Daily Development for Wednesday, July 21, 1999

Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

VENDOR/PURCHASER; MISREPRESENTATION; FRAUD; ECONOMIC LOSS RULE: "Economic Loss Rule" bars recovery for fraud even where fraud occurred if the fraud was in the context of a contract negotiation, dealt with the subject of the contract, and only economic damages were sustained. Pressman v. Wolf, 1999 WL 30366 (Fla. 3d DCA 1999).  

The purchaser of a home brought an action against the vendor claiming breach of contract and fraudulent misrepresentation, among other claims. Buyers' inspectors pointed to the fact that the air conditioning system and pool lacked necessary repairs, and that until those repairs were made, it was impossible to assess the integrity of those systems. The plaintiff alleged that the defendant sellers had told them specifically that the air conditioning system and the pool, despite reservations voiced by defendant's own inspectors, "worked perfectly" and that the replacement parts would solve the problem. The plaintiffs also alleged that the defendants indicated that a certain contractor would carry out all repairs for $100,000.

The parties bargained over these issues, and ultimately agreed upon a price reflecting the $100,000 budget for repairs, but the warranties in the contract as to the operating nature of the house systems was deleted and a prominent "as is" clause was added.

Later, the designated contractor proved unsatisfactory to buyers, who dismissed him and ultimately spent $225,000 on repairs. After two mistrials, the buyers finally got a jury verdit for $125,000 and $40,000 punitive damages.

On appeal: Held: Reversed.  

The appellate court obviously had a different view of the facts than the jury, and the subtext in its opinion reads that the buyers in this case had to be complete idiots to believe anything that the sellers told them about the condition of the house. Unfortunately for this reviewer, the appeals court, not having the witnesses before it, is hardly an appropriate judge of facts such as those here.

The appeals court nevertheless was on sound foundation with regard to the misrepresenatation count in the complaint. It held that the purchaser was not entitled to recovery because there was no material misrepresentation as to the condition of the home when that buyer had the opportunity to discover any defects in the home.

The purchaser, in making its misrepresentation claim, chiefly relied on Johnson v. Davis, 480 So.2d 625 (Fla. 1985), which stands for the proposition that if a vendor of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, then the vendor is under a duty to disclose them to the purchaser. However, the court distinguished Johnson by noting that that case also requires that recovery be limited to those conditions "which are not readily observable and are not known to the buyer." Johnson at 629.

The appellate court also rejected the purchaser's claims of fraudulent inducement, based upon a theory that a fraud claim was barred by the economic loss rule. A leading case adopting this rule, cited by the court, is Huron Tool and Eng'g Co. v. Precision Consulting Services, Inc., 532 N.W. 2d 541 (Mich. App. 1995). The Huron case held that a plaintiff could not avoid the statute of limitations on a claim for faulty goods by claiming a tort of fraud where the sole damages were economic in nature. The case cites UCC doctrine, but clearly holds that the concept is rooted in the common law and goes beyond the UCC. The idea is that a party who alleges fraud in the nature of a misrepresentation of quality, rather than what the court terms "fraud in the inducement," is essentially arguing breach of contractual understandings. The party should have incorporated these understandings into the agreement, and should be left to the breach of contract claim as its sole remedy.

The court in the instant case then held that, because the alleged misrepresentations here concerned the quality and characteristics of the subject of the contract, they were part of the contract understandings rather than "extraneous" to it, and the economic loss doctrine would apply. Therefore, there could be no claim based upon fraud.

Comment 1: The editor admits to being very puzzled here. There is some ring of authenticity to this "economic loss" doctrine, and the editor would prefer to place limits on tort actions as substitutes for contract actions. The notion here is that the buyers couldn't have been that defrauded if the elected not to have the basic contract language to back up what they said the sellers told them. That makes some sense as well. It's the "line drawing" that has the editor in a tizzy. The court talks about "fraud in the inducement" as if it is a well understood term in this context that everyone can recognize. Wouldn't any fraud committed in order to bring about execution of a contract be, literally, "fraud in the inducement? The editor doesn't believe that is what the court intends. What, then, is the "magic measure" of what is actionable fraud and what is not.  

Comment 2: The way the court portrays the facts which is certainly different than the way the jury and the trial judge saw them this was an obvious situation to at least demand contract assurances. But what if the selers' were "very, very convincing?" We have all been conned before. It can happen to anyone. At bottom, if we are going to have faith in the jury system (a question that the editor finds interesting as well, but not the point here), we have to accept that a jury, properly instructed, could find actionable fraud on these facts. If it is not a case in which the plaintiffs lose because of carelessness, but because plaintiff were fooled by a master, the editor is loathe to acknowledge that tortious fraud should not be found.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.