Virginia’s Economic Loss Rule

A plaintiff filing a lawsuit usually wants to demand as much money as possible, both for the intimidation value and because in Virginia state court, you cannot recover damages in an amount greater than what you asked for in the complaint, even if the jury awards it. Plaintiffs are thus often tempted to include demands for punitive damages, which can add as much as $350,000 to a recovery. (Punitives are capped at $350,000 in Virginia). Punitive damages, however, are not available in contract disputes. This creates a situation where the plaintiff’s attorney often tries to craft the complaint in such a way as to make it appear that the defendant not only breached a contract but committed one or more related torts as well, such as fraud, tortious interference with contract, or business conspiracy. Enter the “economic loss rule.”

Designed to maintain the distinctions between contract claims and tort claims, the economic loss rule provides that where the plaintiff is a party to a contract and has suffered only disappointed economic expectations, such as damages for inadequate value, the cost to repair a defective product, or lost profits (as opposed to damage to persons or property), his remedy sounds in contract and not tort. In other words, if the plaintiff did not receive the benefit that he bargained for, his losses will be deemed merely economic and he will not be permitted to recover on a tort theory. An exception would apply if the contract itself was fraudulently induced.

Sometimes the line is not easy to draw. Perhaps the most accurate way to determine whether a court will permit a tort claim is to determine the source of the duty that was violated: is the duty a “common law” duty designed for the protection of persons and property for the benefit of society as a whole, or does the duty exist solely because the contract requires it? If the duty violated is purely a contractual duty, then the plaintiff is limited to a breach-of-contract claim and will not be entitled to recover punitive damages. If the duty arises independent of the parties’ contract, a tort claim may be pursued for violation of that duty.

Last month, in the W.D. Va. case of Kenneth Dale McConnell v. Servinsky Engineering, PLLC, a defendant successfully invoked the economic loss rule and the case against him was dismissed. McConnell had hired Servinsky Engineering to design a post foundation for a fabric-roofed building for his farm. They entered into a written contract. The work was performed by Mark S. Servinsky. McConnell claimed that the designed foundation and structural posts were insufficient to handle local topography, wind, and snow loads. He sued, but did not just sue Servinsky Engineering for breach of contract–he also sued Mr. Servinsky personally for negligence and other claims. (Do you see where this is going?)

The court held that McConnell was seeking recovery for an economic loss only, noting that he was seeking “money damages in order to remove the existing building and erect a new building sufficient to withstand local conditions, as originally bargained for in the contract.” Under the economic loss rule, the court held, when the “bargained-for level of quality” in a contract is not met, “the law of contracts provides the sole remedy.” The court granted judgment in Mr. Servinsky’s favor.