Inside this Issue
- A1 - $3 Million Punitive Damage Award for Misrepresentation Reversed Due to Economic Loss Doctrine and also Waiver of Consequential Damages Clause in Contract (Prevailing Party Attorneys Fees also Awarded)
$3 Million Punitive Damage Award for Misrepresentation Reversed Due to Economic Loss Doctrine and also Waiver of Consequential Damages Clause in Contract (Prevailing Party Attorneys Fees also Awarded)
A jury found Weitz Company liable to a subcontractor for $1,729,122 in compensatory damages for breach of contract. It also awarded punitive damages of $3,900,000 for intentional misrepresentation and $1,103,549 for attorneys fees. On appeal, the court affirmed the compensatory damages award but reversed the punitive damages because the couldn’t be recovered under the contract sine the contract included a waiver of consequential damages and they couldn’t be recovered under tort law because the economic loss doctrine in the state prohibited such tort recovery. Commercial Painting Company, Inc., 2022 WL 737468 (Court of Appeals, Tennessee).
COMMENT: This case demonstrates the power of the economic loss doctrine to prohibit economic losses under tort theories, and it shows the importance of including a good waiver of consequential damages clause in the contract to prohibit recovery of these types of damages under the contract. The Prevailing Party attorneys fees clause entitled the subcontractor to recover attorneys fees. Two clauses that our firm at ConstructionRisk, LLC typically add to contracts are the following:
Mutual Waiver of Consequential Damages
“Consultant and Client waive all consequential or special damages, including, but not limited to, loss of use, profits, revenue, business opportunity, or production, for claims, disputes, or other matters arising out of or relating to the Contract or the services provided by Consultant, regardless of whether such claim or dispute is based upon breach of contract, willful misconduct or negligent act or omission of either of them or their employees, agents, subconsultants, or other legal theory, even if the affected party has knowledge of the possibility of such damages. This mutual waiver shall survive termination or completion of this Contract.”
Prevailing Party Attorneys Fees (Use this only if the clause cannot be deleted)
“Prevailing party is the party who recovers greater than 67% of its total claims in the action or who is required to pay no more than 33% of the other party’s total claims in the action when considered in the totality of claims and counterclaims, if any. In claims for monetary damages, the total amount of recoverable attorney’s fees and costs shall not exceed the net monetary award of the Prevailing Party.”
The subcontract for the painting subcontractor in question was for $3,222,400. Key subcontract language stated:
“In no event shall [Weitz] be obligated to pay [Commercial Painting] any anticipatory profit or indirect, special, or consequential damages, however caused, and [Commercial Painting] hereby waives all such Claims. Without limiting the generality of the foregoing, [Commercial Painting] specifically agrees that it shall not be entitled to assert, and it hereby waives, any Claims in quantum meruit, interest on latepayments, or any other measure of damages other than as specifically provided [in the Subcontract].”
Weitz hired additional workers to supplement the work of Commercial Painting and then withheld payment from Commercial – refusing to pay numerous payment requests. Commercial Painting alleged that at the time the parties entered into the subcontract, Weitz was already approximately six to eight months behind schedule on the project. Commercial Painting asserted that Weitz improperly and unreasonably compressed construction schedules in order to make up for the delay on the project. Weitz argued, however, that the project became further behind once CommercialPainting began working on the project due to allegedly poor workmanship and failure to provide enough workers to timely complete the project. Because of this, Weitz allegedly began negotiating with the project owner regarding an extension on the contract completion date. The court explained:
“It appears that the project owner eventually allowed a six-month extension, but Commercial Painting wasonly informed that an extension of approximately four months had been granted. According to Commercial Painting, Weitz intentionally and fraudulently failed to disclose the full extent of the extension, in violationof the letter and spirit of the contract. Even with the extension, however, Commercial Painting alleged thatWeitz continued to compress its schedules and improperly supplement its work because the extension did not entirely mitigate the eight-month delay on the project.”
The question before the appellate court was whether Commercial should have been allowed to recover in tort rather than solely under its contract. Commercial Painting argued that the case involved not only contractual claims, but a claim ofintentional misrepresentation—a tort. As such, Commercial Painting contends that its ability to recover is not limited by theparties’ contract but may include all damages that flow from the wrong, including punitive damages. In response, Appellants contend that Commercial Painting may not recover under tort theories under two separate doctrines—theindependent duty rule and the economic loss doctrine.
The court explained that, “The economic loss doctrine, or economic loss rule, is a judicially- created rule that was developed in response to concerns that “tort law would erode or consume contract law.” “It has been described as a‘judicially-created remedies principle that operates generally to preclude contracting parties from pursuing tort recovery forpurely economic or commercial losses associated with the contract relationship.’ “In other words, the rule “ ‘prevents aparty who suffers only economic loss from recovering damages under a tort theory.”
Most courts around the country allow plaintiffs to assert fraudulent inducement claims notwithstanding the economic lossrule “because the duty not to commit fraud exists independent of any contract.”
