Lipsit v. Leonard

Supreme Court of New Jersey, 1974.

64 N.J. 276, 315 A.2d 25.

Dawson, pp. 485-488


Facts: Leonard employed Lipsit for over seven years under a series of yearly agreements.  Lipsit claimed that these agreements were accompanied by oral promises of a stake in the business in the future.  Leonard finally offered Lipsit a stake in 1968, but Lipsit found the terms unacceptable and was soon terminated.  Lipsit filed a complaint on both contract and tort theories, alleging that Leonard induced him to become and remain employed by fraud.  Lipsit brought suit in New Jersey, but both parties and the trial court agreed that the case was properly to be tried under New York law.  The defendant moved for summary judgment and the motion was granted by the trial court.  Both the contract and tort claims were dismissed.  The plaintiff appealed, and the Appellate Division upheld the dismissal.  The plaintiff then appealed to the Supreme Court of New Jersey.


Issue: Can a tort action for fraud be maintained even if enforcement of the contract on which it’s based is barred by the parol evidence rule?


Rule: Under New York law, the parol evidence rule does not bar evidence of fraud inducing a written agreement when such evidence is introduced in a tort action for money damages rather than an action for breach of contract.


Analysis: These guys are from the New Jersey Supreme Court!  They have to do New York law.  So they make sure to cite plenty of authority from that state’s law.  Since the court is reviewing a summary judgment dismissal, all they have to find in order to reverse is that the plaintiff has a plausible shot as a matter of law under one of the theories.


They find that the contract suit properly fails under the parol evidence rule.  However, New York is found to follow the “out of pocket” rule of damages in cases of fraud in the inducement.  This means that an action can be sustained and the proper measure of damages is “indemnity for the actual pecuniary loss sustained as a direct result of the wrong”.


The defendant tries to argue that the plaintiff shouldn’t get the benefit of New York’s rule because he had filed suit under the majority “benefit of the bargain” rule.  The trial court says that although the plaintiff may have a hard time making a case under the “out of pocket” rule, he should have the chance to try.


Conclusion: The lower courts are reversed as to the dismissal of the tort action.


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