November 25, 2009
DEEPAK BELANI, PLAINTIFF-APPELLANT/ CROSS-RESPONDENT,
SUDHEER GROVER, DEFENDANT-RESPONDENT/ CROSS-APPELLANT, AND SOFTECH VIDEO, INC., DEFENDANT.
On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-4640-06.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 15, 2009
Before Judges Skillman, Gilroy and Simonelli.
Plaintiff Deepak Belani appeals from those parts of the May 19, 2008 order that: 1) dismissed his complaint; and 2) entered judgment against him on the counterclaim in the amount of $236,000, together with $23,957.52 in pre-judgment interest. Defendant Sudheer Grover cross-appeals from that part of the same order denying his request for attorney's fees and costs. We affirm on the appeal. We reverse on the cross-appeal and remand for further proceedings consistent with this opinion.
Plaintiff is the former owner and operator of Softech Corporation,*fn1 an entity that engaged in the sale and distribution of adult entertainment material, consisting principally of videos, digital versatile/video discs (DVDs) and adult magazines (the business). Prior to 2005, plaintiff and his wife socialized with defendant and his wife. In late 2005, plaintiff's wife informed defendant that plaintiff had received an offer for employment from plaintiff's brother in India, and that plaintiff needed to sell the business to return to India. Plaintiff's wife suggested that if defendant had an interest in purchasing the business, he should speak directly to plaintiff.
Following discussions, wherein plaintiff had represented to defendant that the business earned a net profit of $160,000 per year, defendant agreed to purchase the business for $400,000. On December 12, 2005, the parties executed a deposit letter that provided in part: "Subject: $5,000 (Five Thousand Dollars) check # 1317 good faith deposit given to Deepak Belani on December 12th, 2005 for [s]ale of DVD business . . . ." The letter also provided that "[t]he sale price of the business $400,000 was arrived at by multiplying 2.5 years of $160,000 assured net income per year by Deepak Belani. Further terms of the [contract for the sale of the business are] to be finalized within the next fifteen days."
Following payment of the deposit monies, plaintiff permitted defendant to inspect certain business records at plaintiff's home. The records included Excel spreadsheets that summarized the business's financial information relating to the purchase and sale of the corporation's inventory. Those spreadsheets supported plaintiff's representation that the business earned a net profit of $160,000 per year. The records also included United Parcel Service documents pertaining to some of the business's sales. However, the corporation's most recent tax returns were not available for inspection. Nor were the records underlying the information contained on the spreadsheets, plaintiff having advised defendant that the corporation's books and records were in the possession of plaintiff's tax accountant.
Following negotiations, including the exchange of draft contracts, the parties executed a contract for the purchase and sale of the business on January 9, 2006, the same day the parties closed the transaction. The contract designated the seller as Softech Video, Inc., and the buyer as defendant.
Paragraph 1 of the contract provided that seller would transfer to buyer on closing, a business known as "Softech Video," including those designated assets on Exhibit A to the contract. Exhibit A contained two Internet domain names, and two toll-free telephone numbers. Exhibit A also contained: the seller's promise to provide defendant with seller's unspecified marketing plan; a list of seller's business customers, estimated at 1,060 in number; and a list of seller's suppliers. Lastly, Exhibit A contained a promise that plaintiff would be available to assist defendant in the day-to-day conduct of the business for one month following closing. Elsewhere in the contract, plaintiff represented that he would provide to defendant on closing: the corporation's credit card machine, marketing plan, copies of the Excel spreadsheets, and a full disclosure of the corporation's expenses.
Paragraph 2 of the contract set forth the purchase price as $400,000, with defendant paying $250,000 down and executing and delivering a promissory note to plaintiff in the amount of $164,355, payable over thirty-six months with interest at the rate of 6% per annum.*fn2 In addition, defendant agreed to pay to plaintiff the sum of $38,069.49 for the acquired inventory, by paying an additional $23,714.49 outside of closing. The balance of $14,355 was included in the promissory note.
Paragraph 9 of the contract contained the following provision:
The [b]uyer has conducted an independent financial analysis of the business and has found same satisfactory. Buyer is relying on his business knowledge and that of his consultants in the determination of the value of the enterprise[,] and [s]eller expressly denies providing any representations with respect to the business and any terms thereto.
Seller must provide the [b]uyer with the Excel spreadsheets for 2006, 2005, 2004 used for financial analysis after the closing.
