actions, the New York courts have refused to award damages for lost profits due to a defendant's delay in completing construction where a plaintiff was unable to prove that the delay in construction caused the lost profits. For example, in Teramo v. O'Brien-Sheipe Funeral Home, 283 A.D.2d 635, 637, 725 N.Y.S.2d 87, 90 (2d Dep't 2001) the Appellate Division held that "defendant's unsubstantiated claim that it lost business due to delay in completing construction of the extension to the funeral home is too speculative to allow recovery." See also Movitz v. First Nat'l Bank, 148 F.3d 760 (7th Cir. 1998).
Discovery Zone relies largely on inapposite and distinguishable cases in making its claim that it can prove that Dupont's breaches destroyed Discovery Zone's business. For example, inPerini Corp. v. Great Bay Hotel Casino, Inc., 129 N.J. 479, 499-500, 610 A.2d 364, 374 (1992), the causation of lost profits was clear because there was one contractor responsible for the job; in contrast, Dupont was not the only contractor working in the FunCenters.
Therefore, Discovery Zone has not shown that a material issue of fact exists as to whether it can prove that Dupont's failure to install flooring in a timely fashion caused Discovery Zone's reentry into bankruptcy.
2. Discovery Zone Cannot Prove Its Losses with Reasonable Certainty
Before a party can recover lost profits, the amount of lost profits must be proven with "reasonable certainty," although they do not have to be proven with "mathematical precision." See Ashland Mgmt Inc. v. Janien, 82 N.Y.2d at 403. The lost profits cannot be "merely speculative, possible or imaginary." Kenford I, 67 N.Y.2d at 261.
Additionally, a stricter standard is applied to a "new business" attempting to demonstrate lost profits: "Evidence of lost profits from a new business venture receives greater scrutiny because there is no track record upon which to base an estimate." Schonfeld v. Hilliard, 218 F.3d 164, 172 (2d Cir. 2000); Kenford I, 67 N.Y.2d at 261.
Discovery Zone did not have one profitable quarter from 1995-1997. While Discovery Zone was not a "new" business in 1997, it was emerging from bankruptcy, streamlining its operations, and preparing to enter a new market with newly remodeled stores, new prices, and new services. It was also trying to enter new segments of the market by appealing to older children with laser tag and karaoke. Moreover, after bankruptcy, Discovery Zone had closed one third of its facilities. It could not have accurately predicted how successful its new business strategies would be.Cf. Coastal Aviation, Inc. v. Commander Aircraft Co. 937 F. Supp. 1051, 1070 (S.D.N.Y. 1996).
Discovery Zone fails to establish, as a new business, or otherwise, any reliable measure of its lost profits. Courts repeatedly have rejected claims for lost profits that rest on a "series of assumptions and projections." Kidder, Peabody Co., Inc. v. IAG Intern. Acceptance Group N.V., 28 F. Supp.2d 126, 133-134 (S.D.N.Y. 1998); see also Summit Tax Exempt L.P. II v. Berman, No. 88 Civ. 5839, 1989 WL 152796 (S.D.N.Y. July 19, 1989); Trademark Research Corp. v. Maxwell Online, Inc., 995 F.2d 326 (2d Cir. 1993) (lost profit claim could not have been proven as a matter of law because it was a "network of conjecture" despite the fact that "proof of lost profits was notably voluminous.").
Discovery Zone claims at least $20 million in damages for the destruction of its business. It also seeks to recover, in addition to lost profits, damages for "lost business opportunity, media and advertising costs, extended overhead, escalation costs, costs of storing equipment and materials, interest and financing costs, and depreciation, and other consequential damages including loss of good will, damages to Discovery Zone's business reputation and ultimately the complete loss of business." (Am. Ans. and Counter-Claims, p. 17). Of the total damage, Discovery Zone alleges that $7,691,391 of lost profits was caused by its inability to implement a new pricing structure. (Nicholson Aff. p. 19). To support that claim, Discovery Zone presents various records of revenues by store. (Aff. Opp. Exh. 18).
