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Tort Claims and Contract Relationships
The Economic Loss Rule

A party to a commercial transaction gone awry will typically advance both claims for contract and for tort liability for the alleged injuries arising within the contractual relationship. Although the underlying transaction is defined and circumscribed by a written contract which establishes the rights and responsibilities of the parties, it is usual to have one or more causes of action sounding in tort pleaded. This may be because the party advancing the claim(s) for tort liability has bargained away the right to make a claim for the particular harm or because the parties have bargained to limit the rights, responsibilities or remedies available to redress the perceived harm. It may also be that general contract concepts would not permit recovery under the circumstances. Where the terms of the contract or the law of contract (Contract) foreclose a claim or impose limits on the available remedies, the law of tort (Tort) may recognize a claim or may give the prospect of relief from the restrictions of the contract. As will be discussed below, both a Contract and a Tort remedy for the same harm may not be legally available. As a result of such pleading practices, the courts are required to decide under what legal doctrine the claims should be considered.

It is not surprising that both parties to a dispute will advocate legal positions that are most beneficial to their interests. "Characterizing a claim as contract or tort has at least six important effects. These effects relate to: (1) the standard of liability, (2) the statute of limitations (prescriptive period), (3) venue, (4) the scope of damages, (5) defenses, and (6) the parties' freedom to deal with certain matters for themselves." 69 Tul. L. Rev. 457, 462. Clearly, each legal effect has a tactical or strategic advantage. See Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756 (7th Cir.1996) (defendant asserted antitrust counterclaim to collection action. Court dismissed claim and opined that "[t]his is a mundane commercial case, in which a buyer has used the antitrust laws to postpone paying its debts. Time for payment is at hand."); Public Service Enterprise Group, Inc. v. Philadelphia Electric Co., 722 F.Supp. 184, 199 (D. N.J.1989)(noting that "…the fact that tort rules usually provide greater advantages for plaintiffs' recoveries has led to 'more or less inevitable efforts of lawyers to turn every breach of contract into a tort.'" (Quoting from W. Prosser, Hornbook of the Law of Torts, §92 (4th ed.1971).

At the same time, each legal effect has important policy implications. The different rights and limitations are available to the litigants in individual cases because there are different principles at work and different social interests advanced within the Contract and Tort doctrines. Courts are presented with the problems of applying overarching social and economic policy to the individual events which have resulted in dispute and disappointment. It is, therefore, necessary, in order to promote the policies and principles embodied, to select between alternative and competing views of the responsibilities inherent in the transactional relationship.

Conceptual Background

Why is it not equally appropriate to consider the parties' rights and responsibilities under both Contract and Tort theories? Is there functional value in the different classifications and the effort to assign claims and remedies to one or the other? Are the doctrines not simply formal artifacts of classical common law pleading? While there is a strong influence on the law of the assumpsit and case pleading requirements , the differences reflect more than tradition or archaic artifact. The separation of Contract and Tort doctrines reflects that Contract and Tort doctrines spring from different policy concerns, have different standards for the review of conduct and approach remediation of harm differently. Analytic classification simply supports the achievement of the different purposes by offering a method to consistently and accurately resolve disputes arising from complex but similar events. Rather than being rule oriented as classical pleading became, classification of disputes by the application of Contract or Tort principles is based on the advancement of social purpose. "…[C]lassification …assumes a purpose for the classification, something to be accomplished other than arranging the objects into neat piles." Jay M. Feinman, The Jurisprudence of Classification, (1989) 41 Stan. L. Rev. 661, 664. As Feinman notes, "…[b]ehind the different categories lie distinct objectives, principles, policies or interests. Cases falling into different categories deserve to be treated differently…." 41 Stan. L. Rev. 661, 672-673. Rather than complicating the process, appropriate classification is intended to assist in structuring analysis by reducing complexity through the identification of similarities and differences.

Justifying doctrinal Contract or Tort classification establishes the philosophic purpose of requiring analytic rigor. In order to perform the analytic task, however, it is necessary that the 'distinct objectives, principles, policies and interests' be articulated in a way that permits the application of the analytic standards. "…[T]here are some cases in which the strongest social policy relevant to the underlying fact situation is the ability of parties to transact freely with each other on terms they set. That policy requires that, generally speaking, the law should enforce the parties' own definition of the scope of liability in the event of mishap; the parties may for instance, contract to preclude recovery of consequential damages. There are other cases in which the social interest in preventing and compensating physical harm is stronger, so that the law will not respect the parties' attempt to allocate the risk of loss. The first set of cases falls into the contract category; the second set, into tort. For each set the category stands as proxy for the more complex definition of social interests that determines the results in the particular cases." 41 Stan. L. Rev. 661, 673 (emphasis added). Deciding which is which with accuracy and consistency is both the purpose and the task. Threading one's way along the divide requires a jurisprudential map and compass to define the boundaries and direction of the social interests involved.

Contract and Tort spring from different theories of liability, embody distinct public policy considerations and have developed distinct concepts about the nature of harm and appropriate remedies. Contract is a theory of promissory liability and actionable conduct is the failure to perform an enforceable promise. Tort liability is imposed for actions that result in loss. Unlike Contract, in Tort the failure to act is generally not actionable. Each doctrine seeks to protect and encourage socially valuable but competing policies. Contract doctrine historically encourages and supports the assumption and enforcement of privately (individually) agreed to norms of conduct. Tort initially involves the ex post institutional imposition of conduct standards through which appropriate conduct is thereafter encouraged. Contract encourages and protects private enterprise. Tort encourages particular levels of conduct and provides protection when non-conforming conduct results in harm in those situations determined to require societal intervention. Neither Contract nor Tort seek to redress all perceived injury - only those harms determined to require it for the protection of society (Tort) or those harms contractually agreed to be remedied by the parties (Contract).

"As conventionally conceived, contract law seeks to further relations that are created primarily by affirmative promissory acts and in which a key element is the parties' planning for future conduct. Tort law seeks to prevent and remedy wrongful violations of established interests, particularly where the interest violated was not created by an agreement and concerns the physical integrity of person or property. The ethical basis of contract law lies in remedying the disappointment of reasonable expectations and reasonable reliance raised by a promise (on the plaintiff's side) and in honoring one's commitments (on the defendant's side). The ethical basis of tort law lies in redressing harm (on the plaintiff's side) caused by the wrongful act of another (on the defendant's side). The policy basis of contract law is the protection of expectation and reliance in order to promote initiative and provide security in commercial activity by rewarding risk-taking and internalizing the cost of economic activity, both prospectively and retrospectively. The policy basis of tort law is accident avoidance and efficient and appropriate allocation of risk through compensation for harm. Ultimately, the core values of the category embody theories of social organization: Contract law embodies a theory of personal autonomy in which individuals choose to cooperate with others to advance their own interests, while tort law embodies a theory of personal integrity in which individuals are protected from the wrongful actions of others." 41 Stan. L. Rev. 661, 704.

"…Tort protects B's existing set of entitlements - claims to person, property and relationships - from A's wrongful conduct. The remedy is designed to restore B to his pre-Tort position and, in cases where the public interest will be served, punish A for outrageous conduct and 'deter him and others like him from similar conduct in the future.' This exercise in what some have called 'corrective justice' is structured by court imposed duties and exacted remedies which, in turn, are derived from judgments about the minimum standards of conduct that should be required in the various forms of human interaction. These standards vary with the context and change over time. Contract, in contrast, deals with promised advantages, frequently given as part of a bargained for exchange. Bargains are intended to achieve goals and implement plans - to change the existing state of affairs for both parties to their mutual benefit. By protecting the expectation interest - putting the aggrieved party 'in as good a position as he would have been in had the contract been performed' - Contract is seemingly most sharply differentiated from Tort, with its remedies designed to restore the status quo….[A]lthough most contract scholars agree that the expectation interest should be protected, their reasons vary…. On the one extreme are economic or 'efficiency' reasons. Protecting expectations: (1) rewards risk taking in competitive markets and, therefore, contributes to allocative efficiency; and (2) deters the 'inefficient' breach and enables the parties, through ex ante bargaining to internalize the perceived costs of performance and breach." Richard E. Speidel, The Borderland of Contract, 10 Northern Kentucky Law Review 163, 171-172 (1983) quoting from the Restatements 2d of Tort and Contract respectively.

