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The Economic-Loss Rule: Conflicting Signals

Ellis Winters

Ellis & Winters

As we have discussed before, courts in North Carolina have not agreed on how the economic-loss rule applies, if at all, to claims under N.C. Gen. Stat. § 75-1.1.  Two recent decisions by the North Carolina Court of Appeals—ten days apart—illustrate the varying approaches to this issue.

Applying the economic-loss rule to section 75-1.1 (sort of)

The economic-loss rule holds that when a claim involves economic losses in a contractual setting, a plaintiff cannot use extracontractual claims to recover those economic losses.

On December 30, 2016, in Buffa v. Cygnature Construction & Development, Inc., the Court of Appeals held that the economic-loss rule barred a section 75-1.1 claim.

In 2006, the Buffas built a home in Beech Mountain.  Five years after the construction ended, the Buffas discovered extensive water damage that had already harmed the structural integrity of the home.  Several inspections suggested that the water had entered through windows.

The Buffas sued several companies associated with the construction, including the window manufacturer.  The Buffas’ 75-1.1 claim against the window manufacturer stated only the following (emphasis added):

Windsor Windows engaged in unfair and deceptive acts or practices . . . when, in selling and advertising the windows in the Buffa Home, Windsor Windows failed to give the Buffas adequate warnings and notices regarding the defect in the windows despite the fact that Windsor knew or should have known of this defect, with the intent that the Buffas would rely upon Windsor’s failure to disclose the defect when purchasing the windows.  The Buffas were deceived by and relied upon Windsor Windows’ failure to disclose.

The trial court granted summary judgment in favor of the window manufacturer.  The court held that the economic-loss rule barred the 75-1.1 claim and several tort claims.

The Buffas appealed.  On the section 75-1.1 claim, the Buffas argued that the economic-loss rule does not apply to 75-1.1 claims at all.  They cited a string of state and federal cases that, they argued, allowed consumers to recover under section 75-1.1 “for purely economic loss.”

Because the Buffas had not contracted directly with the window manufacturer, the Court of Appeals first considered whether the case was even within the general ambit of economic-loss rule.  The court held that it was within that ambit.  Although the Buffas did not contract directly with the window manufacturer, they were beneficiaries of a contract:  the window manufacturer’s express warranty.

After reaching that conclusion, the court rejected the Buffas’ “conten[tion that] the trial court erred by applying the economic-loss rule to a claim of unfair and deceptive trade practices.”  The court, however, did not analyze the economic-loss rule beyond that.  Instead, the bulk of the court’s opinion asked the more usual question in contract-based 75-1.1 cases: whether a breach of contract was accompanied by “egregious or aggravating circumstances.”

As the above block quote shows, the Buffas’ section 75-1.1 claim alleged only that the window manufacturer failed to notify the Buffas of a known design defect.  The Court of Appeals held that this nondisclosure was nothing more than a breach of warranty.  On that basis, it upheld the trial court’s summary judgment against the 75-1.1 claim.

Declining to apply the economic-loss rule to section 75-1.1 (sort of)

Just ten days earlier, a different panel of the Court of Appeals issued an opinion in the opposite direction—an opinion that might have a significant effect on the interplay among fraud claims, 75-1.1 claims, and the economic-loss doctrine.

In Bradley Woodcraft, Inc. v. Bodden, the Court of Appeals appeared to hold that fraud claims are never subject to the economic-loss rule—a holding that could affect section 75-1.1 claims as well.

In 2013, Christine Bodden and her husband bought a 20-year-old home in Raleigh.  They signed an agreement with a contractor to renovate the home.  The homeowners were dissatisfied with the renovation work and discussed their complaints with the contractor.  After the discussion, they believed that the contractor had promised to fix the problems, so Ms. Bodden used her credit card to pay the final $26,000 due.  The contractor, in contrast, did not believe that he had agreed to do any further work.  When the contractor did no further work, Ms. Bodden disputed the $26,000 charge on her credit card.

The contractor then sued for breach of contract.  Ms. Bodden counterclaimed for breach of contract, fraud, and violations of section 75-1.1.  The case went to trial.  At the close of Ms. Bodden’s evidence, the contractor moved for a directed verdict on the fraud and section 75-1.1 counterclaims, citing the economic-loss rule.  The trial court granted the contractor’s motion.

On appeal, the Court of Appeals focused on the fraud claim. The court seemed to hold categorically that the economic-loss rule does not apply to fraud claims:  “[W]hile claims for negligence are barred by the economic-loss rule where a valid contract exists between the litigants, claims for fraud are not so barred.”

The court went on to reverse the directed verdict against Ms. Bodden’s 75-1.1 claim because that claim was “factually interwoven” with the fraud claim.  This ruling arguably extended the court’s economic-loss reasoning to section 75-1.1.

If the holding in Bradley is as broad as it appears, it could muddy the relationship among fraud, section 75-1.1, and the economic-loss doctrine.  Under a broad reading of Bradley, breaches of promises in an oral contract would—despite the economic-loss doctrine—support a fraud claim.  And fraud, it bears remembering, is a per se violation of section 75-1.1.

These points, if confirmed, could lead to a proliferation of fraud claims in business disputes.  Under Bradley, adding fraud claims might help plaintiffs avoid the usual fate of contract-based 75-1.1 claims—summary rejection.

On the other hand, Bradley is probably narrower than it appears.  The record and briefs in the case show that the fraud and 75-1.1 claims were based on extracontractual statements by the contractor, including statements about the contractor’s qualifications and later representations about potential damage to the home.  Given this context, the court’s decision might well reflect the “independent duty” exception to the economic-loss rule.  That exception holds that even when a contract generally applies, a plaintiff can pursue tort claims that arise from a defendant’s extracontractual duties.

* * *

 As Buffa and Bradley confirm, the relationship between the economic-loss doctrine and section 75-1.1 will remain unclear until the North Carolina Supreme Court considers the issue.  Bradley might give the court such an opportunity, but the small stakes of the case might prevent the opportunity from arising.

Author: Jeremy Falcone

January 10, 2017
Posted in  Economic-Loss Rule