Discovery Zone provides the testimony of Nicholson and Whitfield, former Discovery Zone employees, to support the contention that Discovery Zone would have been profitable. (Whitfield Aff, Nicholson Aff.). Essentially, those two former Discovery Zone employees testified that after the advertising campaign in the first quarter of 1998, profits began to increase. However "as the customer base recognized that Discovery Zone's stores during this time were in deplorable condition and Discovery Zone was unable to keep its commitments to its customers due to the stalled refurbishing project, in or about the 17th week of 1998, the revenue declined as compared to the same periods in 1997. Indeed it was not until the spring of 1999 — after construction — that the income for the first time exceeded the previous year's income. By then, it was too late and Discovery Zone was essentially bankrupt." (Nicholson Aff. ¶ 56). Discovery Zone further alleges that it spent $3,325,000 on media purchases and did not realize the benefit of 65% of that spending, but provides no specific method whereby it arrived at the figure of 65%. (Nicholson Aff. p. 19). Whitfield stated that the planned cost of the advertising program was "somewhere over nine millon dollars" but does not state what portion of that was actually spent. (Whitfield Aff. ¶ 25).
Aside from figures indicating increased sales in the first quarter of every year, Discovery Zone has not provided any information to support its conjectures about how the timing of advertising and construction would have operated to create a positive customer reaction. Discovery Zone has not provided the analysis of any expert who actually calculated economic harm caused by Dupont; it is unclear which assumptions were used in arriving at the $20 million lost profits figure.
At a minimum, a number of obvious assumptions are necessary to support Discovery Zone's claim that it would have been profitable if Dupont had completed construction in a timely fashion. In general, lost profits could not be determined without assuming that Discovery Zone's post-bankruptcy reorganization plan would have been successful, and an assumption would further have to be made as to how successful it would have been. A calculation of lost profits would necessarily include projections about the numbers of customers who would have used Discovery Zone's facilities, the prices they would have paid, the impact of the economy and the competition on Discovery Zone's business and Discovery Zone's ability to attract customers who did not prefer the competitors' pay-as-you-go model of service. Further, it requires projections about those customers' food and retail purchases. It would also require information about the profitability of the few stores Discovery Zone did complete in time, and the stores that Discovery Zone did not work in at all, so that the profitability of those stores could be subtracted from the damages. None of that exists in this record.
As set forth above, Discovery Zone has no ability to provide reliable profit information based on past earnings. It has failed to present any method of calculating future earnings based on its own sales. Moreover, Discovery Zone's claim of entitlement to lost profits cannot fall within the precedent of the few cases where new businesses have been awarded lost profits based on the earnings of comparable third parties in the same industry because Discovery Zone could not present information of comparable competitors' profitability. See Care Travel Co., Ltd. v. Pan Am. World Airways, Inc., 944 F.2d 983, 994-95 (2d Cir. 1991),Travellers Int'l v. Trans World Airlines, Inc., 41 F.3d 1570, 1579 (2d Cir. 1994); Americana Fabrics, Inc. v. Liebhardt Mills, Inc., 2000 WL 245889, *2 (S.D.N.Y. 2000). Discovery Zone used a different pricing structure than its competitors, and therefore no such comparison is possible. (Exh. J p. 4 "Discovery Zone's closest national competitor, CEC Entertainment, Inc., . . . has an in-store focus on food and game revenue, and does not charge a general admission fee.").
Discovery Zone has only provided a conclusory allegation that it would have made a profit had Dupont not breached the contract and it has failed to support its lost profits calculation with anything but conjecture. Discovery Zone has, in sum, failed as a matter of law to prove its losses with reasonable certainty.
3. Lost Profits and Destruction of Business Damages Were Not Within the Reasonable Contemplation of the Parties
It is a bedrock principle of contract law that a breaching party is only responsible for consequential damages flowing from a breach of contract to the extent those damages are within the contemplation of the parties at the time of contracting, or are reasonably foreseeable. Hadley v. Baxendale, 9 Ex. 341, 156 Eng.Rep. 145 (1854); see also Kenford Company, Inc. v. Erie, 73 N.Y.2d 312, 316-17, 537 N.E.2d 176, 177, 540 N.Y.S.2d 1, 2 (1989) ("Kenford II").
Thus, before Discovery Zone is entitled to survive Dupont's motion for summary judgment, it must show that a material issue of fact exists as to whether lost profit and destruction of business damages were within the "reasonable contemplation" of the parties. "In determining the reasonable contemplation of the parties, the nature, purpose and particular circumstances of the contract known by the parties should be considered . . . as well as `what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made.'" Kenford II, 73 N.Y.2d at 319 (cited in Coastal Aviation, Inc. v. Commander Aircraft Co. 937 F. Supp. 1051, 1065 (S.D.N.Y. 1996).
