The economic loss rule and fraudulent inducement claims.

• Author: Trench, Susan E.
• Position: Florida

The Florida Supreme Court confirmed in HTP, Ltd. v. Lineas Aereas Costarricenses, S.A.,685 So. 2d 1238 (Fla. 1996), that the economic loss rule has not eliminated causes of action based upon the independent tort of fraudulent inducement to contract.(1) Since that decision, however, courts have struggled with the question of what types of fraudulent inducement claims are sufficiently independent of the contract to survive the ELR. Although all provide lip service to the same basic pronouncements, the decisions often are inconsistent and hard to rationalize.

The question becomes critical in that a plaintiff can gain several advantages by initiating a fraud claim, including obtaining access to discovery that would otherwise be unavailable and the possibility of recovering punitive and consequential tort damages not recoverable for breach of contract.

As one judge has noted, "Hopefully, the Supreme Court will give us further guidance in this matter."(2) Until that occurs, however, it is possible to draw some general rules from the caselaw which has developed in the last few years.

Supreme Court Addresses the Issue

In HTP, the Supreme Court set forth the general criteria:

Fraudulent inducement is an independent tort in that it requires proof of facts separate and distinct from the breach of contract. It normally "occurs prior to the contract and the standard of truthful representation placed upon the defendant is not derived from the contract," i.e., "whether the defendant was truthful during the formation of the contract is unrelated to the events giving rise to the breach of contract."(3)

The court agreed with the analysis in Huron Tool & Engineering Co. v. Precision Consulting Services, Inc., 532 N.W. 2d 541, 545 (Mich. App. 1995).:

Fraud in the inducement presents a special situation where parties to a contract appear to negotiate freely which normally would constitute grounds for invoking the economic loss doctrine but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party's fraudulent behavior.

The court also agreed with Judge Altenbernd's dissent in Woodson v. Martin, 663 So. 2d 1327 (Fla. 2d DCA 1995), and his recognition that a cause of action for fraudulent inducement may coexist with breach of contract claims because:

[T]he interest protected by fraud is society's need for true factual statements in important human relationships, primarily commercial or business relationships. More specifically, the interest protected by fraud is the plaintiffs right to justifiably rely on the truth of a defendant's factual representation in a situation where an intentional lie would result in loss to the plaintiff."(4)

The Supreme Court decisions addressing the ELR since HTP have confirmed the court's intent that the ELR be applied sparingly. Thus, in Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999), the Supreme Court held that the ELR does not preclude claims of professional negligence. In discussing the application of the ELR, the court noted its prior lack of clarity on the application of the rule, leading to its unintended application by trial and appellate courts "beyond its principled origins" and "to situations well beyond our original intent."(5) Noting its recognition in HTP of "the danger in an unprincipled extension of the rule," the court reiterated its refusal to extend its application to actions based on fraudulent inducement, and emphasized that the primary intent of the ELR was to restrict products liability actions, "and its application should generally be limited to those contexts or situations where the policy considerations are substantially identical to those underlying the product liability-type analysis."(6)

In its latest consideration of the ELR, Comptech International, Inc. v. Milam Commerce Park, Ltd., 753 So. 2d 1219 (Fla. 1999), the court reiterated its intent that the application of the ELR be limited and not be used to bar well-established common law and statutory causes of action.

Since the HTP decision, the various Florida courts of appeal as well as the federal district courts have attempted to formulate a "bright line" test for assessing viable fraud in the inducement claims.(7)

Puff 'N Stuff Judges Present Differing Interpretations

The first decision of note, Puff 'N Stuff of Winter Park, Inc. v. Bell 683 So. 2d 1176 (Fla. 5th DCA 1996), heard en banc, resulted in a five-four decision, with a special concurrence by one judge and a lengthy dissent by another directly discussing the ELR's application to fraud in the inducement. The issue presented was whether the plaintiffs could allege fraudulent inducement by their lender's purported oral representation to fund over its lending limit. If answered in the affirmative, the plaintiffs would effectively avoid the statute of frauds requiring that credit agreements be in writing.(8) Four judges upheld the summary judgment entered for the lender, stating that to decide otherwise "would effectively repeal the statute."(9)

In his special concurrence, Judge Harris addressed the ELR's application, finding ambiguities in the Supreme Court's references in HTP to "torts independent of the contractual breach" and "a tort action ... independent from acts that...