The Tennessee Court of Appeals recently issued an opinion extending application of the economic loss doctrine to certain construction claims. Among other things, the economic loss doctrine prevents a party from recovering on a non-contractual claim for damages when the subject matter of the claim is addressed in a contract between the parties. The opinion has significant implications for owners, contractors and subcontractors on projects in Tennessee.
Background
The Weitz Company, Inc., acting as general contractor for the construction of a retirement community, subcontracted with Commercial Painting Company, Inc. (CPC) to install drywall at the project. When the parties entered into the subcontract, the project was already six to eight months behind schedule. CPC claimed that Weitz misled it about the extent of the delay and scope of work and that Weitz began compressing the schedule and supplementing CPC’s work to make up time. Weitz also obtained a six-month extension from the owner but told CPC it had received only a four-month extension.
At trial, CPC’s claims included breach of contract and fraud related to the schedule and scope of work representations. A jury awarded CPC $1,729,122.46 in compensatory damages on both claims and $3,900,000 in punitive damages on the fraud claim. Weitz appealed, asserting that the economic loss doctrine prevented CPC from maintaining its fraud claim and from recovering punitive damages, which are generally unavailable for breach of contract.
Summary of the Tennessee Court of Appeals’ Decision
The court began its analysis by exploring the history of the economic loss doctrine around the country and in Tennessee. Although the doctrine is applied in various ways, the court focused on applying the doctrine between parties to a contract where one of them seeks a remedy in tort. “In general, tort offers a broader array of damages than contract. The economic loss doctrine precludes parties under certain circumstances from eschewing the more limited contract remedies and seeking tort remedies.”
Despite this general rule, many states have adopted exceptions to the economic loss doctrine where a party alleges fraud in connection with forming the contract. Most states apply this exception broadly, allowing claimants to assert fraud claims despite the economic loss doctrine because “the duty not to commit fraud exists independent of any contract.” Other states have taken a more limited approach, allowing fraud claims where a party’s misrepresentation induces another to enter into a contract, but only where the misrepresentation concerns matters “extraneous to the contract’s terms.” The rationale for this approach is that allowing tort claims for matters covered in a contract would further blur the line between tort and contract law, which is precisely what the economic loss doctrine exists to prevent.
Tennessee had previously adopted the economic loss doctrine and limited fraud exception, seemingly only in cases involving defective products. In the 2021 Milan Supply Chain case, the Tennessee Supreme Court held that “the economic loss doctrine applies only if the misrepresentation by the dishonest party concerns the quality or character of the goods sold.” Based on this holding, CPC argued that the economic loss doctrine and limited fraud exception applied only to cases involving product liability or the sale of goods. Weitz took a broader view and, after analyzing prior decisions from Tennessee and other states, the Court of Appeals agreed:
“First, we note that most states have not limited the doctrine to the products liability context…. [T]he reasoning employed by the Tennessee Supreme Court in Milan Supply Chain hews most closely to the reasoning of those jurisdictions that have extended the economic loss rule beyond its origination…. 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 contracts outside the sale of goods arena.”
Citing an Arizona case, the court went out of its way to note that this principle applies with even greater force to construction contracts, which are “typically negotiated to have specific provisions detailing the allocations of risks and specifying remedies.” Thus, the court explicitly extended the economic loss doctrine and the limited fraud exception to contracts other than those involving only the sale of goods, including construction contracts. In keeping with the Milan Supply Chain decision, however, the court specifically limited the extension of the doctrine to cases where the contract at issue is negotiated between “sophisticated commercial business entities.”
Based on this holding, the court found that the economic loss doctrine barred CPC’s fraud claim because Weitz and CPC were sophisticated commercial business entities, and the limited fraud exception did not apply because Weitz’s misrepresentations about the schedule and scope of work pertained to matters covered in the subcontract. Therefore, the court reversed the $3,900,000 punitive damage award but upheld the award of $1,729,122.46 in compensatory damages on CPC’s breach of contract claim.
Implications for Project Participants in Tennessee
The Commercial Painting decision limits the scope of claims and damages available to owners, contractors and subcontractors on projects in Tennessee, where there has been no fraud related to matters beyond the contract. As such, project participants would be wise to closely analyze the remedies and damages available to them under their contracts and subcontracts, and those remedies that are expressly waived or excluded. Except in cases of serious fraud, and assuming the contract is between “sophisticated commercial business entities,” the parties likely will be stuck with the rights and remedies available to them under their contract and applicable contract law. It remains to be seen whether the economic loss doctrine and limited fraud exception will be extended to the residential construction context, where some parties are typically not sophisticated business entities.
Commercial Painting Co. Inc. v. Weitz Co. LLC, No. W201902089COAR3CV, 2022 WL 737468 (Tenn. Ct. App. Mar. 11, 2022).
If you have any questions about the Commercial Painting decision and how it may impact your business, please contact the authors.