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Dog Non-Searches

Contort

You can’t get punitive damages for a breach of contract. It’s one of those rules everybody knows. But plaintiffs are always seeking ways around that rule, and they succeed so often that Grant Gilmore once declared that contract law itself was dying, and being replaced by “contort,” a mixture of contract and tort law. In Robinson Helicopter v. Dana Corporation, the plaintiff was a helicopter manufacturer that sued a supplier for breach of contract, and also for fraud, when the supplier made helicopter parts the wrong way.

Under a rule called the “economic loss rule,” though, if your contract is breached and you experience only economic losses from that breach, you can only sue for breach. You can’t sue for tort unless it operates outside the bounds of the breach of contract. So, in Seeley v. White Motor Co., a guy bought a truck, which had all sorts of problems, and it finally turned over when he was going around a corner. He sued the seller for the purchase price and for lost profits arising from the loss of the truck. The Court allowed only the breach of contract damages, not the lost profits, because that would be essentially allowing two lawsuits for the same wrong.

This is an important rule, because contract law is primarily concerned with economic efficiency, not with punishing wrongful behavior. That’s why punitive damages aren’t allowed for most breaches of contract—because, as long as contract damages are correctly calculated, the parties are compensated enough. Also, punitive damages are often unpredictable and expensive, and could cause over-deterrence, meaning companies are afraid to do business lest they get smacked with big damages awards. With these things in mind, I wrote an amicus brief for the Pacific Legal Foundation arguing that the Court should continue to apply the economic loss rule.

But there was a twist in Robinson Helicopter; the plaintiff claimed that it wasn’t trying to get two lawsuits, but was instead suing for both the breach of contract and the fraudulent concealment of that breach. Dana Corporation not only made faulty parts, but issued certificates claiming that the parts were not faulty, which Robinson relied on to their detriment. The Court agreed, and held that

Dana’s issuance of the false certificates of conformance were unquestionably affirmative misrepresentations that Robinson justifiably relied on to its detriment. But for Dana's affirmative misrepresentations…Robinson would not have accepted delivery and used the nonconforming clutches…. Accordingly, Dana’s tortious conduct was separate from the breach itself, which involved Dana's provision of the nonconforming clutches. In addition, Dana's provision of faulty clutches exposed Robinson to liability for personal damages if a helicopter crashed and to disciplinary action by the FAA. Thus, Dana’s fraud is a tort independent of the breach. We hold the economic loss rule does not bar Robinson’s fraud and intentional misrepresentation claims because they were independent of Dana’s breach of contract.

Blogger George Wallace points out, this holding does not mean that breach of contract will now come along with punitive damages. And that’s true; it isn’t the end of the world. But there is still reason to be concerned about this holding. As Justice Werdegar points out in her dissent,

The challenged conduct in this case is a breach of contract accompanied by false contractually required representations that the party was not in breach. This, the majority holds, is enough to allow a jury to inquire into whether the breaching party knew it was breaching the contract at the time and, if so, whether such a knowing misrepresentation might appropriately give rise to punitive damages. Of course, rare is the commercial contract that does not involve ongoing statements by the parties relating to their performance. In all such cases…it is now possible to plead a fraud claim. This raises the specter that every alleged breach will yield satellite litigation over whether contemporaneous remarks by one side or the other amounted to intentional misrepresentations about the existence of a breach…

As Werdegar suggests, telling a person that you’re not breaching a contract (even while you do so) is conduct awfully similar to the breach itself. In some cases, at least, representations of performance are called for in the contract itself. Imagine, for instance, that Crusoe Helicopters makes a contract with Zuul Corporation to manufacture and deliver widgets and to report every month on how things are going. If Zuul issues false reports that everything’s going great, is that a breach of contract only or is that a separate misrepresentation of the breach of contract? It’s only conduct arising from the contract, because otherwise Zuul wouldn’t provide the reports. But this case would seem to allow a separate lawsuit.

More importantly, contract law isn’t so much about what plaintiffs win as about what they bring. Robinson Helicopter might encourage folks to file “satellite” claims, increasing the legal burden on parties whether or not those plaintiffs ultimately win. While the Court’s decision is reasonable, I think a bright line rule forbidding fraud suits unless some independent harm arose from the conduct, would have been a more sensible decision.

--Timothy Sandefur

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