No Fraud Claim On Builder’s Contract

The Accomack Circuit Court applies the “source of duty rule” and says a couple who alleges defendant contractor drew payment but never finished building their new home, may sue for breach of contract, but not for fraudulent inducement.

The fraud count alleges the contractor demanded and received an advance of $63,340. Plaintiffs allege the contractor did not apply the funds to pay subcontractors or buy materials for construction, but rather took the initial draw and applied some portion, or all of it, towards personal purchases. By March 2011, the contractor had submitted certifications and received payment for 67 percent of the contracted work ($400,000), even though the residence was only approximately 25 percent constructed ($150,000). Plaintiffs further allege the contractor’s wife, as bookkeeper for the contracting business, participated in the fraudulent draw down of construction funds.

The purpose of the source of duty rule is to avoid turning every breach of contract into a tort. Losses suffered as a result of the breach of a duty assumed only by agreement, rather than a duty imposed by law, remain the sole province of the law of contracts. However, a single act or occurrence can, in certain circumstances, support causes of action both for breach of contract and for breach of a duty arising in tort, thus permitting a plaintiff to recover both for the loss suffered as a result of the breach and traditional tort damages and, where appropriate, punitive damages. Exceptions are fraud in the inducement and actions that violate the Virginia Consumer Protection Act.

The analysis involves application of the source of duty rule to the dual counts of breach of contract and fraud to determine whether the fraud count can proceed.

No test or factors of consideration have been outlined by the Virginia Supreme Court to establish when fraud can be pled within a contractual relationship. Under current interpretations, the court has broadly applied the source of duty rule limiting fraudulent actions evolving from a contractual relationship to fraud in the inducement or actions under the VCPA when consumer transactions are involved.

The rule serves to shield the tortfeasor from the penalties of fraud and provides opportunities for the tortfeasor to avoid a judgment in favor of plaintiff. It is difficult for this court to believe such results are an intended consequence. Other states have struck the balance differently.

While this court expresses concern with the result under the source of duty rule in factual situations such as alleged here, it is without authority to craft or expand exceptions to Virginia’s application of the source of duty rule. The fraud count in this action, as pled, cannot stand and the demurrer is sustained.

Turning to the fraud count against the contractor’s spouse, the demurrer is also sustained to the cause of action against her. The court finds the fraud count averred against the spouse does not allege sufficient facts to maintain an actionable fraud against her individually. As she is not a party to the contract, the source of duty rule is inapplicable as to her.

Plaintiff is granted leave to amend.

Penney v. Brock (Lilley) No. CL 12-0010, April 24, 2012; Accomack Circuit Court; Douglas E. Kahle, Kevin E. Martingayle for the parties. VLW 012-8-050, 7 pp.