For cases in Tennessee, the Tennessee Supreme Court has declined to issue a broad rule either extending the economicloss rule to all fraud claims or exempting all fraud claims from the economic loss rule. “Instead, the Court held that where a situation involves a contract between sophisticated commercial entities and the plaintiff seeks to recovereconomic losses only, “the economic loss doctrine applies if the only misrepresentation[s] by the dishonest party concern[ ] the quality or character of the goods sold.” This rule, according to the supreme court, strikes “a careful balance” betweenthe “freedom of contract and the abhorrence of fraud.”
“Tennessee law has long held that courts cannot rewrite the contracts of parties, even when the terms negotiated therein later prove burdensome or foolhardy. This principle applies with equal force to contractsoutside the sale of goods arena; indeed, it is oft cited in cases involving construction contracts…. Here, bothparties are sophisticated commercial business entities. The parties’ contract was drafted after negotiation and investigation by the parties.”
“The misrepresentations at issue here clearly involved the subject matter of the parties’ agreement.Specifically, the question presented to the jury concerning Weitz's intention misrepresentation asked whetherWeitz made false misrepresentations about the length of time Commercial Painting would have to perform itswork or about the amount of work Commercial Painting would be required to perform. Issues of time,duration, and the scope of work were covered by the Subcontract.”
“There can also be little dispute that the damage that allegedly resulted from Weitz's tortious conduct completely overlaps with the damage that resulted from their breach of contract; indeed, Commercial Painting insists in this appeal that a single damage calculation included in an exhibit is proof of the damagethat resulted from all the various causes of action that it asserts. As a result, we must conclude thatCommercial Painting's fraud claim is barred by the economic loss rule and must be dismissed.”
Commercial Painting asserts that the court’s inquiry should be whether material evidence supports the jury's finding that Weitz engaged in egregious conduct intentionally, fraudulently, maliciously, or recklessly. The court disagreed, and explained that because the economic loss rule is applicable here, Commercial Painting is limited to its own contract remedies. “Unlike the typical cases in which punitive damages have been awarded in breach of contract cases, the partieshere agreed to specific provisions related to the damages that could be recovered in relation to the Project.”
In this case, item 11.6 of the Subcontract contains a rather broad limitation on damages that precludes recovery of “specifically agrees that it shall not be entitled to assert, and it hereby waives, any Claims in quantum meruit, interest on late payments, or any other measure of damages ….”
Commercial Painting offers no authority to suggest that a contractual waiver of punitive damages is wholly unenforceable under any circumstances. Indeed, limitations on liability are not disfavored in Tennessee:
The court explained that limitations of liability clauses are not disfavored in Tennessee and “that parties to an agreementhave the right and power to construct their own bargains.” This Court has consistently recognized that the right of parties to allocate liability for future damages through indemnity clauses, generally, is not contrary to public policy.
“Indeed, limiting parties to their agreed upon contractual remedies is the very purpose of the economic loss rule when applicable to a situation that is governed by a contract. And, when the rule is applicable, this limitation applies even where fraud is present if the contract is between sophisticated commercial entities and results in only economic losses, as is the case here. As such, to allow punitive damages that have been clearly waived under the Subcontract would essentially be to negate the entire purpose of the economic lossrule as it applies in this specific case. We decline to do so. Because Commercial Painting offers no other basis from which to avoid the consequences of its own agreements, we reverse the award of punitivedamages as not authorized by the Subcontract.”
Prevailing Party Attorneys Fees
The trial court awarded Commercial Painting costs and attorney's fees in the amount of
$1,103,549.00. The contract contained a prevailing party attorneys fees clause as follows:
“In the event it shall become necessary for either party to institute legal proceedings against the other party for recovery of any amounts due and owing under the Agreement, it is expressly agreed that the prevailing party in any such action shall be entitled to recover from the non-prevailing party all costs, includingreasonable attorney's fees, of pre-suit collection attempts, suit, and post judgment or settlement collection including those incurred on appeal.”
When attorney's fees are limited to a “prevailing party,” the trial court must determine which party prevailed. According to the Tennessee Supreme Court: a “prevailing party” is “[a] party in whose favor a judgment is rendered, regardless of the amount of damages awarded.” The Court has also noted that a party need not attain complete success on the merits of a lawsuit in order to prevail. Rather, a prevailing party is one who has succeeded “ ‘on any significantissue in litigation which achieves some of the benefit the parties sought in bringing suit.’ ”
“We conclude that despite the reversal of much of the damages in this case, Commercial Painting did prevail in the trial court, in that it was awarded substantial compensatory damages. Because the costs and attorney's fees awarded by the trial court do not segregate those costs and fees solely associated with thecompensatory damages award, however, we deem it necessary to vacate the award and remand to the trial court for reconsideration. On remand, the trial court shall determine the reasonable costs and attorney's fees incurred by Commercial Painting in securing the award of compensatory damages in the trial court proceedings. We must conclude, however, that in obtaining reversal of a significant portion of the damagesawarded by the jury in this appeal, Appellants are properly termed the prevailing party of this appeal.Commercial Painting is therefore not entitled to attorney's fees incurred on appeal.”
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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 24, No. 8 (October 2022).
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