We Have a Business Contract, So How Are We Being Sued in Tort? The Limits of the Economic Loss Doctrine

When you enter into a contract, it is reasonable to assume that the contract will control the rights, obligations, and remedies of the parties. Increasingly, we are seeing more actions filed that assert tort claims (such as negligence or fraud) along with, or instead of, breach of contract claims. So how can this happen and why is it so hard to get courts to dismiss the tort claims outright? Let me explain.
 
The Economic Loss Doctrine
The Ohio Supreme Court has held that where parties are in privity of contract, and one party allegedly suffers purely economic damages as a result of an alleged breach of that contract, the party’s exclusive remedy is in the law of contracts and no action is cognizable in tort. Chemtrol Adhesives, Inc. v. American Mfr. Mut. Ins. Co., 42 Ohio St.3d 40, 45 (1989). “When the promisee’s injury consists merely of the loss of his bargain, no tort claim arises because the duty of the promisor to fulfill the term of the bargain arises only from the contract.”  Id. (quoting Battista v. Lebanon Trotting Ass’n, 538 F.2d 111, 117 (6th Cir. 1976)). This is called the economic loss doctrine.  
 
“[U]nder Ohio law, the existence of a contract action generally excludes the opportunity to present the same case as a tort claim.” Nichols v. Chicago Title Ins. Co., 107 Ohio App. 3d 684, 697 (Cuyahoga Cty. 1995). “It is not a tort to breach a contract, no matter how willful or malicious the breach.”  Id.
 
Exceptions for Negligent Misrepresentation and Intentional Torts
As often happens in the law, there are exceptions that exist to the general rule that the existence of a contract bars claims in tort. 
 
In Hodell-Natco Indus. v. SAP Am., Inc., No. 1:08-cv-02755, 2010 U.S. Dist. LEXIS 143144, at *31 (N.D. Ohio Sep. 2, 2010), the Court recognized that the Ohio Supreme Court’s decision in Corporex Dev. Constr. Mgmt. v. Shook, Inc., 106 Ohio St. 3d 412 (Ohio 2005) generally barred claims seeking to recover purely economic losses between parties to a contract in tort, but would not necessarily bar a negligent misrepresentation claim. In Hodell, the Court found that the plaintiff still could not maintain a negligence action because it had failed to allege breach of any duty owed independent of the contract and has alleged only economic damages. 
 
Claims such as negligent misrepresentation, fraudulent misrepresentation, and fraud in the inducement are not per se barred (subject to outright dismissal), but may be subject to summary judgment. 
 
The Claimant Still Must Prove a Separate Duty and Separate Damages
A tort claim based on the same actions upon which a breach of contract claim is based will exist independently of the contract action only if: (1) the breaching party breaches a duty owed separately from that created by the contract (i.e., a duty owed even if no contract existed) and (2) there must be actual damages attributable to the wrongful acts of the alleged tortfeasor that are in addition to those attributable to the breach of contract. Textron Financial Corp. v. Nationwide Mutual Ins. Co., 115 Ohio App. 3d 137, 151 (Summit Cty. 1996); see also Tarquinio v. Equity Trust Co., Ninth Dist. No. 06CA008913, 2007-Ohio-3305, at ¶ 11 (tort claim will not exist unless other party breaches a duty owed separately from that created by contract). Absent proof of a separate duty and separate damages, summary judgment is appropriate.
 
An example of a separate duty being owed would be when the contract does not cover the subject matter of the tort claim. 
 
In J.F. Meskill Enters., LLC v. Acuity and Acordia of Ohio, LLC, 2006 WL 903207 (N.D. Ohio 2006), the court noted that there was no contractual provision covering the alleged negligent misrepresentation regarding rendering insurance advice.  Id. at *6.  In fact, the alleged negligent misrepresentation regarding the scope of coverage occurred long after the insurance contract was already in place. The court further noted that, “If such a [contractual] provision did exist, the parties would be best left to their bargain.”  Id. 
 
The Parol Evidence Rule to the Rescue
Even in instances where negligent misrepresentation claims are not per se barred by the economic loss doctrine, they may still be barred by the parol evidence rule, and fraud claims based on alleged verbal promises or representations that are directly contradicted by the written contract will also fail.
 
“The parol-evidence rule states that ‘absent fraud, mistake or other invalidating cause, the parties’ final written integration of their agreement may not be varied, contradicted or supplemented by evidence of prior or contemporaneous oral agreements, or prior written agreements.’” Licata Jewelers, Inc. v. Levis Commons, L.L.C., 6th Dist. WD-10-038, 2011-Ohio-4684, at ¶ 20 (citing Galmish v. Cicchini (2000), 90 Ohio St.3d 22, 27, quoting 11 Williston on Contracts (4th Ed.1999) 569-570, Section 33:4).
 
Further, “the parol-evidence rule cannot be avoided by a claim of fraudulent inducement where the alleged inducement was a promise that directly contradicts or pertains to exactly the same subject matter as the final terms of the contract.” Licata Jewelers, Inc., 2011-Ohio-4684, at ¶ 21 (citing Galmish, 90 Ohio St.3d at 29); see also Marion Prod. Credit Assn. v. Cochran (1988), 40 Ohio St.3d 265 (syllabus ¶ 3). “[A]n oral agreement cannot be enforced in preference to a signed writing which pertains to exactly the same subject matter, yet has different terms.” Galmish, 90 Ohio St.3d at 29; Abm Farms v. Woods, 81 Ohio St.3d 498, 503 (1997).
 
Conclusion
The economic loss doctrine generally prevents claims in tort for mere breaches of contract. Even for tort claims that are not barred per se (negligent misrepresentation or fraud claims), the claimant still must allege and prove a duty owed separately from the contract and damages arising independent of the breach of contract damages. Further, a tort (other than fraud) cannot be based on verbal promises before the contract was signed. Finally, the claimant’s fraud allegations cannot directly contradict the terms of the written contract. So, while certain business torts may survive an initial motion to dismiss, it is difficult for them to survive summary judgment. 
 
If you would like us to help you evaluate how this may affect you, please contact Mark L. Rodio at mrodio@frantzward.com or (216) 515-1640.