Paragraph 11 provided that the seller "represents that the gross sales for 2004 was $375,405.00 and [for the] year 2005 was $366,775.00. Further, [s]eller's principal represents that he will provide a marketing plan and a list of approximately 1,060 customers at the time of closing."
Paragraph 13 provided that the warranties, covenants and promises of the contract would not merge but would survive the closing. Lastly, the contract contained a provision governing payment of legal fees and expenses on default. Exhibit A of the agreement provided in part: "Seller and his/her agent will be liable for legal fees and all other reasonable expenses if the terms of this contract are violated by the [s]eller." That provision contained a reciprocal obligation requiring buyer to indemnify seller for legal fees and other reasonable expenses if the buyer violated the contract.
Immediately following execution of the contract, the parties closed the transaction, with defendant executing the promissory note, a personal guarantee, and a security agreement. Plaintiff executed the bill of sale for the business that contained a restrictive covenant, prohibiting not only the seller but also plaintiff, individually, from competing with the business for a period of five years. On January 17, 2006, the parties executed a separate bill of sale for the inventory which contained defendant's acknowledgement that the balance owed on the inventory of $23,714.49 remained unpaid.
After closing, plaintiff sporadically assisted defendant in the management of the business. During his assistance, plaintiff, who had retained possession of the credit card machine, unilaterally processed some of the sales and applied the monies received against that which was owed to him by defendant. On June 6, 2006, after defendant failed to make payments on the promissory note and on the balance owed for purchase of the inventory, plaintiff filed a complaint against defendant and Softech Video, Inc., seeking $188,069, and for enforcement of plaintiff's security interest in the collateral. The complaint alleged causes of action for breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment.
On August 23, 2006, defendant filed an answer and counterclaim against plaintiff seeking rescission; compensatory and punitive damages; and attorney's fees, alleging causes of action in legal fraud, equitable fraud, breach of contract, and breach of the covenant of good faith and fair dealing.
Defendant also designated Softech Video, Inc., as an "additional defendant" on the counterclaim.*fn3
The parties tried the matter non-jury. On April 16, 2008, the court delivered an oral opinion dismissing the complaint and entering judgment in favor of defendant on the counterclaim in the amount of $236,000, representing the purchase price of $250,000, less $14,000 in sales revenue earned by defendant after closing. The court determined that plaintiff had knowingly misrepresented the net earnings of the business with the intent to deceive defendant into entering into the contract for the purchase of the business. In making that determination, the court acknowledged plaintiff had denied misrepresenting the business's net profit of $160,000 a year; however, the court concluded that plaintiff's testimony was not credible.
Mr. Belani vehemently denies making that assurance. And did everything he could to make it go away. But there it is. [(referring to the December 12, 2005 deposit letter)]. Sincerely Deepak Belani. He is no less sophisticated than Mr. Grover. And I reject his excuse of claim that he didn't read it when he signed it. It is implausible. It is incredible.
And . . . since the net income was well . . . far below that figure, that certainly is material. It's significant. It goes to the essence of the contract. It's a significant misrepresentation, a material misrepresentation.
Based on the inherent plausibility of their testimony, based on credibility I resolve the contradictions in favor of the [defendant-counterclaimant].
The court also determined that plaintiff had made other misrepresentations of fact to defendant prior to the closing. The court found plaintiff had misrepresented that he possessed a "marketing plan," which he allegedly utilized to increase the gross sales of the business from approximately $80,000 in 2003 to $374,000 in 2004. Contrary to plaintiff's representation, the court found that plaintiff did not possess a written marketing plan, and only provided defendant with the names of several magazines or circulars in which plaintiff had advertised the sale of the business's merchandise. The court, describing that misrepresentation as "incredible[,]" concluded that it was "[a]nother fraud in the inducement."
On finding those misrepresentations, the court concluded that defendant had proven fraud against plaintiff.
[T]hat as a result of [d]efendant's reliance on the statements of the [p]laintiff, he sustained damage. That is without a doubt proven by the evidence in this case. Misrepresenting or concealing the identity of the business and the financial soundness of the business is a statement of fact and not mere opinion or judgment.
The representations were false as to profits and identity. I find that the [p]laintiff knew them to be false. They were not mere mistakes. And they were made with the intent to deceive the [d]efendant [counterclaimant]. He knew they were false and used them to deceive the [d]efendant [counterclaimant].
I find the [d]efendant [counterclaimant] was justified in relying on the representation[s]. That the misrepresentations were [ones] that a reasonable man would consider important in reaching a decision in the transaction that occurred here. Certainly, the [d]efendant considered it important and relied on it.
