In a very interesting case recently decided by the Appellate Division of the Supreme Court of NY, first department invovled a construction contract dispute.
Summary of the Case
In Waterscape Resort v. Eric McGovern the plaintiffs hired the defendant to do some construction work via subcontractors. The deal went sour when one of the major subcontractors was unable to complete the work and defaulted. The plaintiffs alleged that the defendant fraudulently misrepresented the fact that they had obtained subguard insurance coverage to protect the defendant in just such a case of default. Plaintiffs then sued the defendant for fraud.
Here we have a situation where defendant failed to perform one of their contract duties, thus creating a breach of contract. However the plaintiff argues that this conduct was so bad that it amounts to actual fraud. The distinction between breach of contract and tort law is an important one, because typically damages in a contract lawsuit are limited to what are known as actual or compensatory damages. If the defendant is guilty, the court, as a matter of public policy, will ‘make the plaintiff whole’ or in otherwise restore them to the position they would have been in if defendant had not breached the contract. A tort claim is different in the sense that punitive damages are possible. These are damages added to compensatory damages as a sort of condemnation of the defendant’s conduct, and according to some legal scholars, are designed to have a deterrence value on similar conduct in the future. Another way to state the distinction is that breaching a contract is a failure to live up to a business deal, whereas committing a tort is the causing of actual harm to another, whether it be by fraud, negligence, physical attack, etc.
Sommer v. Federal Signal Corp
The court stated that “merely alleging that the breach of a contract duty arose from a lack of due care will not transform a simple breach of contract into a tort” ( Sommer v Federal Signal Corp., 79 NY2d 540, 551 ). The words ‘lack of due care’ are typically used when accusing someone of the tort of negligence. The court is saying that simply failing to live up to one’s end of a contract does NOT mean that one has been negligent – if as in this case a plaintiff accuses the defendant of committing a tort, the burden is on the plaintiff to prove this fact, which the defendant failed to do in this case.
This result is a positive one for business contracts. Breach of contract situations do happen, for a variety of reasons. If the court had ruled in the opposite way, it would have had a chilling effect on business, as the specter of a tort lawsuit would hang over the head of anyone who signed a contract – including the possibility of those punitive damages. Fortunately, based on this ruling and the earlier case cited, we continue to have a clear separation between breach of contract and tort claims in New York.
Even if breaches of contract don’t amount to torts, they are still a very serious matter. If you are involved in a contractual dispute it is important to retain an experienced attorney who understands contract law and breach of contract claims. Please do not hesitate to contact our office for a consultation.