Why All the Attempts to Allege Construction Cases as Fraud? Limitations and Economic Loss Rule
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Many plaintiffs attempt to allege fraud claims in construction cases. These attempts generally fail in Virginia because a claimant must allege a basis for a fraud claim that arises outside the context of a contractual duty. This theory was clearly established in the Richmond v. McDevitt Street Bovis case in 1998, but we still see it regularly playing out in Virginia state and federal courts.
Fraud claims have a couple interesting features. First, they must be pleaded with specificity and particularity. Second, a host of case law establishes that the types of "representations" that can support a fraud claim are quite limited. These first two features mean that a plaintiff can expect extensive aggressive motions practice attacking their offensive pleading and courts often throw out fraud cases. Third, fraud claims have an elevated burden of proof. Rather than proving fraud by a preponderance of evidence, the plaintiff must prove fraud by clear and convincing evidence. Fourth, fraud claims allow recovery of punitive damages in egregious cases. Fifth, fraud claims can also allow recovery of attorney's fees in some circumstances.
Why invite all this hassle and increased expense and effort into a case? The reality is that recovery of punitive damages is extremely rare and punitive damages are capped in Virginia at $350,000. The potential for attorney fee recovery is nice and may represent leverage in negotiations, but in my estimation this is not the driving issue. The two biggest reasons in my mind are 1) attempting to gain the benefit of a discovery accrual trigger for statute of limitations, and 2) finding ways to circumvent the economic loss rule.
As we recently discussed, Virginia law has a hair trigger on when the limitations clock starts to run. Unlike neighboring Maryland and DC, Virginia uses a damage trigger instead of starting from when a plaintiff knows they have a problem. In construction cases, many elements of the project are covered up and defective work can take years to manifest in observable damages.
Fraud also may offer a way to sidestep the economic loss rule. We have often discussed the economic loss rule which is critical to analyzing who can be sued for what. In cases where a party is not in contract with the plaintiff, options are limited under Virginia law. Fraud is one way to potentially get around that boundary, but it is a very narrow passage and subject to significant obstacles.
That being said, many plaintiffs seem to use the kitchen sink method of pleading and allege every cause of action that exists in Virginia. This may not only be risky from a perspective of good faith pleading, it can be a strategic nightmare. Why drive up litigation costs, invite hosts of well taken motions, and lost credibility in a case just to stretch to allege a claim that will ultimately fail?
Links to recent fraud posts by Heidi Meinzer:
Broken Promises Won't Get You a Fraud in the Inducement Claim
Construction Law Musings Reply: Fraud and Construction Contracts: Like Oil and Water?
Image by Marco Bellucci
Thanks for the mention Tim. These days another reason to see fraud brought up (aside from just getting around the econ. loss rule) is because the party with whom the plaintiff may have the contract is not a "deep pocket" or even a pocket with change in it. Seeking a place to recover the money owed is a big motivator.
You hit the nail on the head Chris. The main reason to worry about getting around the economic loss rule is you are stuck with an empty or shallow pocket with the party that signed the contract. Given the frequency of bankruptcies these days, I suppose getting a fraud judgment may have some modest advantage in fighting against a discharge in bankruptcy, but I have heard that is not foolproof.
I don't think that it is Tim. In any event, many times construction contracts don't have enough assets to even make bankruptcy worthwhile.
Happily, I have other folks around me who can answer bankruptcy questions with fluidity and rapidity :)
Wow! Me too, but they're at other firms. I also got tongue tied on "fluidity and rapidity"!
Not to be a cynic, but might the reason that so many plaintiffs try every possible cause of action despite the higher costs and minimal chance of success be that the people advising and representing them have a potential conflict of interest...?
Sweth,
Great to hear from you! At the risk of replying cynically ... there are definitely times where you wonder whether the lawyers keep their clients interest truly in mind, or whether they even fully grasp those interests.
This particular question is one where there are tactical advantages to specific claims, so I am not sure the cynical question applies here ... but I can definitely think of plenty of situations where I have asked that exact question.
How does alleging fraud provide that tactical advantage if the plaintiff's attorneys know that the claim isn't likely to proceed, though? Just alleging it wouldn't trigger a discovery rule or make that rule applicable to other claims, would it? (I'm not familiar w/ VA statue of limitations laws, but am assuming from the context that there's something in the statutes that triggers a discovery rule for cases of fraud vs. the usual accrual rule.)
More generally, though, in any field, if a tactical move has minimal chance of success and jeopardizes one's strategic position, the only reasonable explanations are usually either incomplete information, or external incentives making losses more palatable. Hence my assumption that the incentives are probably playing a part in the decision; I've yet to see an industry where the majority of people won't, if faced with a client who insists that "more is better" and who stands to gain if they "do more" even if it doesn't help the client, won't acquiesce to the client's wishes.
You raise a very interesting parallel question there Sweth, on the probably merits its own post. Ultimately, as a lawyer it is my job to recommend and advise the client what I think is in their best interest. It is ultimately the client's call what they want to do with their case, subject to not filing claims or arguments that violate applicable rules of pleadings (i.e. not filing claims or positions in bad faith).
I am one who gives clients my blunt take, good or bad, on their case, their positions, and the likely results. Some clients love this. Other clients seems to want the catharsis of "a tough lawyer" who "believes in" their case. I have watched that paradigm play out in many a case, usually badly for the other side but expensively for mine as folks get sucked down a rabbit hole that makes no sense for anyone.
As much as people want to blame lawyers for that type situation, and there is some blame deserved, folks need to keep in mind there is always a client behind these positions as well.
You raise a very interesting question that is worth talking about at greater length!!