Under Contract harm is limited to that which is within the expectation of the parties. It is injury to investment or opportunity. Contract doctrine protects that which is anticipated. Tort on the other hand protects against harm to that which exists (although contractual interference has elements of expectancy, the relationship interfered with is the protected interest). Since that which is harmed is seen differently, the remedy fashioned is different. Tort remedies look to restore the interest harmed. Contract remedies look to fulfill promised advantages. Tort, as a social doctrine, assigns risk and responsibility and permits deterrence of socially impermissible conduct through punitive damages. Contract, as a doctrine of enterprise, promotes interactive enterprise, permits bargain and exchange of interests for mutual benefit and protects and encourages risk taking.

Based on the social policy description of Contract and Tort doctrine, one would appear to be left with a Hobson's choice between competing but equal interests. Classification, however, as an analytic process, presumes a hierarchy for decision making, otherwise all things are equal and distinction is indifferent. Feinman notes that "[c]ombining a purposive aim and a principled substance leads to a clear hierarchy between the contract and tort principles. In this classification scheme, contract is normatively superior to tort. Thus, the principle may be restated: private ordering should generally be respected by the law unless there is an overriding public purpose, which usually arises only where the private ordering process itself is defective in some significant respect." 41 Stan. L. Rev. 661, 682. This normative selection is historically based. "…[T]he development in Tort and Contract shows a preference for allocative efficiency - an economic concept that preserves and creates wealth by encouraging the allocation of resources to their highest valuing users. More importantly, the explanation appears to be consistent with the emerging scheme of things: (1) a government, which, in the 19th and early 20th century, was perfecting a system of private property and fostering the development of private markets for private exchange, and (2) a legal and intellectual order that resisted governmental taking or redistribution of existing private shares without compensation or consent. The role of government was to protect not to redistribute private shares. The emphasis was upon individual liberty and economic efficiency, not social justice." 10 N. Ky. L. Rev. 163, 168. As a result " [I]n the economic loss cases, the instrumental goal of classification is very important. In particular, a strong theme running throughout these cases is classification's function in preserving the realm properly governed by contract law from incursion by tort." 41 Stan. L. Rev. 661, 674. "…[T]he purpose of the contract/tort distinction … is to ensure that the separate policies in each area are implemented. In particular, the classification protects the integrity of the normatively superior contract enclave from incursion by the imperialistic tort area." 41 Stan. L. Rev. 661, 683. "The rationale for the rule is that tort law and contract law must be held apart in order to foster the reliability of commercial transactions. Where the parties have limited liability and allocated risk by agreement, tort remedies should not be allowed to supersede the parties' prior understanding of the consequences of deficient performance. Contractual duties are imposed by agreement between the parties; the scope of those duties and of liability for their breach, are limited by the agreement. Tort duties are imposed by society, are not limited by the understanding of the parties, and their breach may result in far more extensive remedies." Leisure Founders, Inc. v. CUC International, Inc., 833 F. Supp. 1562, 1572 (S.D.Fla.1993).

Doctrinal classification, to further the advancement of policy priorities, requires not only purpose and doctrinal preference it requires analytical standards. Feinman has identified three bases for classification: tradition, fact and principle. Tradition or stare decisis fosters predictability. "Despite the demise of classical formalism, law's claim to authority still rests in part on logic, order and consistency." 41 Stan. L. Rev. 661, 676. Principled classification focuses on those elements of the dispute which implicate the overriding interests. The New Jersey Supreme Court found as a matter of principle that "Generally speaking, tort principles…are better suited for resolving claims involving unanticipated physical injury, particularly those arising out of an accident. Contract principles, on the other hand, are generally more appropriate for determining claims for consequential damage that the parties have, or could have, addressed in their agreement. Spring Motors Distributors v. Ford Motor Co., (1985) 98 N.J. 555, 489 A.2d 660, 672. Likewise, the Florida courts have stated that "Under current Florida law, 'contract principles are more appropriate than tort principles to resolve purely economic claims.''' Dantzler Lumber & Export Co. v. Bullington Lumber Co., 1997 U.S. Dist. LEXIS 9306, page 4 (M.D.Fla.1997) (quoting Florida Power & Light Co. v. Westinghouse Elec. Co., 510 So.2d 899, 900 (Fla.1987). See also Interstate Securities Corp. v. Hayes Corp., 920 F.2d 769, 775-776 (11th Cir.1991) in which the court held that "Appellants essentially claim that Interstate negligently mishandled the Hayes account, the remedies for which were negotiated or at least agreed upon by the parties in the various customer agreements. Florida law is clear that claims for negligent breach of contract are foreclosed. Indeed, prohibiting claims for negligent breach of contract preserves the essential distinction between contract and tort law and is the fundamental premise of the AFM doctrine. To permit the recovery of tort damages in this case would disturb the agreement signed by the parties, blur the distinction between contract and tort and conflict fundamentally with the AFM decision."

Both tradition and principle require careful attention to fact since the facts of the matter are what ultimately determines how this matter is similar to or different from traditional classification decisions or how that principle is strongly or weakly associated with the principle(s) in question. As Feinman describes the process, "[f]actual organization provides a basis for grouping like cases, but legal reasoning dictates that the factual likeness reflect some common principles." 41 Stan. L. Rev. 661, 680. The principle advanced is that "…wrongful conduct which causes 'physical harm…usually represents an invasion of a right existing apart from any contract - a tort interest' but if the promisor 'simply fails to live up to its promise, if it does not accomplish what it was supposed to, that is only an invasion of a contract-like interest: the user has lost the benefit of his bargain. 10 N. Ky. L. Rev. 163, 183 (quoting from Moorman Mfg. Co. v. National Tank Co., 91 Ill.2d 69, 435 N.E.2d 443, 455 (1982).

In summary, the jurisprudence defining the divide and methodology for application of Contract and Tort doctrines, while containing areas of overlap, give predominance, although not exclusivity, to Contract to resolve transactional disputes. "The factual distinctions are simply abstracted restatements of the terms of the paradigms, generally distinguishing productive exchanges founded on bargains (contract) from fortuitous accidents between strangers (tort). Contracts are founded on exchange and agreement; they look forward to economic gain resulting from the parties' ability to implement their planning in the framework of a recognized commercial environment. Torts, alternatively, are accidents between parties not tied by extensive relations relevant to the tort. Although torts may arise out of relations, and even exchange relations, the relational and exchange aspects are not dominant parts of the situation, either because the relation is one-sided and limited or because it does not contemplate the events at issue…." 41 Stan. L. Rev. 661, 701.

Review of Caselaw

Courts, in putting the philosophy into practice, have typically approached the analysis from one of two distinct vantages. The more general or philosophical approach has focused on the nature of the duty that is alleged to have been breached. Other courts have focused on the harm claimed and the nature of the damages sought. Others have attempted to categorize cases on the basis of the facts. Some have found it useful to look at the problem from a combination of the views. Still others have avoided the categorization process by treating the process as one of applying a prohibitory rule, i.e. the economic loss rule instead of describing the economic loss doctrine as an analytic process.

Cases Relying on Legal Duty

New York courts have generally relied principally on determining the source of duty. The New York courts have consistently stated the law to be that "to sustain a tort action separate from the breach of contract claim, the tortious conduct must have breached a legal duty existing independently of the contractual relations between the parties." Strojmaterialintorg v. Russian American Commercial Corp., 815 F. Supp. 103, 105 (E.D.N.Y. 1993) quoting Crabtree v. Tristar Automotive Group., 776 F. Supp. 155 (S.D.N.Y. 1991) (in which a claim for fraud in failing to complete payment for an automobile dealership business was dismissed despite claims that financial records had been destroyed). U.S. East Telecommunications, Inc. v. U.S. West Information Systems, Inc., 1991 U.S. Dist. LEXIS 4802, at page *7, (S.D.N.Y.1991). "New York courts distinguish between an action for fraud in the inducement, which is actionable due to the presence of tortious conduct independent of mere nonperformance or intent not to perform, and an impermissibly merged claim of breach of contract masquerading as a fraud claim. See Tesoro Petroleum Corp. v. Holborn Oil Co., 108 A.D.2d 607, 484 N.Y.S. 2d 834, 835 (1st Dep't 1985) (fraud in the inducement claim properly dismissed where plaintiff failed to allege breach of 'any duty owed to plaintiff separate and apart from the contractual duty when they misrepresented their intent to perform as promised' and where no 'special damages proximately cause by the false representation, not recoverable under contract measure of damages' existed. To withstand the instant motion for partial summary judgment, U.S. East must allege facts independent of those giving rise to a breach of contract and breach of some duty other than the nonperformance of contractual duties. In addition, it must seek special damages other than those that contractual terms would dictate, stemming from an injury other than the breach of contract itself." (emphasis added). The Reuben H. Donnelley Corp. v. Mark I Marketing Corp., 893 F.Supp. 283, 289 (S.D.N.Y.1995). "…[D]efendants contend that plaintiff has breached an independent fiduciary duty arising out of the contract by using the Markolor process without paying royalties and/or failing to promote the Markolor process as contractually required….However, a 'conventional business relationship does not create a fiduciary relationship in the absence of additional factors. (citations omitted)…Defendants point to no 'duties,' apart from those specifically enumerated by the licensing agreement, that plaintiff allegedly breached…Indeed, absent the enumerated contractual obligations, plaintiff's alleged conduct would not be actionable. Because plaintiff's duties arise out of the contract language itself and not from any other relationship between the parties, breach of those duties does not give rise to a claim for constructive fraud. In response to an attempt to amend the complaint, the court once again noted that "Defendants' fraud counterclaim must be dismissed as redundant of their breach of contract counterclaims because the duties allegedly breached by plaintiff, and any relief that may be recovered by defendants, arise only in contract." The Reuben H. Donnelley Corp. v. Mark I Marketing Corp., 925 F.Supp. 203, 206 (S.D.N.Y. 1996).

South Carolina courts have applied the same rule i.e. "…in order for a plaintiff to state a claim in tort, he must allege a duty owed him by the defendant separate and distinct from any duty owed under a contract." Duc v. Orkin Exterminating Company, 729 F. Supp. 1533, 1535 (D.S.C. 1990) (dismissing claims for negligence and fraud for failing to report water damage to home. 'Ordinarily, where there is no duty except such as the contract creates, the plaintiff's remedy is for breach of contract, but when the breach of duty alleged arises out of a liability independently of the personal obligation undertaken by the contract, it is a tort….As a general rule, there must be some active negligence or misfeasance to support tort. There must be some breach of duty distinct from breach of contract…Here, the duties and liabilities of the parties were created and defined by the contract and the guarantee").

Like New York, the courts of Pennsylvania have relied on an assessment of the existence of legal duty to distinguish between contract and tort claims. In Public Service Enterprise Group, Inc. v. Philadelphia Electric Co., 722 F.Supp. 184 (D. N.J.1989), while the court extensively reviewed the economic loss doctrine, it was the nature of the breach and the legal duties which may arise from the breach which were important in determining whether the Plaintiff had stated a claim. The Public Service court concluded that, while it believed that the claims related to the operation of the Peach Bottom nuclear plant were contract claims, the law of Pennsylvania was too uncertain to permit it to simply dismiss the complaint. This distinction was noted in Sun Company Inc. v. Badger Design & Constructors, Inc., 939 F. Supp. 365, 370-371and n5 at 370 (E.D.Pa.1996). "Pennsylvania courts have generally taken two approaches in analyzing whether a cause of action arising from a contractual relationship should be brought in contract or in tort. The first approach involves a misfeasance/nonfeasance distinction. …The economic loss doctrine presents a second alternative. …There are also cases that have discussed a third approach in addition to the malfeasance/nonfeasance distinction and the economic loss doctrine. These cases allow a tort claim 'when the wrong ascribed to the defendant is the gist of the action, the contract being collateral." The Sun Co. court, while not expressly repudiating the misperformance/ nonperformance analysis strongly criticized the concept. "The East River Court also found 'contract law, the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements. …There is no reason to extricate the parties from their bargain.' (citation omitted). Sun Co., 939 F. Supp. at 372.

Pennsylvania and the Federal courts have now expressly repudiated the misfeasance/nonfeasance distinction as both unhelpful and logically unsupported. In August of 1997, the District Court for the Eastern District of Pennsylvania repudiated the doctrine. "The Public Service court…noted a line of cases in which the Pennsylvania courts have held that 'a suit between parties to a contract based on negligent breach of contract may be brought in tort only when the plaintiff alleges improper performance of a contract, rather than nonperformance.' (citations omitted). These cases have been titled the misfeasance/nonfeasance cases; in these cases, the courts have determined whether causes of action sound in tort or breach of contract by examining whether the complaint alleges nonperformance of the contract or misperformance of the contract. …[T]his line of cases no longer seems to be good law in Pennsylvania. Factory Market, Inc. v. Schuller International, Inc., 1997 U.S. Dist. LEXIS 13572, *16 (E.D.Pa.)(decided August 31, 1997) (emphasis added).

The analysis of legal duty has similarly been recognized in Florida, where customarily the courts have relied on the nature of the injury or damage in determining whether a tort claim will lie. Dantzler Lumber & Export Co. v. Bullington Lumber Co., 1997 U.S. Dist. LEXIS 9306, page 4 (M.D.Fla.1997) (stating that "[t]he additional shipping expenses and credits given to Dantzler's customers do not demonstrate distinct damages flowing from a separate tort duty"). (emphasis added).

Cases Relying on Damages or Harm

The better known approach to classification is the "economic loss rule." Under the economic loss rule it is the nature of the loss and the nature of the damages claimed which controls whether the claim is to be tried as a tort or as a contract claim. The economic loss rule or doctrine is both a rule of construction and a rule of limitation. As a rule of construction or analysis it looks at the claim not from the perspective of the source of duty but from the source of the harm. As the Public Service court commented, "And we think, quite candidly, that [defendant] is quite right in suggesting that, at its core, this is a contract action. Asking two questions helped us reach this conclusion: (1) what is the nature of the loss suffered by the plaintiffs? And (2) from what source did the defendant's duty to refrain from the conduct complained of primarily derive?" Public Service Enterprise Group, Inc. v. Philadelphia Electric Co., 722 F.Supp. 184, 208 (D. N.J.1989) (emphasis added).

The nature of the harm or damages sought provides an effective screen because the harms or injuries protected against by Contract and Tort are different. The economic loss doctrine -as distinguished from its application as a rule- is but another iteration of the analysis of the harm or damage claimed. To better understand the meaning and scope of the 'economic loss doctrine' it is necessary to see it in its context as an assessment tool:

"…[I]n distinguishing between the losses which are recoverable under a tort theory and the economic losses which are recoverable under a contract theory, it is inappropriate to focus 'solely on the nature of damages while ignoring the policy behind and analytical underpinnings of that opinion.' (citation omitted). …Moorman's [Manufacturing Company v. National Tank Company, 91 Ill.2d 69, 61 Ill. Dec. 746, 435 N.E.2d 443 (1982)] bar to tort recovery for economic losses does not focus on a particular type of damage, so much as it identifies harm originating from a particular context, the commercial context wherein harm is to a consumer's commercial expectations.'" Chicago Heights Venture v. Dynamit Nobel of America, 782 F.2d 723, 728 (7th Cir.1986).

Since Contract is based on the protection of expectation and is normatively superior to Tort in the hierarchical scheme of analysis, the salient question is whether the claimed injury is within the expectation of the bargain. Are the claims benefit of the bargain claims? "The crucial factor in deciding what remedies are available to a plaintiff is the character of the plaintiff's loss; '[a]s we read East River, it is the character of the plaintiff's loss that determines the nature of the available remedies. When loss of the benefit of a bargain is the plaintiff's sole loss, the judgment of the Supreme Court was that the undesirable consequences of affording a tort remedy in addition to a contract-based recovery were sufficient to outweigh the limited interest of the plaintiff in having relief beyond that provided by warranty claims.'" Public Service Enterprise Group, Inc. v. Philadelphia Electric Co., 722 F.Supp. 184, 196 (D. N.J.1989) (quoting from King v. Hilton-Davis, 855 F.2d 1047 (3d Cir.1988).

The assessment of what would reasonably be anticipated by the parties to a commercial contract is an effective screen. While neither party to a contract expects that the transaction will fail, clearly the parties to a carefully drafted contract have attempted to anticipate the results of failure. "In general, the economic-loss doctrine 'prohibits plaintiffs from recovering in tort economic losses to which their entitlement flows only from a contract.' (citation omitted). 'The rationale of the economic loss rule is that tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement. (citation omitted). Compensation for losses suffered as a result of a breached agreement 'requires an analysis of damages which were in the contemplation of the parties at the origination of the agreement, an analysis within the sole purview of contract law.' (citation omitted). 'In order to recover negligence, there must be a showing of harm above and beyond disappointed expectations evolving solely from a prior agreement. A buyer, contractor, or subcontractor's desire to enjoy the benefit of his bargain is not an interest that tort law traditionally protects." Factory Market, Inc. v. Schuller International, Inc., 1997 U.S. Dist. LEXIS 13572, *27 (E.D.Pa.)(decided August 31, 1997). In Dantzler Lumber & Export Co. v. Bullington Lumber Co., 1997 U.S. Dist. LEXIS 9306, page 12 (M.D.Fla.1997) the court, like others, attempted to define expectation damages. "A distinction in damages may in fact present another factor Florida courts use to determine the independence of a fraud claim from a breach of contract claim. See Williams Electric, 772 F.Supp. at 1238; see, e.g., Rolls v. Bliss & Nyitray, Inc. 408 So. 2d 229, 237 (Fla. 3d DCA 1981). The labeling of damages as economic loss is likely not dispositive after HTP, Ltd. [685 So.2d at 1239]. However, if the economic loss results from inadequate value, repair costs, replacement costs for non-conforming goods, or subsequent loss of profits, Florida courts would likely link this loss with the breach of contract." The search for the identity of the damage claim is simply a substitute for the broader search for the identity of the cause of action. There being fewer variables in the more limited search, it's result is a useful surrogate for the conclusion sought. …'Where the compensatory damages requested in a count for tort are identical to the compensatory damages sought in a count for breach of contract, compensatory damages and punitive damages for the tort are not recoverable.' Rosen v Marlin, 486 So.2d 623, 626 (Fla. Dist.Ct.App.1986). See also Rolls v. Bliss & Nyitray, Inc., 408 So2d 229, 237 (Fla.Dist.Ct.App.1981) (stating that 'since plaintiffs failed to prove that they sustained compensatory damages based on a theory of fraud which were in any way separate or distinguishable from their compensatory damages based on the contract, we conclude that the plaintiffs have failed to meet the strict pleading and proof requirements necessary to recover compensatory and punitive damages based on fraud.')…." Kee v. National Reserve Life Ins. Co., 918 F.2d 1538, 1543 (11th Cir.1990).

Several cases in which the courts have identified a damage claim which supports the assertion of a tort claim make the analytic process clearer. In Pulte Home Corporation, Inc. v. Ply Gem Industries, Inc., 804 F.Supp. 1471,1484 (M.D.Fla.1992) the claim was fraud. The fraud claim was based on the fact that the defendants, all of whom were engaged in the manufacture, treatment and sale of treated plywood had previously discovered that the plywood treatment used had resulted in deterioration of the plywood and making it unsuitable for roofing. The defendants continued to promote the marketing of the treated plywood as superior to untreated plywood without notice or advice about their knowledge of the history of the failure of the treated plywood. The claims were not based on the failure of the product which could have been and were dealt with in the contract. Rather, the claim was based on Pulte's exposure to lawsuits by third parties who made breach of contract and warranty claims, damage to its business reputation and other indirect damage claims. The court, while expressing skepticism, concluded that it could not speculate at the time of a motion to dismiss that plaintiff could not make out separate damages. "The standard for determining whether an action for fraud survives is more particular. The controlling issue is whether the Plaintiff has requested compensatory damages in a count for tort which are in any way separable or distinguishable from [its] compensatory damages sought on the breach of contract action. Kee v. National Reserve Life Ins. Co., 918 F.2d 1538 (11th Cir.1990). Arguably, Pulte has alleged a factual basis supporting a cause of action for the independent tort of fraud, thus avoiding the limiting principal of the Economic Loss doctrine. The damages which Plaintiff claims to have flowed from any fraudulent actions upon the part of the Defendants are distinguishable from damages which would flow from a breach of warranty action, arising from the same circumstances." The Pulte court did, however, conclude that all claims for product defect, repair, replacement and related claims would be barred.

Fireman's Fund provides a clearer insight into the difference in contract and tort damage claims. In Fireman's Fund, Fireman's Fund initially sued its insured to recover the full amount of the loss payments made alleging that the insured's misstated claims permitted the recovery of the full amount under the terms of the policy. The court dismissed the fraud claim, saying "By way of example, in Brick [v. Cohn-Hall-Marx Co., 276 N.Y. 259, 11 N.E.2d 902 (1937)], the plaintiff sued to recover the difference between the full amount that he should have been paid under the contract and the lesser sum that was actually remitted based on fraudulently altered royalty records. Brick, 276 N.Y. at 262. The relief sought depended on the payment provisions of the agreement between the parties being enforced." Fireman's Fund, 942 F.Supp. at 839. In contrast, in the second action Fireman's Fund sought only to recover the amounts alleged by it to have been paid based on the false claims. "…[U]nlike the first fraud cause of action in the amended complaint, the second fraud claim is aimed at recovering what was paid as a result of fraud, not the greater sum attributable to the contractual breach by Rose Kaprolos. Fireman's Fund, 942 F.Supp. at 839.

The Economic Loss Rule

The economic loss doctrine (rule) is most easily understood as a further simplification of the analytic process. Rather than attempting to assess the context and the scope of expectations, the economic loss doctrine attempts to pare down the analytic variables to either contractual relationship or injury to person or property. The economic loss rule was first applied in the matter of Seely v. White Motor Co., 63 Cal. 2d 9, 403 P.2d 145, 45 Cal. Rptr. 17 (1965), a product liability case. The purchaser of a defective truck sought damages from the seller and manufacturer for the cost of repairs, the purchase price and lost profits on account of his inability to use the truck. The court held that an injured party may have either a tort or contract claim or both where there has been personal injury or property damage (other than to the product itself) since such a tort claim and a contract claim would be separate from one another and would provide remedies for different harms. However, a claimant is limited to contract claims where the only harm has been to an economic interest.

The economic loss doctrine is based on the clear recognition of the different principles served by Contract and by Tort. "One of the reasons why courts have limited tort recovery for benefit of the bargain damages is the perception that allowing recovery for purely economic loss in tort cases would unduly interfere with the contractual freedom of the parties to limit the seller's liability for economic loss for breach of warranty." 69 Tul. L. Rev. 457, 487. This sentiment has been expressed by the Supreme Court. East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986). "The East River Court …found 'contract law, the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements." Sun Co. 939 F. Supp. at 372. Recognition of this overarching policy is well expressed by the Public Service court. "To allow a cause of action for negligent cause of purely economic loss would be to open the door to every person in the economic chain of the negligent person or business to bring a cause of action. Such an outstanding burden is clearly inappropriate and a danger to our economic system." Public Service, 722 F.Supp. at 193 "Commercial parties are able to allocate the risk that products will not perform as expected through a contract, and when they make such an allocation it should not be displaced by an overriding tort remedy. Public Service, 722 F.Supp. at 195. "In the marketplace, commercial parties may strike a bargain whereby the manufacturer restricts its liability by disclaiming warranties or limiting remedies in exchange for exacting a lower purchase price. When such a bargain is struck, public policy, as expressed through federal common law, is best served by restricting the parties to its terms rather than disrupting it by recognizing a concurrent cause of action in tort; a cause of action in which the bargained for allocation of risks is supplanted by a potentially limitless imposition of liability upon the manufacturer. Public Service, 722 F.Supp. at 196.

What is the scope and the limit of the phrase economic loss? "In essence, economic losses are all pecuniary damages not resulting from physical harm or property damage." Public Service, 722 F.Supp. 184, 193 n.4. "…[I]n Moorman Manufacturing Company v. National Tank Company, 91 Ill.2d 69, 61 Ill. Dec. 746, 435 N.E.2d 443 (1982)….'Economic loss' has been defined as 'damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits-without any claim of personal injury or damage to other property…." Chicago Heights Venture v. Dynamit Nobel of America, 782 F.2d 723, 726-727 (7th Cir.1986). In Pulte Home Corporation, Inc. v. Ply Gem Industries, Inc., 804 F.Supp. 1471,1488 (M.D.Fla.1992) the court surveyed the law and concluded that "[t]he economic loss doctrine bars tort actions for recovery of economic damages without accompanying physical or property damage. Florida Power & Light Co. v. Westinghouse Corp., 510 So.2d 899 (Fla.1987). 'Economic loss' has been defined as 'damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits-without any claim of personal injury or damage to other property…' Note, Economic Loss in Products Liability Jurisprudence, 66 Colum. L.Rev. 917, 918 (1966). Such economic losses are said to occur when the product injures only itself. East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 106 S.Ct. 2295, 90 L.Ed. 2d 865 (1986). The weight of authority states that such economic claims are founded in contract law and warranty law rather then (sic) in tort law. Seely v. White Motor Co., 63 Cal. 2d 9, 45 Cal. Rptr. 17, 403 P.2d 145 (Cal.1965); Chicago Board of Education v. A,C&S, Inc. 171 Ill.App.3d 737, 121 Ill.Dec. 643, 525 N.E.2d 950 (1988); Chicago Heights Venture v. Dynamit Nobel of America, Inc., 782 F.2d 723 (7th Cir.1986); McClain v. Harveston, 263 S.E.2d 228 (Ga. Ct.App.1979); Redarowicz v. Ohlendorf, 92 Ill.2d 171, 65 Ill.Dec.411, 441 N.E.2d 324 (1982); Rotonda Condominium Unit Owners Ass'n v. Rotonda Associates, 238 Va. 85, 380 S.E.2d 876 (1988); Sensenbrenner v. Rust, Orling & Neale Architects, Inc., 236 Va. 419, 374 S.E.2d 55 (1988); Wood Products, Inc. v. CMI Corp. 651 F.Supp. 641 (D. Md. 1986)." See also Leisure Founders, Inc. v. CUC International, Inc., 833 F. Supp. 1562, 1572 (S.D.Fla.1993) ("The 'economic loss rule' pronounced by the Florida Supreme Court in Florida Power & Light Co. v. Westinghouse Electric Corp. 510 So.2d 899 (Fla.1987) (contract for goods), and AFM Corp. v. Southern Bell Tel.&Tel., 515 So.2d 180 (Fla.1987) (contract for services), holds that without allegations of physical injury or property damages, there can be no independent tort claiming solely economic losses flowing from a contractual breach. Although the 'mere existence of a contract claim does not automatically vitiate all causes of action in tort,' (citation omitted), contract principles, rather than tort principles, must be applied to resolve claims solely for economic loss consequent to a breach of contract").

Interestingly, because the economic loss doctrine arose from the product liability setting it has often been seen as a rule of limitation, a rule walling off contract from tort rather than a tool of analysis. As a result, many of the cases have had to deal with litigants attempts to define the particular details of the rule -details which would be more apparent if approached conceptually rather than as a question of construction. In defining the shape of the rule, courts have had to deal with defining the meaning of injury to property , have had to determine if the rule applies with equal force to intentional as well as negligent actions which constitute a breach, have considered the question of misfeasance and nonfeasance discussed earlier, have considered whether it applies to fraud claims , or whether it is limited to product liability claims , or whether it is limited to claims for the sale of goods under the U.C.C or have considered whether the rule controls claims under service contracts .

The analysis by the courts of the questions relating to alleged intentional acts constituting breach and the meaning of 'other property' have been most illustrative of the analytic (as opposed to the prohibitory) elements of the economic loss doctrine. Like the earlier discussion of damages, the defining characteristic of 'other property' is based not on its character qua property but on whether it is within the contemplation of the bargain and therefore within the realm of contemplation in the event of an untoward result. "…[A]t least within the commercial context, the phrase 'other property' does not include the type of property that one would reasonably expect to be injured as a direct consequence of the failure of the product at issue….[T]he 'economic-loss doctrine precludes recovery in tort for claims that seek to recover damages for failed commercial expectations.'" Factory Market, Inc. v. Schuller International, Inc., 1997 U.S. Dist. LEXIS 13572, *31 (E.D.Pa.)(decided August 31, 1997).

In Serina v. Albertson's Inc., 744 F.Supp. 1113 (M.D. Fla.1990) the court considered whether an intentional act constituting a breach of contract would be treated differently from an unintentional breach for the purpose of permitting a tort claim. The court initially determined that the conduct complained of might support a tort claim but concluded that a) the economic loss rule applies to negligence and fraud alike, b) that it is irrelevant to the application of the economic loss rule whether the conduct alleged is intentional and c) that where the facts of the alleged tort claim and the contract claim are interwoven, the claim is a contract claim. Serina discussed the economic loss rule as it applies to both negligence and intentional tort claim. Without looking at the analytic purpose of the economic loss rule and taking it simply as a prohibitory rule where the claim is for economic loss, the court reviewed the existing precedent in Florida and elsewhere. Relying on Public Service Enterprise Group, Inc. v. Philadelphia Electric Co., 722 F. Supp. 184 (D.N.J. 1989) the Serina decision concluded that it was the "distinction between fraud extraneous to the contract and fraud interwoven with the breach of contract…" which was compelling in its analysis of the problem. "The torts of negligence and fraud are distinct torts with distinct elements. However, there is simply no basis presented or found for disparate treatment of fraud and negligence within the 'economic loss rule.' Furthermore, the Court finds the holding in Public Service Enterprise Group to be persuasive when the District court of New Jersey refused to make an exception for fraud in the 'economic loss rule' when the facts surrounding the tort claim are interwoven with the facts surrounding the breach of contract claim." Serina, 744 F.Supp. at 1118.

