A Misrepresentation Made During a Contract Performance May Not Constitute Fraud

In a newly released opinion, the Virginia Supreme Court reaffirmed the Virginia rule that a fraud claim cannot be based upon one contracting party's false statements to another contracting party in absence of an independent common law duty. The opinion can be found here. This rule is designed to prevent ordinary breach of contract claims from turning into tort claims. The facts in the new case illustrate the principle neatly.

In Dunn Construction Company, Inc. v. Cloney, Cloney contracted with Dunn Construction to build Cloney a house. Dunn Construction improperly constructed the front foundation wall, and after the wall failed inspection, Dunn Construction agreed to repair the cinderblock wall with steel reinforcing bars referred to as "rebar". After a second inspection and further repairs, Dunn Construction presented Cloney a final invoice. Cloney disputed parts of the invoice and suggested putting the final payment in escrow, pending final inspection of the wall.

After a "heated exchange," Cloney gave Dunn a check for the invoice amount, and Dunn Construction gave Cloney a written statement "guaranteeing the wall's stability for ten years and averring that the wall had been repaired by placing rebar in every cell of the cinderblocks and filling the wall to its top with concrete."

Cloney then hired a structural engineer "who determined that the wall had not been filled with reinforced concrete or adequately reinforced with rebar, as Dunn had represented to [County inspector] and Cloney." Rather, "between one-third to one-half of the cells had no reinforcement" and the wall could not pass a building code inspection.

Cloney filed a complaint against Dunn Construction for breach of contract, negligence and fraud. In addition to seeking compensatory damages, "Cloney sought $100,000 in punitive damages for the alleged fraud." The jury returned a verdict for $25,000 in punitive damages.

On appeal, Dunn Construction "contended that the circuit court impermissibly permitted Cloney to convert his breach of contract action into a tort action."

The Court agreed with Dunn Construction, even though it did "not condone [Dunn Constructon's] misrepresentations":

"As a general rule, damages for breach of contracts are limited to the pecuniary loss sustained. However, a single act or occurrence can, in certain circumstances, support causes of action both for breach of contract and for breach of a duty arising in tort, thus permitting a plaintiff to recover both for the loss suffered as a result of the breach and traditional tort damages, including, where appropriate, punitive damages. To avoid turning every breach of contract into a tort, however, we have consistently adhered to the rule that, in order 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.

Cloney contends that the present case can be distinguished . . . because the guarantee given by Dunn in exchange for Cloney making the final payment on the contract was used to procure a novation to the original contract and the false statement in the guarantee that the foundation wall had been properly repaired constituted a fraudulent inducement violative of a common law duty separate and apart from any duty arising under the contract. We disagree.

Under the contract, Dunn had a duty to construct the foundation wall in a workmanlike manner according to standard practices. Clearly, the original wall was not constructed in accord with this duty, and Dunn was required to make repairs to bring the wall in compliance with the applicable building code under that same duty. Dunn’s false representation that he had made adequate repairs thus related to a duty that arose under the contract. The fact that the representation was made in order to obtain payment from Cloney does not take the fraud outside of the contract relationship, because the payment obtained was also due under the original terms of the contract.

Nonetheless, . . . we cannot permit turning every breach of contract into an actionable claim for fraud simply because of misrepresentations of the contractor entwined with a breach of the contract."