A recent New York Court of Appeals decision provides some guidance of relevance to all transactional lawyers and clients relating to potential causes of action for contractual representations and warrantees, which prove to be untrue.

In DDJ Management, LLC, et al., v. Rhone Group L.L.C., et al., 15 N.Y.3d 147___N.Y.S.2d___ (June 24, 2010), the New York Court of Appeals addressed the following questions in its decision to allow Plaintiff DDJ Management’s $40 million fraud claim to proceed to a jury:

• When can a recipient of written representations from a company, which prove to be untrue, sue third parties, such as shareholders and officers of the company making the representations?
• In what circumstances does neglecting to conduct a due diligence investigation impede the  recipient of contract representations from bringing a fraud claim?

The basic facts, in a nutshell, are as follows: