Misrepresentations As to Work Performed by Contractors Only Support Action for Breach of Contract and Not Fraud

(Last Updated On: January 24, 2017)

The Supreme Court of Virginia recently applied and reaffirmed the rule that representations as to performance of duties imposed by contract, although unquestionably deliberate and false, only support recovery of compensatory damages based on breach of contract and not punitive damages based on fraud. Dunn Construction Company, Inc., v. Cloney, 278 Va. 260 (2009).

Dunn entered into a contract to partially construct a house for Cloney. The contract required that all work by Dunn would “be completed in a workmanlike manner according to standard practices.” Dunn failed to construct the front foundation wall in accordance with standards set forth in the applicable building code and the wall cracked and bowed. Dunn undertook repairs consisting of the addition of steel rebar in some of the concrete cinderblock units and filling some of the cinderblock with concrete up to the level of the cracks.

Dunn presented a final bill to Cloney along with a written statement guaranteeing the wall for 10 years and representing that it had been repaired by inserting rebar in every cinderblock and filling each with concrete to the top of the wall. A subsequent inspection revealed that the wall had not been filled with reinforced concrete or adequately reinforced with rebar as represented by Dunn.

Cloney filed suit against Dunn alleging claims for breach of contract, negligence and fraud. Cloney sought recovery of compensatory damages for the cost of repairs and punitive damages for the fraudulent misrepresentations. A jury returned a verdict for Cloney awarding $33,838 in compensatory damages for breach of contract and $25,000 in punitive damages for fraud. The trial court entered judgment for Cloney in accordance with the verdict and Dunn appealed the award of punitive damages.

The Supreme Court reversed the judgment for punitive damages. As a general rule, damages for breach of contract are limited to compensation for pecuniary loss. A single act may, in certain circumstances, give rise to actions for both breach of contract and tort such as fraud, thus permitting recovery of both compensatory and punitive damages. Nevertheless, the Court has consistently ruled that to recover damages in tort the duty breached must be a duty not existing solely by virtue of a contract. Thus, the issue in Dunn was whether the alleged misrepresentations violated a duty separate and apart from Dunn’s duties under the contract.

The Court held that the duty breached by Dunn arose from his contractual duty to construct the wall in accordance with standard practices and in compliance with the building code. Therefore, the false representation related to a contractual duty. The Court made it clear that while it did not condone such misrepresentations, a breach of contract may not be converted into an actionable fraud claim, “simply because of misrepresentations of the contractor entwined with a breach of the contract.”

The Court in Dunn relied on the prior decision in Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 256 Va. 553, 507 S.E.2d 344 (1998). Both of the cases involved alleged misrepresentations by a contractor connected to its performance of contractual duties. In each of the cases the Court held that an action for fraud may not be maintained where the source of the duty allegedly breached is contractual. It should be noted that these cases are distinguishable from those cases involving parties who fraudulently represented an intention to perform an un-completed contractual duty. Such misrepresentation will support a claim for fraudulent inducement.