When is a breach of contract also a claim for fraud?
The economic loss rule precludes actions in tort which are completely economic and which arise out of contract. Under Florida law, the economic loss rule operates to bar tort claims for purely economic loss in cases involving a defendant who is a manufacturer or distributor of a product or where the parties have contractual privity. See Indem. Ins. Co. of N. Am. v. Am. Aviation, Inc., 891 So. 2d 532, 536 (Fla. 2004).
If the parties have contractual privity, and a claim for tort simply restates a claim for breach of contract, the tort claim is barred. Eclipse Med., Inc. v. Hydro-Surgical Instruments, Inc., 262 F. Supp. 2d 1334, 1354 (S.D. Fla. 1999), aff’d, 235 F.3d 1344 (11th Cir. 2000); see also Thompkins v. Lil’ Joe Records, Inc., 476 F.3d 1294, 1316 (11th Cir. 2007) (stating that the fraud claim was the exact basis for the breach of contract claim and that the economic loss rule “probably” applied); Time Int’l, S.A. v. Safilo U.S.A., Inc., 802 So. 2d 382, 383-84 n.1 (Fla. Dist. Ct. App. 2001) (stating that a claim for fraud in the inducement is not barred by the economic loss rule as a matter of law, but if the claim is not independent of contract, then the economic loss rule will apply).
Underlying the economic loss rule is the assumption that the parties to a contract have allocated the economic risks of nonperformance through the bargaining process. A party to a contract who attempts to circumvent the contractual agreement by making a claim for economic loss in tort is, in effect, seeking to obtain a better bargain than he originally made. Indem. Ins. Co. of N. Am. v. Am. Aviation, Inc., 891 So. 2d 532, 536 (Fla. 2004).
The only exception to the economic loss rule to plead fraud in a contract arena is fraudulent inducement.
“To state a cause of action for fraud in the inducement, the Plaintiff must allege (a) a misrepresentation of a material fact; (b) that the representor of the misrepresentation knew or should have known of the statement’s falsity; (c) that the representor intended that the representation would induce another to rely and act on it; and (d) that the plaintiff suffered injury in justifiable reliance on the representation.” Samuels v. King Motor Co. of Fort Lauderdale, 782 So. 2d 489, 497 (Fla. 4th DCA 2001) (emphasis added.)
See Connecticut Gen. Life Ins. Co. v. Jones, 764 So. 2d 677, 682 (Fla. Dist. Ct. App. 1st Dist. 2000), The potential for recovery of both punitive damages and consequential tort damages makes the pleading of an alternative count alleging fraud in the inducement extremely tempting in breach of contract cases. In Puff ‘ N Stuff of Winter Park, Inc. v. Bell, 683 So. 2d 1176 (Fla. 5th DCA 1996), Judge Harris recognized this problem in a special concurrence when he observed that “almost any contract claim can also be framed as a fraud in the inducement action.” Id. at 1179 (Harris, J., specially concurring). Judge Griffin responded in a dissenting opinion, however, that the problem should be resolved by the courts requiring specific allegations of all of the necessary elements of fraud. See id. at (Griffin, J., dissenting). Judge Griffin stated, I agree with Judge Harris that fraud is a much overused and misused cause of action. Its abuse has been fueled by the access it provides to otherwise unavailable discovery and to punitive damages. Its misuse has been exacerbated by Florida’s embrace of the “promissory” form of fraud whereby a promise made with no intent to perform is deemed actionable as fraud. Unfortunately, too many cases have gotten to the jury and large tort verdicts have been rendered on a theory of fraud that had no business being anything other than breach of contract.
The problem is not with the distinction between fraud and breach of contract, however, the problem lies in our courts’ failure to appreciate or require competent proof of the distinct elements. The statement that virtually any breach of contract action can be pleaded as fraud in the inducement proves the point. Every breach of contract cannot be pleaded as fraud in the inducement–at least, not properly. Certainly, the classic type of fraud present in this case–a knowingly false representation of fact–requires a specific allegation of such a false representation. Even “promissory fraud, ” however, requires a specific allegation (and ultimate proof) that the promise was made with no intent to perform.
Andrew Douglas, P.A., A Florida Commercial Litigation Attorney. Please feel free to contact us to discuss your legal needs.