While Discovery Zone alleges that Dupont knew that time was of the essence in the completion of the contract and that the target completion date for the project was Christmas, 1997, Discovery Zone has not presented any evidence to indicate that it could make a showing at trial that the parties contemplated that a failure to perform would threaten the entire Discovery Zone business. Where a construction contract states that the work must be performed by a date certain, that is insufficient to show that the parties contemplated potential economic loss caused by delays as a basis for damages. See Maimis Knox Group, Ltd. v. Grand Central Zocalo, LLC, 5 A.D.3d 129, 771 N.Y.S.2d 888, 2004 N.Y.S.lip Op. 01339 (1st Dep't, Mar. 2, 2004). There is no evidence of discussions on the subject in the contract negotiations, nor in the contract itself. Thus Discovery Zone has not shown that the lost profit damages were contemplated. See Maimis-Knox, 771 N.Y.S.2d 888.
Discovery Zone cites cases where courts have awarded lost profits damages based on similar failures to complete construction; however, Discovery Zone's reliance is misplaced because in cases such as Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 604 N.Y.S.2d 912 (1993) and Harbor Hill Lithographing Corp. v. Ditler Bros, 76 Misc.2d 145, 348 N.Y.S.2d 920 (Nassau Co., 1973) the consequential damages flowing from a breach were explicitly contemplated by the parties. Here, there is no indication that Dupont could reasonably foresee destruction of business or lost profits resulting from its failure to install flooring materials in accordance with the contract, nor is there any indication that Dupont agreed to accept responsibility for such damages when it agreed to perform work for Discovery Zone.
B. The Fraud Claim Is Impermissibly Duplicative of the Breach of Contract Claim
In the second and sixth counter-claims, Discovery Zone alleges that Dupont engaged in actionable fraud when it misrepresented its ability to perform the contract in order to induce Discovery Zone to enter into that contract. Specifically, Discovery Zone alleges that Dupont intentionally misrepresented its ability to complete the work in a timely fashion by claiming to be a national contractor when in fact Dupont was not established as a national flooring installer, had only been formed in 1997, and had no national contacts. Discovery Zone further alleges that if it had known that Dupont lacked a national presence and did not have the experience to coordinate the renovation project, it would not have entered the contract. Pursuant to New York law, "a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated."Clark-Fitzpatrick, Inc. v. Long Island RR Co., 70 N.Y.2d 382, 389, 521 N.Y.S.2d 653, 656, 516 N.E.2d 190, 193 (N.Y. 1987));see also Bridgestone/Firestone, 98 F.3d 13, 20 (2d Cir. 1996); Multi-Juice, S.A. v. Snapple Beverage Corp., 2003 WL 1961636, at *4 (S.D.N.Y.).
Therefore, in order to bring a claim for fraud based on a misrepresentation supporting a claim for breach of contract, a plaintiff must either: "(i) demonstrate a legal duty separate from the duty to perform under the contract; or (ii) demonstrate a fraudulent misrepresentation collateral or extraneous to the contract; or (iii) seek special damages that are caused by the misrepresentation and unrecoverable as contract damages."Bridgestone/Firestone, 98 F.3d at 20; John Paul Mitchell Sys. v. Quality King Distrib., Inc., No. 99 Civ. 9905, 2001 WL 910405, at *4 (S.D.N.Y. Aug. 13, 2001).
Discovery Zone has not seriously contended that it is entitled to damages under the first or third methods set forth inBridgestone/Firestone; it has not alleged that Dupont owed it a legal duty separate from the contract for flooring, and it has not alleged that it is due the type of special damages that are not recoverable in breach of contract, and that entitle it to pursue a fraud claim. The damages alleged by Discovery Zone are unlike those sought in cases such as Lam v. Am. Exp. Co. 265 F. Supp.2d 225 (S.D.N.Y. 2003) where the plaintiff was entitled to pursue a cause of action for fraud where misrepresentation caused harms that were extraneous to the contract, and not recoverable in a breach of contract action. All of Discovery Zone's alleged injuries can be remedied through damages available for the breach of contract action against Dupont.
Discovery Zone primarily attempts to demonstrate an entitlement to bring a tort claim based on the second category of actionable fraud set forth in Bridgestone/Firestone — "a fraudulent misrepresentation collateral or extraneous to the contract" — based on Dupont's representations that it had a "national presence" and had experience in installing flooring. Thus, the question is whether those alleged misrepresentation was "collateral or extraneous" to the flooring and carpeting agreements.
