When is a Breach of Contract an Unfair Business Practice -- Virginia

Courts in many jurisdictions work hard to prevent parties from turning every breach of contract, no matter how egregious, into a tort claim. Plaintiffs often want to add tort claims because they may be able to recover additional compensatory damages that would not be available in a vanilla breach of contract situation. In addition, a tort claim may allow the plaintiff to recover exemplary or punitive damages, or a multiple of the compensatory damages, as well as attorneys' fees.

In Virginia, a party's conduct gives rise to both a contract and tort claim only in limited circumstances. In a recent case, the Virginia Supreme Court explained that to "recover in tort, the duty tortiously or negligently breached must be a common law duty, not one existing between the parties solely by virtue of the contract." Augusta Mut. Ins. Co. v. Mason, 645 S.E.2d 290, 293 (Va. 2007) (internal quotes omitted). http://www.courts.state.va.us/opinions/opnscvwp/1061339.pdf. A tort claim only occurs when there is a "violation of certain common law and statutory duties involving the safety of persons and property, which are imposed to protect the broad interests of society." Id. at 295, citing Filak v. George, 267 Va. 612, 618, 594 S.E.2d 610, 613 (2004). http://www.courts.state.va.us/opinions/opnscvwp/1031407.pdf.

On the other hand, a contract claim is the only method of redress "[i]f the cause of complaint be for an act of omission or non-feasance which, without proof of a contract to do what was left undone, would not give rise to any cause of action (because no duty apart from contract to do what is complained of exits) . . . ." Id., citing O’Connell v. Bean, 263 Va. 176, 181, 556 S.E.2d 741, 743 (2002). http://www.courts.state.va.us/opinions/opnscvwp/1002900.doc.

In Augusta, the issue was whether a fraud claim existed when an insurance agent allegedly made false statements in a prospective insurance report in order to convince the homeowner’s insurance company to insure the house. The Court dismissed the fraud claim because the insurance company "failed to identify the breach of any duty arising from a source other than its contractual relationship . . . ." Id. at 294. The court relied on its prior decision in Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 507 S.E.2d 344, 256 Va. 553 (1998), http://www.courts.state.va.us/opinions/opnscvwp/1980081.doc, where it held that even the false representations of a construction company that it completed certain phased work to secure payments did not give rise to tort claim.

A different outcome may result, however, if the breaching party fraudulently induced the other party to enter into the contract. This is because "the promisor's intention-his state of mind-is a matter of fact. When he makes the promise, intending not to perform, his promise is a misrepresentation of present fact, and if made to induce the promisee to act to his detriment, is actionable as an actual fraud." Id., citing Colonial Ford Truck Sales, Inc. v. Schneider, 228 Va. 671, 325 S.E.2d 91 (1985) (link unavailable). In some cases, courts have found that a party's breach immediately after signing the contract to be indicative the party's intent to never perform the contract. See Flip Mortgage Corp. v. McElhone, 841 F.2d 531 (4th Cir. 1988) (link unavailable).

The lesson behind these cases is that contracting parties should carefully consider the available remedies if the contract is breached. These remedies could include negotiating a reasonable liquidated damages provision, whereby the breaching party would be liable for a specified amount of damages.