In Commercial
Painting Co. Inc. v. Weitz Co. LLC, the Supreme Court of Tennessee ruled
the economic loss doctrine does not extend to fraud related to construction contract
disputes. The case arose from a contract
dispute between a general contractor, The Weitz Company, LLC (“Weitz”), and its
subcontractor, Commercial Painting Company, Inc. (“Commercial”).
In
2004, Weitz and Commercial contracted for Commercial to perform drywall work on
a project. At the time of the contract’s execution, the project was reportedly already
months behind schedule. Commercial alleged Weitz misled it about its scope of
work, compensation, and the extent of the delay. Commercial’s claims included
breach of contract and fraud related to the schedule and scope of work. A jury
awarded Commercial compensatory damages on both claims and punitive damages on
the fraud claim.
On appeal,
Weitz argued the economic loss doctrine barred Commercial’s fraud claim and thus
the punitive damages. The economic
loss doctrine generally operates to preclude contracting parties from pursing
tort recovery for purely economic or commercial losses associated with the contractual
relationship. Many states have adopted exceptions to the economic loss doctrine,
including where a party alleges fraud in the formation of a contract. Weitz argued,
however, that the fraud exception only applied in the context of product
liability or the sale of goods.
The Tennessee Court of Civil Appeals did not agree and held
the economic loss doctrine barred Commercial’s fraud claim because Weitz and
Commercial were sophisticated commercial business entities and Weitz’s
misrepresentations pertained to matters stated in the contract. Following the
Tennessee Court of Civil Appeals’ decision, the issue was appealed to the
Supreme Court of Tennessee.
The Tennessee Supreme Court overturned the Court of Civil
Appeals’ decision and adopted a narrow exception to the bar of a purely
economic loss claim in cases where “the alleged fraud concerns pre-contractual
misrepresentations and nondisclosures about the quality, reliability, and
character of the goods that are the subject of a contract between sophisticated
business entities.” The Tennessee Supreme
Court further held, “contracting parties in Tennessee, including those in the
construction industry, should not have to factor into their decision to enter a
contract the potential for fraud or another party’s dishonesty.”
The Court’s
opinion raises questions about the applicability of the economic loss doctrine,
as almost everyone will allege the fraud falls within the exception. At a minimum, parties to construction
contracts in Tennessee should be aware of the potential tort claims that were
previously believed to be barred.