It was both justifiable reliance I find and that the matters were substantial factors to induce [d]efendant [counterclaimant] into the transaction. Plaintiff knew it was important to the [d]efendant and that [d]efendant would rely on it. And that [d]efendant's belief in the representation was a substantial factor in his decision to engage in the transaction.
What is more, the court determined plaintiff breached the contract of sale by not: 1) delivering the books and records of the business including the tax returns; 2) delivering a genuine marketing plan; 3) transferring the actual corporate name, trade names and the good will associated with those names; 4) providing personal assistance to defendant for the agreed upon one-month post-closing period; 5) delivering the credit card machine; and 6) transferring the domain names.
The court found that defendant was damaged "[a]t least . . . to the extent of $250,000." Concluding that defendant had proven fraud in the inducement against plaintiff by clear and convincing evidence, the court dismissed the complaint determining that the contract was voidable and unenforceable against defendant. As to compensatory damages, the court found that defendant was entitled to the return of the $250,000 he paid under the contract. Accordingly, the court awarded defendant $250,000, less $14,000 in sales retained by defendant during the short period that he had operated the business post-closing. The court also ordered defendant to return the unsold inventory to plaintiff, as well as any equipment defendant received at closing.
Defendant filed a motion seeking a determination that he was entitled to attorney's fees and costs pursuant to the provision contained in Exhibit A of the contract. In addition, defendant requested pre-judgment interest on the award.
The court denied the request for attorney's fees but granted pre-judgment interest at the rate fixed by the court rules. In denying the request for attorney's fees, the court determined that by returning the parties to their original positions it had granted defendant's request for rescission and that rescission had to be exercised in total. Simply stated, the court reasoned that having granted rescission, "no contract provisions remain in force to bind either of the parties," including the provision providing for counsel fees on breach of the contract.
On appeal, plaintiff argues that: 1) the trial court's findings of fact and conclusions of law were not supported by sufficient credible evidence in the record; 2) the court erred in granting the remedy of rescission because defendant "failed to act expeditiously and this failure made it impossible to put the parties on the same footing on which they stood prior to the transaction"; 3) the record is devoid of evidence supporting the court's determination of fraud in the inducement; and 4) the court erred by not considering defendant's failure to mitigate in assessing damages.
A judgment shall not be overturned except where, after a careful review of the record and weighing of the evidence, the appellate court determines that "'continued viability of the judgment would constitute a manifest denial of justice.'" In re Adoption of a Child by P.F.R., 308 N.J. Super. 250, 255 (App. Div. 1998) (quoting Baxter v. Fairmont Food Co., 74 N.J. 588, 597-98 (1977)). We will not disturb the factual findings and legal conclusions of a trial court unless they are "'so manifestly unsupported by or inconsistent with the competent, relevant and reasonably credible evidence as to offend the interests of justice.'" Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 484 (1974) (quoting Fagliarone v. Twp. of N. Bergen, 78 N.J. Super. 154, 155 (App. Div. 1963)). Consequently, "the appellate court should exercise its original fact finding jurisdiction sparingly and in none but a clear case where there is no doubt about the matter." Ibid. "'That the case may be a close one or that the trial court decided all evidence or inference conflicts in favor of one side has no special effect.'" Czoch v. Freeman, 317 N.J. Super. 273, 283 (App. Div.) (quoting State v. Johnson, 42 N.J. 146, 162 (1964)), certif. denied, 161 N.J. 149 (1999).
The rationale underlying this limited scope of appellate review is that "a trial judge's findings are substantially influenced by his or her opportunity to hear and see the witnesses and to get a 'feel' for the case that the reviewing court [cannot] enjoy." Twp. of W. Windsor v. Nierenberg, 150 N.J. 111, 132 (1997). For this reason, credibility determinations are entitled to particular deference, because the trial judge has a superior perspective "in evaluating the veracity of witnesses." Id. at 133. However, the same level of deference is not required when we are reviewing a legal conclusion. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995).
