This post takes yet another look at whether and when North Carolina law allows a claim for violation of N.C. Gen. Stat. § 75-1.1 when the claim relates to the subject-matter of a contract.

As a matter of orientation, let’s first review three principles that most often affect this type of claim:

1. Substantial aggravating circumstances. North Carolina courts have interpreted section 75-1.1 to exclude contract breaches, even if intentional. But when conduct is attendant to a breach, and that conduct has “substantial aggravating circumstances,” then the conduct might violate section 75-1.1.
2. The economic-loss rule. This doctrine forecloses a party from asserting a tort claim that arises from a contract breach.
3. The independent-tort doctrine. This doctrine clarifies that a party to a contract can assert a tort claim against the other contracting party if the claim rests on a different obligation than a contract obligation.

One could reasonably read the above summaries and ask, “Don’t all three principles really say the same thing?”

The recent decision in AVX Corp. v. Corning Inc. provides a basis to look at that good question.

Lucky number fourteen

AVX concerns a property in Raleigh with environmental contamination. Corning sold it back in 1987 to AVX. That sale—no surprise—was fully papered on the matter of environmental liabilities and imposed remediation obligations on Corning.

Those papers didn’t stop years of squabbling about Corning’s performance of those obligations. At one point, in 2013, Corning’s consultant submitted a report to the State of North Carolina about the contamination. That report denied the existence of serious contamination.

AVX claims that the report was false, that Corning hadn’t adequately remediated the contamination, and that it couldn’t sell the property as a result.

Cue the lawsuit. By last October, AVX had filed its third iteration of the complaint. It featured fourteen different claims! One of those claims, of course, alleged that Corning violated section 75-1.1.

Corning moved to dismiss. As you probably guessed, Corning’s lead argument pointed to the contract papers between AVX and Corning. Corning argued that, under the economic-loss rule, those papers foreclosed AVX from pursuing non-contract claims. All of the claims, after all, concerned contamination at the property—the subject of the contract papers.

In response, AVX argued that its tort claims concerned duties that Corning owed to AVX separate and apart from duties owed under the contract.

How did the Court rule?

Timing is everything

In analyzing the parties’ arguments, the Honorable Louise Flanagan parsed the complaint’s allegations. Her opinion cited to specific paragraphs in the third amended complaint that reflected an overlap between the 75-1.1 claim and the claim for breach of contract. Judge Flanagan dismissed these claims under the economic-loss rule.

But Judge Flanagan distinguished the 75-1.1 allegations that were co-extensive with the contract claim from the 75-1.1 allegations that were independent of that claim.

In particular, her opinion pointed to Corning’s report to the State, which occurred in 2013, well after the initial contract. The opinion noted that the third amended complaint did not allege that Corning breached the contract through the misrepresentations in that report.

The upshot was that, while much of the 75-1.1 complaint did not survive the pleadings, at least one aspect—and the threat of treble damages—lived to fight another day.

Contracts and Rule 12 motions

The start of this post noted multiple relevant doctrines when a 75-1.1 claim has some connection to a contract.

The doctrine that most often comes into play is the “substantial aggravating circumstances” doctrine. But, in AVX, Corning didn’t move to dismiss on this ground. Corning instead turned to the economic-loss rule.

The opinion shows the benefit of that decision. Even though the substantial aggravating circumstances doctrine is robust from a defense perspective, it might be less successful in a Rule 12(b)(6) motion when—as in AVX— the 75-1.1 claim concerns deception.

The economic-loss rule, in contrast, might have brighter and more objective lines. If the 75-1.1 claim concerns the subject-matter of the contract, the rule arguably applies.

The primary exception is if the claim concerns a duty independent of the contract. As AVX shows, the application of that doctrine turns on the pleading of specific facts that show a distinct non-contractual duty, rather than on whether the complaint sufficiently amplifies allegations of deception to create the fog of “substantial aggravating circumstances.”

In the end, these doctrines are closely related, and plaintiffs and defendants alike can benefit from gaming out each doctrine’s application at the outset of a case.

Author: Stephen Feldman