As the discussion of the cases dealing with the concepts of harm reflect simply looking at the result without reference to the factual context is impossible. It is equally necessary to describe the factual context to determine what legal duty is implicated. Courts, however, have sometimes attempted to determine classification directly from the facts of the claim by determining the extent of the entanglement, the interweave, of the facts supporting the tort and contract claims. Such reliance on distinguishing the operable facts was noted in Sun Co. and was depicted as a "gist of the action" determination. This approach requires application of educated judgment about what constitutes the framework and legal requirements of a particular class of actions. The essential effort is to try to include within Contract those things which are parts of the bargain-even when the bargain goes awry- and to exclude the things which are outside of the reasonable contemplation of commercial parties and therefore reasonably characterized as extrinsic to the context of the bargain relationship.

"The operative distinction is between fraud 'intrinsic' to the contract (in which non-performance of a provision of the contract is an element of the cause of action) and such conduct which is appropriately labeled 'extrinsic (in which non-performance is not a (sic) element of the cause of action, although it is relevant in providing the context within which the fraud occurred." Fireman's Fund, 942 F.Supp. at 840. See D.S. America (East), Inc. v. Chromagrafx Imaging Systems, Inc., 873 F.Supp. 786, 795-6 (E.D.N.Y.1995) ("Under New York Law, a party cannot maintain a fraud claim if the alleged fraud is merely the breach of contract. (citations omitted). Where the fraud claim is 'premised upon an alleged breach of contractual duties and the supporting allegations do not concern representations which are collateral or extraneous to the terms of the parties' agreement, a cause of action sounding in fraud does not lie.") In Chromagrafx, 873 F.Supp at 796, the defendant alleged in support of its fraud claim that plaintiff "…never intended to honor its stated intentions." The court held that to state a separate tort claim, "…the promise must be collateral or extraneous to the terms of the agreement, not merely a promise to perform under the express terms of the contract even if made with no intention to abide by the stated intention…. Analyzed under these principles, Chromagrafx's allegations of misrepresentations as to delivery date and technical assistance…state nothing more than breaches of promises of future performance that constitute the express terms of the contract, not promises collateral or extraneous to the contract. An alleged failure to perform these acts is a breach of contract…."

"The Pennsylvania Superior Court …has recently determined that for a claim 'to be construed as a tort action, the wrong ascribed to the defendant must be the gist of the action with the contract being collateral.'" Factory Market, Inc. v. Schuller International, Inc., 1997 U.S. Dist. LEXIS 13572, *21 (E.D.Pa.) (decided August 31, 1997) [quoting Redev. Auth. Of Cambria, 685 A.2d 581(1996)] ("FMI's claim that Schuller misrepresented the fact that its repairs would make the roof watertight are so intertwined with the obligations that flow from the Guarantees, the Court cannot find that the Guarantees are collateral to plaintiff's fraud count. Thus the Court concludes that plaintiff's fraud claim more properly sound in contract then (sic) tort…" at *27). See also Public Service Enterprise Group, Inc. v. Philadelphia Electric Co., 722 F.Supp. 184, 200 (D. N.J.1989) (quoting from Unifoil Corp. v. Cheque Printers and Encoders Ltd., 622 F. Supp. 268 (D.N.J.1985). "In Cheque Printers, a …defendant moved to dismiss a fraud claim against it. The defendant premised a fraud claim on the theory that the third party knew that the sales contract specified a certain type of foil to be used in making lottery tickets, and knowingly supplied another kind…. 'On the fraud claim [plaintiff] argues that Spring Motors does not directly address allegations of intentionally tortious conduct. This is true; but the reasoning of Spring Motors leads us to conclude that, as between commercial parties, New Jersey will not countenance such claims….This Court, moreover, has construed the law of New Jersey to prohibit fraud claims when the 'fraud contemplated by the plaintiff…does not seem to be extraneous to the contract, but rather on fraudulent performance of the contract itself.'"

In Florida, the courts have required additional conduct unrelated (except contextually) to the contract claim to support a tort claim. "…[R]ecovery in tort is nonetheless possible in a contract context if the plaintiff proves that a tort 'distinguishable from and independent of the breach of contract' was committed. A breach of contract, alone, cannot constitute a cause of action in tort… It is only when the breach of contract is attended by some additional conduct which amounts to some independent tort that such breach can constitute negligence…. In the Florida 'economic loss' rule cases dealing with fraud, either the conduct of the defendant is 'inextricable from the events constituting the breach of contract' or tort damages are not separate from the contract damages." Williams Elec. Co. v. Honeywell, Inc., 772 F.Supp.1225, 1237-1238 (N.D.Fla.1991). Quoting from Philadelphia Electric at 201 the Serina court noted, at pages 1117-18, that "…'the plaintiffs' fraud claims…are based solely upon misrepresentations and concealments of facts by PECO with respect to operations at the Peach Bottom plant; that is, fraudulent statements relating to PECO's performance of the Owners Agreement. Such fraud is not extraneous to the contractual dispute among the parties, but is instead but another thread in the fabric of plaintiffs' contract claim. Like the Plaintiffs' other tort claims, its fraud claim is under-girded by factual allegations identical to those supporting their breach of contract counts….This fraud did not induce the plaintiffs to enter into the original agreement nor did it induce them to enter into additional undertakings. It did not cause harm to the plaintiffs distinct from those caused by the breach of contract…'" A plaintiff's fraud claim is barred by the economic loss rule if the facts surrounding the tort claim are 'interwoven' with the facts surrounding the breach of contract claim. Serina v. Albertson's Inc., 744 F.Supp. 1113, 1117-8 (M.D. Fla.1990). An independent tort 'requires proof of facts separate and distinct from the breach of contract.'" Dantzler Lumber & Export Co. v. Bullington Lumber Co., 1997 U.S. Dist. LEXIS 9306, page 8 (M.D.Fla.1997).

Summary of Jurisprudence

Courts have consistently and carefully analyzed pleadings in commercial cases where both contract and tort claims are asserted. The courts have long recognized that Contract law is best suited for the resolution of commercial disputes and that Tort law should not be permitted to intrude in or reallocate commercial risk in bargain relationships. At the same time, the rights of parties to commercial engagements to be free from unanticipated and unbargained for harm at the hand of the commercial venturer must be preserved. To assure the interests of the parties and society are adequately considered and protected the courts have fashioned rules of construction designed to identify legitimate tort claims and to preserve contract prerogatives against intrusion by inappropriate tort claims. There are three approaches favored by the courts which have applied one, two or all of the methods in the same case. The first approach is to identify the duty claimed to have been breached. The second consideration is to identify the harm involved and to determine whether such harm was or could have been contemplated at the time of contracting. The courts have fashioned the economic loss doctrine as a codification of the damage or harm analysis. The final consideration is to determine whether the tort claim is inherent in the contract claim or whether it is separate and distinct. If the contract claim constitutes the gist of the action, then no separate claim for tort remedy will be permitted. This analytic effort is justified on the ground that "contract law…is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements. …There is no reason to extricate the parties from their bargain." East River, U.S. at .