"Depending on the remedy sought, an action for fraud may be either legal or equitable in nature." Jewish Center for Sussex Cty. v. Whale, 86 N.J. 619, 624 (1981). "A misrepresentation amounting to actual legal fraud consists of a material representation of a presently existing or past fact, made with knowledge of its falsity and with the intention that the other party rely thereon, resulting in reliance of that party to his [or her] detriment." Ibid. However, unlike legal fraud, to prove equitable fraud, plaintiff must only establish that there was "a material misrepresentation of a presently existing or past fact"; "the maker's intent that the other party rely on it"; and "detrimental reliance by the other party." Liebling v. Garden State Indemn., 337 N.J. Super. 447, 453 (App. Div.), certif. denied, 169 N.J. 606 (2001). Thus, to prove equitable fraud, a plaintiff does not have to establish that the misrepresentation was made with knowledge of falsity.
Where the plaintiff seeks the equitable remedy of rescission, "'[e]ven an innocent misrepresentation can constitute equitable fraud'" justifying relief. Ibid. (quoting Ledley v. William Penn Life Ins. Co., 138 N.J. 627, 635 (1995)). Because legal fraud encompasses the additional element of proof that the party who made the representation did so with knowledge of its falsity, whatever constitutes legal fraud will also constitute equitable fraud. Jewish Center for Sussex Cty., supra, 86 N.J. at 625.
"[U]nder ordinary contract princip[le]s, transactions entered into in reliance upon material misrepresentations are voidable." Massey v. Trump's Castle Hotel & Casino, 828 F. Supp. 314, 325 (D.N.J. 1993). "Intentional misrepresentation and concealment of material facts renders a transaction voidable at the option of the defrauded party." Konsuvo v. Netzke, 91 N.J. Super. 353, 367 (Ch. Div. 1966). "If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient." Restatement (Second) of Contracts § 164 (1) (1981). It is against these principles that we consider plaintiff's arguments.
We have considered plaintiff's arguments in light of the record and applicable law. We conclude that the arguments are without merit. We affirm substantially for the reasons expressed by the trial court in its oral opinion of April 16, 2008, as amplified by its oral opinion of May 5, 2008. R. 2:11-3(e)(1)(A). Nevertheless, we add the following comments.
Plaintiff argues that the trial court's finding he had committed fraud in the inducement of the contract was not supported by sufficient credible evidence in the record. We disagree.
Generally, "past or present . . . profits or income of the subject matter of a contract are material." Trautwein v. Bozzo, 35 N.J. Super. 270, 277 (Ch. Div. 1955), aff'd, o.b., 39 N.J. Super. 267 (App. Div. 1956). "One who . . . buys a business is concerned primarily with the amount of net income that he will obtain from the property in the future, and the most important factor in his estimate of future net income is the amount of income the business has produced in the past." Ibid.
The primary misrepresentation found by the trial court concerned the financial condition of the business. The court determined plaintiff knowingly misrepresented that the business had earned a net profit of at least $160,000 a year. That this misrepresentation was made by plaintiff is evidenced not only by defendant's testimony which the court found credible, but also by the December 12, 2005 deposit letter signed by plaintiff. That the representation was false is evidenced by plaintiff's testimony that in 2004 the business's net income "was around $35,000, not including salaries. If [it] includes salaries it's around $61,000 and change." This testimony was confirmed by the 2004 and 2005 corporate tax returns that disclosed a net income in 2004 of $35,862, after payment of compensation to the officers of $26,000; and in 2005 of $21,786, after payment of compensation to officers of $26,000.
Plaintiff also contends, assuming arguendo he had made a misrepresentation as to the net income of the business, that the court mistakenly determined that defendant had reasonably relied on that misrepresentation in entering into the contract. Defendant asserts that the requisite reliance required for fraud cannot be established where the defrauded party undertakes to make an independent investigation on which he relies in entering the contract. Although we agree with the general principle cited, we disagree that the principle is applicable to this matter.
"Reliance is an essential element of common law fraud." Byrne v. Weichert Realtors, 290 N.J. Super. 126, 137 (App. Div.), certif. denied, 147 N.J. 259 (1996). A buyer of a business is entitled to rely on the seller's statement concerning the business's net profit or income. Trautwein, supra, 35 N.J. Super. at 278. However, "[i]n instances in which a party undertakes an independent investigation and relies on it, there can be no reliance." Byrne, supra, 290 N.J. Super. at 137. Thus, "if the buyer knows, before executing the agreement of purchase and sale, that the seller had misrepresented to him the income of the subject matter of the sale, the buyer is not deceived and may not rescind the contract or recover for fraud." Trautwein, supra, 35 N.J. Super. at 278.
Here, plaintiff permitted defendant to review a summary of the business's financial records but did not produce supporting documents, including the business's past tax returns, advising defendant instead that the business's records were with his accountant. If the financial information disclosed to defendant prior to entering into the contract was accurate, we might concur with plaintiff. However, the information shown to defendant did not support plaintiff's contentions.