"[A] valid fraud claim may be premised on misrepresentations that were made before the formation of the contract and that induced the plaintiff to enter the contract." See e.g. Astroworks, Inc. v. Astroexhibit, Inc., 257 F. Supp.2d 609, 616 (S.D.N.Y. 2003) (citing Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994)); Vtech Holdings Ltd. v. Lucent Technologies, Inc., 172 F. Supp.2d 435, 439 (S.D.N.Y. 2001) (citing Grappo v. Alitalia Linee Aeree Italiane, S.p.A., 56 F.3d 427, 434 (2d Cir. 1995); Rocanova v. Equitable Live Assurance Soc'y of the United States, 83 N.Y.2d 603, 614, 612 N.Y.S.2d 211, 211 (1997)).
For example, in First Bank of the Americas v. Motor Car Funding, Inc., 257 A.D.2d 287, 292, 690 N.Y.S.2d 17, 21 (1999), plaintiff's fraud claim survived alongside its contract claim because defendants mischaracterized facts about loans sold to the plaintiff. In a similar case, Stewart v. Jackson Nash, 976 F.2d 86, 89 (2d Cir. 1992), the U.S. Court of Appeals for the Second Circuit allowed a fraud claim to survive alongside a breach of contract claim where the law firm hiring the plaintiff falsely induced him to accept their offer of employment by making a collateral false statement that it served a particular client and was developing a practice in an area of law in which the plaintiff specialized.
Generally, for a misrepresentation of present fact to give rise to a claim for fraudulent inducement, it must be collateral or extraneous to the contract, and it must be made to induce a party to enter the contract. See e.g., Cougar Audio, Inc. v. Reich, No. 99 Civ. 4498, 2000 WL 420546, at *6 (S.D.N.Y. 2000). For example, a promise to promote a prospective employee after hiring, which was not included in the employment contract, was an integral part of that employee's inducement to enter the contract, and therefore gave rise to a separate claim for fraudulent inducement. See Hirsch v. Columbia University, College of Physicians and Surgeons, 293 F. Supp.2d 372, 380 (S.D.N.Y. 2003).
A representation that in essence is merely a promise to perform under the contract is different from a misrepresentation inducing a party to enter a contract, and is not actionable in fraud. Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 250 N.E.2d 214, 302 N.Y.S.2d 799 (1969); see also Deutsche Asset Mgmt, Inc. v. Callaghan, No. 01 Civ. 4426 2004 WL 758303, at *10 (April 7, 2004); Slapshot Beverage Co., Inc. v. Southern Packaging Mach., Inc., 980 F. Supp. 684, 690 (E.D.N.Y. 1997);Rolls-Royce Motor Cars, Inc. v. Schudroff, 929 F. Supp. 117, 123 (S.D.N.Y. 1996).
The various misrepresentations that Dupont allegedly made were not "collateral or extraneous to the contract." Promises "such as representations of expertise and resources, are not considered collateral to the contract because they `simply underscore the defendant's purported intention and ability to perform the contract' and are thus `simply part and parcel of the intention to perform.'" John Paul Mitchell Sys., 2001 WL 910405, at *4 (citing Crabtree, 776 F. Supp. at 162-63. For example, in Rolls Royce, where the false statements concerned the defendant's ability to pay the sums due under the contract, thus its ability to perform, there was no cause of action for fraud. Rolls-Royce Motor Cars, Inc. v. Schudroff, 929 F. Supp. 117, 124 (S.D.N.Y. 1996).
III. Conclusion
Discovery Zone has failed to meet its burden as a non-movant of showing any material issue of fact that, if resolved in its favor, would entitle it to recover destruction of business and lost profit damages at trial. As set forth above, the second and six causes of action, seeking to recover for fraudulent inducement, are impermissibly duplicative of the breach of contract claims. Discovery Zone also fails to raise an issue of fact on its claim for destruction of business damages and lost profits because it has presented no method of calculating the value of the business, nor has it indicated that it can refute Dupont's showing that a variety of causes contributed to Discovery Zone's eventual bankruptcy. Accordingly, Dupont's motion for summary judgment dismissing the second, fifth and sixth counter-claims is granted in whole.
SO ORDERED.