Fraud Claims and Contract Performance

ABC Inc. pleads a fraud claim arising from the alleged misperformance of a service contract. Its claim is that a service technician failed to, or failed to properly, perform routine maintenance on a backup tape drive, noted that the service was performed in the service book, and upon the failure and reformatting of the computer hard disk all data was lost because the data had not been captured in the running of routine backup procedures. ABC Inc. claims that the notation of the service performed was false and was intended by XYZ Co. to be relied on by it. As evidence of reliance, ABC Inc. notes that if it had known of the failure of the backup system it would have taken steps to avoid the loss of data by getting alternative service, but because of the concealment of the breach of the service agreement it was prevented from so doing. ABC Inc. asserts that this is actionable fraud. Assuming for the initial purposes of this analysis that ABC Inc. has adequately alleged conduct which satisfies the basic elements of a fraud claim (i.e. a misrepresentation of existing fact knowing that the fact is untrue or having no reasonable basis to believe in its truth with the intention to cause the other party to rely thereon, reasonable reliance and resulting injury), it is clear that ABC Inc.'s allegation of fraud fails to state a tort separate and distinct from any contract claim under any one or all of the analytic approaches relied on by the courts generally and by Florida courts in particular.

ABC Inc.'s allegation fails to assert the breach of any separate duty. "…[I]f suit is brought to enforce a contractual obligation or is otherwise premised on a breach of contract-even if the alleged breach is attributable to fraud-the…contract actions controls." Fireman's Fund, 942 F.Supp. at 839. "Indeed, absent the enumerated contractual obligations, plaintiff's alleged conduct would not be actionable. Because plaintiff's duties arise out of the contract language itself and not from any other relationship between the parties, breach of those duties does not give rise to a claim for constructive fraud." The Reuben H. Donnelley Corp. v. Mark I Marketing Corp, 893 F.Supp. 283, 289 (S.D.N.Y.1995). See also Dantzler Lumber & Export Co. v. Bullington Lumber Co., 1997 U.S. Dist. LEXIS 9306, page 4 (M.D.Fla.1997) (stating that "[t]he additional shipping expenses and credits given to Dantzler's customers do not demonstrate distinct damages flowing from a separate tort duty"). XYZ Co. had no duty to provide maintenance service separate and apart from its contractual undertaking.

ABC Inc.'s allegation of fraud fails to allege any damage not in the contemplation of the parties. In fact the damages alleged are expressly disclaimed by the agreement between the parties "…I conclude that 'economic loss' rule bars a fraud recovery with respect to claims of fraud in the performance." Williams Elec. Co. v. Honeywell, Inc., 772 F.Supp.1225, 1238 (N.D.Fla.1991). "…'Where the compensatory damages requested in a count for tort are identical to the compensatory damages sought in a count for breach of contract, compensatory damages and punitive damages for the tort are not recoverable.' Rosen v Marlin, 486 So.2d 623, 626 (Fla. Dist.Ct.App.1986). See also Rolls v. Bliss & Nyitray, Inc., 408 So2d 229, 237 (Fla.Dist.Ct.App.1981) (stating that 'since plaintiffs failed to prove that they sustained compensatory damages based on a theory of fraud which were in any way separate or distinguishable from their compensatory damages based on the contract, we conclude that the plaintiffs have failed to meet the strict pleading and proof requirements necessary to recover compensatory and punitive damages based on fraud.')…." Kee v. National Reserve Life Ins. Co., 918 F.2d 1538, 1543 (11th Cir.1990).

ABC Inc.'s allegation of fraud fails to allege any conduct or facts in support of its claim which are in any way extrinsic to the contract between the parties. See D.S. America (East), Inc. v. Chromagrafx Imaging Systems, Inc., 873 F.Supp. 786, 795-6."Under New York Law, a party cannot maintain a fraud claim if the alleged fraud is merely the breach of contract. (citations omitted). Where the fraud claim is 'premised upon an alleged breach of contractual duties and the supporting allegations do not concern representations which are collateral or extraneous to the terms of the parties' agreement, a cause of action sounding in fraud does not lie." In Chromagrafx, 873 F.Supp at 796, the defendant alleged in support of its fraud claim that plaintiff "…never intended to honor its stated intentions." The court held that to state a separate tort claim, "…the promise must be collateral or extraneous to the terms of the agreement, not merely a promise to perform under the express terms of the contract even if made with no intention to abide by the stated intention…. Analyzed under these principles, Chromagrafx's allegations of misrepresentations as to delivery date and technical assistance…state nothing more than breaches of promises of future performance that constitute the express terms of the contract, not promises collateral or extraneous to the contract. An alleged failure to perform these acts is a breach of contract…." Here all that is alleged is that XYZ Co. promised to maintain ABC Inc.'s system which it failed to do properly.

In Public Service Enterprise Group, Inc. v. Philadelphia Electric Co., 722 F.Supp. 184, 200 (D. N.J.1989) (quoting from Unifoil Corp. v. Cheque Printers and Encoders Ltd., 622 F. Supp. 268 (D.N.J.1985) the court stated that "[t]his Court, moreover, has construed the law of New Jersey to prohibit fraud claims when the 'fraud contemplated by the plaintiff…does not seem to be extraneous to the contract, but rather on fraudulent performance of the contract itself.'" See also Factory Market, Inc. v. Schuller International, Inc., 1997 U.S. Dist. LEXIS 13572, *27 (E.D.Pa.)(decided August 31, 1997) ("FMI's claim that Schuller misrepresented the fact that its repairs would make the roof watertight are so intertwined with the obligations that flow from the Guarantees, the Court cannot find that the Guarantees are collateral to plaintiff's fraud count. Thus the Court concludes that plaintiff's fraud claim more properly sound in contract then (sic) tort…").

"One Florida appellate court…deciding under the economic loss rule that a showing of fraud at a trial of a breach of contract case could not support an award of punitive damages, noted the 'constant untangled thread running through all the cases' indicating that a fraud claim is precluded where it is 'associated with the performance of a contract ….'" Leisure Founders, Inc. v. CUC International, Inc., 833 F. Supp. 1562, 1572-3. "Where the complaint alleges fraudulent inducement, but the facts comprising the fraudulent inducement claim are closely interwoven with the (sic) those constituting the breach of contract, the economic loss rule bars the pleading of a separate tort claim. See Serina v. Albertsons's Inc., 744 F.Supp. 1113, 1118 (M.D. Fla. 1990); John Brown Automation, Inc. v. Nobles, 537 So.2d 614, 617-618 (Fla. 2d DCA 1988) (striking punitive damages for fraud where the misrepresentation was 'inextricable from the events constituting a breach of contract'); J. Batten Corp. v. Oakridge Investments 85 Ltd., 546 So. 2d 68, 69 (Fla. 5th DCA 1989) (dismissing fraud claim in breach of contract case." Leisure Founders, Inc. v. CUC International, Inc., 833 F. Supp. 1562, 1572. "It is clear that Florida law bars all claims for fraud where the plaintiff has a remedy in contract for the breach. See Interstate Securities Corp. v. Hayes Corp., 920 F.2d 769, 776-777 (11th Cir.1991). Where a contract exists, and the plaintiff asserts a claim for fraud in the breach, this is essentially the equivalent of a claim that the breach is willful. A claim for willful breach of contract is still a claim for breach of contract, and does not give rise to tort remedies, e.g. punitive damages, no matter how oppressive the breach." Leisure Founders, Inc. v. CUC International, Inc., 833 F. Supp. 1562, 1572.

Breach of contract is not fraud and will not support a claim for fraud, even where a plaintiff pleads intention or wantonness or some other reprehensible motive behind the breach. "U.S. East contends that it was defrauded because it was induced to continue on the GSA project by U.S. West's false promises to pay…On the other hand, U.S. West alleges that no facts independent of the breach of contract claim are provided by U.S. East in support of its fraud theory. Nor does U.S. East allege that U.S. West breached any duty beyond failing to pay according to the terms of the alleged oral agreement and as such, no claim of fraud is made out….[A] claim for fraud will be dismissed when 'the only fraud charged relates to a breach of contract….Including allegations of scienter or concealment in the complaint does not alter the nature of an action….[I]t is clear that like a rose, which if called by any other name is still a rose, a contract action labeled a fraud is no more that (sic) a simple contract action, regardless of allegations of scienter. Here, U.S. East's allegations of fraud and breach of contract are redundant because of its failure to allege any facts extraneous and collateral to the contract that would entitle it to relief on the claim of fraud. U.S. East Telecommunications, Inc. v. U.S. West Information Systems, Inc., 1991 U.S. Dist. LEXIS 4802, at page *4, (S.D.N.Y.1991). (emphasis added).