At trial, plaintiff testified that he had shown defendant a spreadsheet indicating the net profits of the business were approximately $25,000 to $30,000. Defendant, however, testified that the spreadsheet referenced by plaintiff was not made available to him before closing on the contract for the purchase of the business. The court, after having the opportunity to assess the parties' credibility, determined plaintiff not credible and defendant credible. With plaintiff withholding accurate financial information of the business, it cannot be said that defendant relied upon his own investigation rather than the misrepresentation made by plaintiff.
We now turn to defendant's cross-appeal. Defendant argues that the trial court erred in denying his request for attorney's fees and costs pursuant to the fee-shifting provision contained in the contract. We agree.
"New Jersey has a strong policy disfavoring shifting of attorneys' fees." N. Bergen Rex Transp. v. TLC., 158 N.J. 561, 569 (1999). New Jersey courts generally follow the "American Rule," that is, "the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser." Rendine v. Pantzer, 141 N.J. 292, 322 (1995) (quoting Alyeska Pipeline Serv. Co. v. Wilderness Society, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed. 2d 141, 147 (1975)). That rule is premised on the principle "'that sound judicial administration is best advanced if litigants bear their own counsel fees.'" N. Bergen Rex Transp., supra, 158 N.J. at 569 (quoting Dep't of Envtl. Protection v. Ventron Corp., 94 N.J. 473, 504 (1983)).
However, like most principles, there are exceptions. R. 4:42-9. Additionally, "[c]counsel fees may be allowed where the parties have agreed thereto in advance by stipulation in a . . . contract." Pressler, Current N.J. Court Rules, comment 2.10 on R. 4:42-9 (2010); see also Satellite Gateway Com. v. Musi Dining Car Co., 110 N.J. 280, 286 (1988). Nevertheless, "even where attorney-fee shifting is controlled by contractual provisions, courts will strictly construe that provision in light of the general policy disfavoring the award of attorneys' fees." N. Bergen Rex Transp., supra, 158 N.J. at 570.
Defendant's counsel fee application was based on an express provision of the contract he entered into with plaintiff, which stated: "Seller . . . will be liable for legal fees and all other reasonable expenses if the terms of this contract are violated by the [s]eller." The sixth and seventh counts of defendant's counterclaim asserted claims for breach of contract. In a single ad damnum clause applicable to all counts of his counterclaim, defendant sought, among other things, a judgment awarding him "actual damages, compensatory damages, consequential damages, and punitive damages, along with costs of suit and a reasonable attorney's fee." (Emphasis added).
The trial court concluded based on the evidence presented at trial that defendant had established his claim for breach of contract. The court also concluded that defendant had established his claims for legal and equitable fraud. The court awarded defendant $236,000 in damages, which consisted of the $250,000 defendant had paid plaintiff for the business less $14,000 defendant earned from his operation of the business. The court's original opinion did not include any reference to rescission of the contract.
Defendant then filed a motion for an award of counsel fees in accordance with the previously quoted provision entitling him to such an award "if the terms of the contract are violated by the [s]eller." At argument on the motion, the court accepted plaintiff's contention that the relief the court awarded in its original opinion was rescission based on plaintiff's fraud in inducing defendant to enter into the contract, which "void[ed] the contract ab initio," including the provision for counsel fees. Based on this reasoning, the court denied defendant's motion for a counsel fee award.
Plaintiff argues that "[w]hen a party is entitled to rescission based on fraud, the party may either void or confirm the transaction, but not both. Once that decision made, the party is bound," citing Adjamian v. Schlanger, 20 N.J. Super. 246, 249 (App. Div. 1952). Plaintiff contends that: "[R]escission 'must be exercised in toto and is applied to the contract in its entirety with the result that what has been done is wholly undone and no contract provisions remain in force to bind either of the parties,'" quoting County of Morris v. Fauver, 153 N.J. 80, 97 (1998). While those arguments reflect correct general principles of law where a party affirmatively elects to rescind a contract rather than pursue a claim for breach of contract, we are satisfied that the principles are not applicable to this matter.
Here, defendant never elected to rescind the contract. To be sure, one of the demands for relief in the ad damnum clause of the complaint sought "[e]ntry of an Order rescinding the purported Sale Agreement and Promissory Note[.]" But that ad damnum clause also contained the previously quoted demand for compensatory, consequential and punitive damages, along with costs of suit and a reasonable attorney's fee.
