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The economic loss rule was applied by a trial court to bar a homeowner in a contractual relationship with a contractor from suing for fraud instead of only for breach of contract. This was reversed on appeal, with the appellate court holding that while claims for negligence are barred by the economic loss rule where a valid contract exists between the litigants, claims for fraud are not barred. The homeowner may, therefore, assert both claims. Bradley Woodcraft, Inc. v. Bodden, 795 S.E. 2d 253 (North Carolina 2016).

In this case, the court stated that the homeowner presented evidence at trial tending to establish that the contractor misrepresented that he was licensed, that he billed her for items that were not delivered, and he promised to perform certain work without any actual intention of doing so.

In explaining the economic loss rule, the court quoted from a decision in the case of “Lord v. Customized Consulting Specialty, Inc., 182 N.C.App. 635, 639, 643 S.E.2d 28, 30–31 (2007) as follows:

Simply stated, the economic loss rule prohibits recovery for purely economic loss in tort, as such claims are instead governed by contract law…. Thus, the rule encourages contracting parties to allocate risks for economic loss themselves, because the promisee has the best opportunity to bargain for coverage of that risk or of faulty workmanship by the promisor. For that reason, a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract, even if that failure to perform was due to the negligent or intentional conduct of that party, when the injury resulting from the breach is damage to the subject matter of the contract. It is the law of contract and not the law of negligence which defines the obligations and remedies of the parties in such a situation.

The court goes on to explain that decisions subsequent to the quoted decision limited the economic loss rule so that it did not apply to all “torts” as might have been suggested but rather only to prohibit negligence actions. No cause of action for negligence will be permitted when the plaintiff has a breach of contract action available. But a fraud action is permitted to proceed. For this reason, the court reversed the trial court decision and sent the case back for retrial on all issues.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 19, No. 9 (Sep 2017).

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