"Plaintiff may not simply point to a bad result and allege fraud…. Defendant's alleged failure to perform is inexplicably transformed into a claim that this failure amounts to fraud-'an intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right.' Blacks Law Dictionary 660 (6th ed.1990)…. [A]ssuming Defendants did in fact breach the Contract, the mere non-performance of an agreement is not evidence of fraud. (citations omitted). Sun Company Inc. v. Badger Design & Constructors, Inc., 939 F. Supp. 365, 369-370 (E.D.Pa.1996).

Fraud Claim based on Concealment of Breach

Essentially ABC Inc. claims that it is entitled to assert a fraud claim because XYZ Co.'s actions served to conceal the fact that it had breached the service contract with ABC Inc. The issue of whether a concealed breach will support a fraud claim has been previously considered and rejected. In "Brick [v. Cohn-Hall-Marx Co., 276 N.Y. 259, 11 N.E.2d 902 (1937)… the claim was that after the parties had entered into a contract regarding royalties for use of a certain type of package, which obligated the defendant to pay 7½ cents for each package sold and to keep accurate books and records showing the number of packages sold by it, and to render verified statements showing its package sales, the defendant 'kept false books, rendered false statements and made false statements for which it did not account,' thereby avoiding payment of royalties due under the contract. This clearly was a patent effort to disguise the breach of contract claim as one for fraud, in order to take advantage of a longer period of limitations in respect of fraud claims. The Court of Appeals in Brick, holding that the claim was time barred for failure to sue within the contract period of limitations, pointed out that: 'The falsity of these statements and the fraud of the defendant according to the allegations amounted to a breach of the contract and was no more or less a breach of the contract than if the defendant had deliberately refused to pay or neglected to pay…'" Triangle Underwriteres, Inc. v. Honeywell, Inc., 604 F.2d 737, 747 (1979). In The Reuben H. Donnelley Corp. v. Mark I Marketing Corp, 925 F.Supp. 203, 205-6 (S.D.N.Y. 1996) (Reuben Donnelley II) the counterclaim plaintiff asserted a claim for fraud based on the counterclaim defendant's "concealment of its use of the Markolor process." "Defendants' new fraud counterclaim is premised on plaintiffs alleged breach of a 'fiduciary duty' to classify directories honestly. Defendants allege that plaintiff intentionally misclassified directories into low rate royalty categories in order to shortchange defendants under the Agreement….[I]t still 'seeks to enforce no more than the breached promises and obligations of a contract.

"…[D]efendants contend that by alleging that plaintiff intentionally concealed its breach of the agreement, which misled defendants into not taking action against it, they have established a cause of action independent of the breach itself. Under New York law, however, alleged concealment of a breach is insufficient to transform what would normally be a breach of contract action into one for fraud. MBW Advertising Network v. Century Business Credit Corp., 173 A.D. 2d 306, 306-07, 569 N.Y.S.2d 682, 682 (N.Y. App. Div. 1991); Glynwill Investments, N.V. v. Prudential Securities, Inc., 1995 U.S. Dist. LEXIS 8262, No. 92 Civ. 9267, 1995 WL 363500, at *6-*7 (S.D.N.Y. June 16, 1995); Airlines [Reporting Corp. v. Aero Voyagers, Inc.], 721 F.Supp. [579 (S.D.N.Y. 1989)] at 582; Vista [Co. v Columbia Pictures Indus. Inc.], 725 F.Supp. [1286 (S.D.N.Y. 199?)] at 1294. In MBW, the plaintiff pled fraud based, in part, on the defendant's misrepresentations that it was properly performing under a contract. Upholding the dismissal of the fraud claim, the court held that 'a cause of action for fraud will not arise if the alleged fraud merely relates to the breach of contract.' (citation omitted). As in MBW, here, plaintiff's alleged concealment of its breach is nothing more than a breach of the contract itself. Moreover, the fact that defendants are not seeking compensatory damages for fraud separate from those flowing from the breach of the Agreement itself bolsters the holding." The Reuben H. Donnelley Corp. v. Mark I Marketing Corp, 893 F.Supp. 283, 289 (S.D.N.Y.1995) (Reuben Donnelley I).

In Public Service Enterprise Group, Inc. v. Philadelphia Electric Co., 722 F.Supp. 184, 200 (D. N.J.1989) the court noted that "In Public Service Co. of N.H. v. Westinghouse Elec. Co., 685 F. Supp. 1281 (D.N.H.1988), the complaint alleged that the defendant fraudulently concealed facts about two failing turbine blades in a steam turbine electric generator which defendant supplied to the plaintiff. The plaintiff contended that if it had been told the true facts it would have had the blades inspected and would have avoided a subsequent breakdown and a resulting shutdown of the power plant. The court indicated that defendant's duty to warn arose from the terms of the contract, rather than any common law duty…The gravamen of plaintiff's fraud claim was that it did not get the benefit of its bargain because the defendant's withholding of information breached the defendant's contractual duty ….As such, the plaintiff did not have an independent fraud claim under tort law. Instead, these allegations were properly regarded as another way of stating a claim for breach of contract." The court further stated that "…[t]he mere fact that disclosure of certain facts to plaintiffs earlier may have allowed them to take corrective action does not change the result. If a plaintiff knew, for example, that he was being supplied with unsuitable goods he could act to obtain other goods and therefore avoid any harm from the supplier's breach. However, in just this type of situation courts have held that tort remedy does not exist." Public Service, 722 F.Supp. at 201 "…[I]s it not usually the case that anytime a defendant misrepresents the status of its contractual performance and therefore postpones the plaintiff's awareness of a breach, that it prevents the plaintiff from taking action to minimize the harm caused by the breach or to end the contractual relationship….No distinct harm results. Public Service, 722 F.Supp. at 210. (emphasis added).

In Dantzler Lumber & Export Co. v. Bullington Lumber Co., 1997 U.S. Dist. LEXIS 9306, (M.D.Fla.1997) the claim at issue involved the alleged "strawberry packing" ("an industry packing term where conforming lumber is placed on the outside, and non-conforming lumber is hidden in the middle surrounded by the conforming lumber. This packing method hides the non-conforming lumber from view, and only disassembly would reveal the non-conforming material." page 1) of lumber pallets. Plaintiff asserted both contract and fraud claims. As the court held, "Bullington's sales contract concerned the quality and characteristics of the lumber products. The alleged wrongdoing by Bullington concerned only these characteristics which were defined by the contract. Dantzler's injury resulted only from its reliance on the performance by Bullington. (emphasis added). "The analysis of the independent fraud claim should not focus on the possibility that recognition of the breach of contract would prevent further undertakings. See Public Service, 772 F. Supp. At 201. Dantzler attempts to create a new fraud in the inducement cause of action based on a duty to disclose a breach of contract. Florida cases do not appear to go so far. Dantzler, 1997 U.S. Dist. LEXIS 9306, page 12 (emphasis added).

"…I conclude that 'economic loss' rule bars a fraud recovery with respect to claims of fraud in the performance. Here, Williams claims that Honeywell failed to disclose these fraudulent billings, falsified records, etc., thereby covering up its breach. This is fraud in the performance, and is barred by the economic loss rule." Williams Elec. Co. v. Honeywell, Inc., 772 F.Supp.1225, 1238 (N.D.Fla.1991).