Our court rules authorize a party asserting a claim to demand "[r]elief in the alternative or of several different types." R. 4:5-2; see also R. 4:5-6. Consequently, a party seeking one form of relief does not thereby waive his right to other forms of relief. See Caputo v. Nice-Pak Prods., Inc., 300 N.J. Super. 498, 504 (App. Div.), certif. denied, 151 N.J. 463 (1997); see also Restatement (Second) of Contracts § 378 (1981) (providing in relevant part: that a "manifestation of a choice of one [remedy] by bringing suit or otherwise is not a bar to another remedy unless the remedies are inconsistent and the other party materially changes his position in reliance on the manifestation.") Moreover, the general understanding is that, in seeking alternative relief, a party is seeking whatever remedy will be most advantageous. See Cartel Capital Corp. v. Fireco of N.J., 81 N.J. 548, 564-65 (1980).
Defendant made clear at trial that he was continuing to pursue his claims for compensatory, consequential and punitive damages based on plaintiff's fraud in the inducement and breach of the contract. In his opening, defendant's counsel stated:
We're going to ask the Court to enter judgment against Mr. Belani for $250,000 representing the sum that was taken [and] interest on that money. We're going to ask the Court for punitive damages associated with what we think are plainly false material representations of fact, which will not be substantiated here. We're going to ask the Court to recognize that there was an agreement here that was not performed. And there seems to some -- fraud associated with the formation of the agreement in the first place. And for those reasons, Your Honor, we would request the Court enter judgment in our favor on the counter-claim and dismiss the complaint with prejudice.
Similarly, in his closing summation, defendant's counsel stated:
. . . [D]id the gentleman who took his money perform all of his material obligations post closing? Absolutely not. . . .
So the return is $250,000 that we delivered to Mr. Belani in cash and any other cash consideration that he provided. I think he's entitled to be relieved from his promissory note. One question. And what other measure of damages is Mr. Grover entitled to other than $250,000.
I submit to you there's an application here for punitive damages, specifically pled for in the complaint and conforming with the Statute and pursued here at trial. There are any number of material misrepresentations of fact which have to have been known pre-petition, pre-closing, the manner in which this business conducted itself, the existence of a marketing plan, the net sales number.
All of which in and of itself is an actual and knowing fraud which entitles the gentleman punitive damages . . . .
Defendant's counsel did not refer to the complaint's alternative demand for rescission in either his opening statement or summation.
"Rescission is an equitable remedy and only available in limited circumstances." Intertech Assocs., Inc. v. City of Paterson, 255 N.J. Super. 52, 59 (App. Div. 1992). Where the basis for this remedy is fraud, only the defrauded party may seek rescission. See Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, 130-31 (1962). Therefore, a court may not force rescission upon a party who establishes fraud in the inducement and breach of a contract. See Litton Indus., Inc. v. IMO Indus., Inc., ___ N.J. ___, ___ (2009) (slip op. at 14-15) (holding that plaintiffs were entitled to an award of counsel fees because they "prevailed on one of their breach of contract claims, and the contract required defendants to indemnify plaintiffs for their losses in the event of a breach").
We do not consider defendant's alternative demand for rescission in his counterclaim or any other action taken by defendant to constitute an election for rescission of the contract. Plaintiff's fraudulent inducement of defendant to enter into the contract occurred in late 2005 and plaintiff's breaches occurred in early 2006. Thereafter, defendant did not notify plaintiff that he was rescinding. Instead, he simply refused to pay plaintiff any of the additional sums due under the contract and promissory note, which precipitated plaintiff filing this action in the summer of 2006 and defendant filing the counterclaim the trial court eventually decided in his favor. The case was not tried until approximately twenty months after defendant filed his counterclaim. During the intervening period, neither party took any steps to rescind the contract. In fact, as previously discussed, the subject of rescission, other than as pled in the counterclaim, appears to have first arisen after trial when defendant applied for counsel fees.
Under these circumstances, the trial court's re-characterization of its damages award to defendant as a rescission of the contract did not provide a basis for denial of the counsel fees to which defendant was entitled based on plaintiff's breach of the contract. Accordingly, we reverse that part of the final judgment denying defendant's motion for counsel fees and costs, and remand the matter for the determination of a reasonable award.
Affirmed on the appeal; reversed on the cross-appeal; and remanded to the trial court for further proceedings consistent with this opinion.