Fraud and the Economic Loss Rule by Sam K. Abdulaziz
Many of you have read articles dealing with the Economic Loss Rule. Typically, those articles dealt with construction matters because those are the things that interest contractors. However, the Economic Loss Rule would apply to any other similar dispute.
In general, the Economic Loss Rule states that one cannot recover for economic losses that have not yet resulted in physical injury to something other than a damaged product itself based on negligence. In a negligence action, one must have suffered an actual loss, not a prospective loss. However, it should be remembered that a breach of a warranty is still actionable. That means that one who is in direct contract with the injured party, can recover on a warranty theory rather than a negligence theory.
This article deals with fraud involving Economic Loss. This is a new situation that had not yet been decided and the Supreme Court has just given us the decision.
Although this case did not involve construction, the Economic Loss Rule with respect to fraud, is still applicable. This case involved a helicopter manufacturer who fraudulently changed specifications of parts it sold and provided false certification dealing with those parts. The nitty-gritty of the fraudulent actions is not important. What is important is that the court considered that there was fraud involved and then decided whether the Economic Loss Rule would keep the injured party from recovering damages for the fraudulent conduct.
The trial court found that the plaintiff was damaged in the sum of $1.5 million. They also allowed damages for fraud in the amount of $6 million. The case was appealed based on the Economic Loss Rule, stating that prospective damages were not recoverable until they had ripened into actual damages. Since the manufacturer of the parts was not in privity of contract (a direct contractual relationship) with the plaintiff, it could not sue for breach of warranty and the case fell square within the facts of the Economic Loss Rule.
The holding of the court was not at all surprising. The holding of the court was that the plaintiff had an independent action for the fraudulent acts committed by the defendant. The action was not based on damages to property. With respect to the Economic Loss Rule, damages for inadequate value, cost of repair and replacement of defective product or consequent loss of profits -- without any claim of personal injury or damages to the other property "is not compensable under a negligence theory." Where a purchasers expectations in a sale are frustrated because the product he bought is not working properly, his remedy is set to be in contract alone, for he has suffered only "economic losses". The plaintiff's claims are based on an intentional affirmative misrepresentation. It was based on the actions of the defendant. The elements of fraud are (1) misrepresentation (false representation, concealment, or non-disclosure); (2) knowledge of falsity; (3) intent to defraud; (4) justifiable reliance; and (5) resulting damage. All of this was present in the defendant's actions.
Punitive damages are used to keep others from doing the same thing. Therefore, they are punitive in nature. They are intended to punish. It is not an action based on damage to property but an independent action based on fraud. Accordingly, the Supreme Court sent the case back to the trial court to determine the loss.
Attorney Sam Abdulaziz of Abdulaziz & Grossbart has been practicing construction law for 30 years. He has written a book called “California Construction Law” which is updated annually. He represents numerous construction trade associations and contractors. He appears at Contractors State License Board meetings and has argued a number of cases before the appellate courts, including the California Supreme Court dealing with the "Pay-If-Paid Clause." Abdulaziz & Grossbart provides this information as a service to its friends & clients. The documents are of a general nature and are intended to highlight areas of the subject matter and should not be used as a substitute for specific legal advice. You should seek the aid and advice of a competent attorney and/or accountant instead of relying on the presentation and/or documents.
Sam Abdulaziz can be reached at Abdulaziz & Grossbart, P.O. Box 15458, North Hollywood, CA 91615-5458; (818) 760-2000, Facsimile (818) 760-3908; or by E-Mail at info@aglaw.net . On the Internet, visit our Website at www.aglaw.net
Citation
Robinson Helicopter co., Inc. v. Dana Corp., CA Supreme Court, No. S114054, December 23, 2004, by Brown; Werdegar, dissenting. Los Angeles Superior Court Case No. YC036795. |
