New Jersey Appellate Division Limits Application of Parol Evidence Rule in Fraudulent Inducement Cases and Finds that Unsophisticated Fraud Claimant Can Only Be Charged With His Actual Knowledge

In a to-be-published opinion in Walid v. Yolanda for Irene Couture, Inc., the New Jersey Appellate Division reaffirmed and clarified the scope of the fraudulent inducement exception to the parol evidence rule. The court also clarified the level of knowledge to be imputed to a contracting party when assessing the reasonableness of that party’s reliance on the alleged misrepresentations.

In Walid, purchasers of a retail business claimed that they were fraudulently induced into buying the business when the seller misrepresented the business’s historical revenues. The seller claimed that the integration clause in the purchase agreement, which provided that the buyers were not relying on any representations not contained in the written agreement, precluded the buyers’ fraud claim. While acknowledging that the parol evidence rule generally prevents reliance upon extrinsic evidence to alter or vary the terms of an integrated written agreement, the Appellate Division, borrowing from New York law, held that the parol evidence rule does not preclude extrinsic evidence of fraud if: (1) the misrepresented facts are “peculiarly within [the disclosing] party’s knowledge” and 2) the facts were intentionally misrepresented by the disclosing party. Because both elements existed in Walid, the Appellate Division found that the parol evidence rule did not preclude the buyers’ fraud claim.

The Appellate Division also found that the buyers’ reliance on the seller’s representations was reasonable, despite the trial court’s finding that the buyers would have discovered the misrepresentations had they retained a business consultant with some expertise in the type of business being acquired. Admitting that a party cannot claim fraud when the falsity of a misrepresentation is “obvious” to that party, the Appellate Division held that the knowledge of an expert in the subject matter of a transaction cannot be imputed to a party in determining whether a misrepresentation would be “obvious” to that party. Instead, the court must consider what is actually known by the party, unless the party in fact retains a consultant with expertise in the field. Because the buyers in Walid did not retain a consultant and because they could not have been expected to discover the fraud by themselves, their reliance on the seller’s misrepresentations was reasonable and justified.

Walid should make it easier for defrauded parties to sustain fraudulent inducement claims in the face of an integration clause because it expressly permits them to avoid the preclusive effect of such a clause if they can show that the misrepresented fact was peculiarly within the disclosing party’s knowledge, which is often the case in fraud claims, and that the disclosing party intentionally misrepresented the fact, which is an element of every fraud claim. The opinion should also assist unsophisticated fraud claimants by allowing them to rely upon their actual knowledge.