Originally posted 2020-07-23 15:57:40.
In prior posts here at Construction Law Musings, I have discussed how fraud and contracts are often like oil and water. While there are exceptions, these exceptions are few and far between here in Virginia. The reason for the lack of a mix between these two types of claims is the so-called “source of duty” rule. The gist of this rule is that where the reason money is owed from one party to another (the source of the “duty to pay”) is based in the contract, Virginia courts will not allow a fraud claim. The rule was created so that all breaches of contract, claims that are at base a failure to fulfill a prior promise and could, therefore, be considered to be based on a prior “lie,” would not be expanded to turn into tort claims. This rule has been extended to claims that most average people (read, non-lawyers) would consider fraud because there was no intent to fulfill the contract at the time it was signed.
Just so you don’t think that lawyers are exempt from this legal analysis, I point you to a recent case where a law firm sued a construction client of theirs for failure to pay legal fees. In EvansStarrett PLC v. Goode & Preferred General Contracting, the Fairfax County Circuit Court considered a motion by the Plaintiff law firm seeking to add a count of fraud to its breach of contract lawsuit. The Court considered the following facts.
The Plaintiff obtained a settlement between Defendant, Preferred, and another party. As a provision of the settlement, the judgment debtor was to wire the full arbitration award plus attorney fees to EvansStarrett’s account. Prior to that wire having been made, EvansStarrett alleged, Preferred, with the intent to mislead, requested that the full award and attorney fees (approximately $145,000) be wired instead to Preferred and that Preferred would then pay the attorney fees from its account. Needless to say, Preferred didn’t pay the fees and EvansStarrett sued and then sought to amend its Complaint to add fraud based on Preferred’s request and promise described above.
The Court denied the amendment. After a great review of the case law relating to the economic loss and source of duty rules, including cases where a deliberate false representation was made and still no fraud claim could follow, the Court stated:
Whatever monies Defendant owed Plaintiff for legal fees and costs arose wholly from their contractual relationship. The fact that there was [a] dispute about the amount owed is a contractual dispute, nothing more.
Because there would have been no duty to pay fees without the fee agreement between the parties, no fraud could be claimed.
The interactions of tort and contract can be complicated, and sometimes there are exceptions to this rule. I recommend this case for your reading and suggest that you consult an experienced Virginia construction lawyer if you have a construction claim that could involve fraud.
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