News & Insights

Tennessee Supreme Court Rules The Economic Loss Doctrine Does Not Bar Fraud Claim By Subcontract Against A General Contractor

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.