Contractor defeats interfering homeowners’ fraud claims

Despite a contractor’s failure to complete a multimillion-dollar home renovation by the deadline, a federal judge has dismissed fraud and consumer protection claims brought by the homeowners.

Judge Liam O’Grady of the Eastern District of Virginia agreed that the contractor was disorganized and ineffective.

However, “the Plaintiffs have not met their burden to demonstrate that the Defendant had the intent not to complete performance on the contract or intended to defraud the Plaintiffs,” he pointed out.

While the judge found the contractor was in breach of his agreement with the plaintiffs and awarded actual damages, he declined to award recission or consequential damages.

The opinion is Harrell v. Deluca (VLW 022-3-500).

Stymied renovation

John and Dawn Harrell lived in Washington, D.C., before they relocated to the Northern Virginia area in 2019. They were introduced by a realtor to Douglas Deluca, a general contractor who specialized in renovating residential properties.

In 2018, Deluca purchased a six-bedroom house that was constructed in the 1930s with a separate two-level garage in Arlington. In early April 2019, the Harrells contracted to buy the house and have Deluca renovate it.

After several addendums to the contract, including changes to the work to be completed, the Harrells moved to close the sale in early July 2019 and paid Deluca almost $4.5 million.

They also signed a post-closing construction agreement. It detailed what work needed to be completed by the first of August and outlined new work to be finished two weeks later.

Trouble arose in early August when the Harrells began have doubts about Deluca’s performance.

But according to Deluca, the Harrells kept changing their plans, neglected to give needed input and interfered with the subcontractors — one of whom they falsely accused of being a registered sex offender.

On Aug. 6, 2019, John Harrell told Deluca in an email to stop work and remove all equipment so that they could find a replacement contractor. Harrell warned Deluca of a coming lawsuit.

The Harrells, however, had difficulty replacing Deluca. They invited him back, but found that the relationship was irreconcilable. The renovation was never finished.

The Harrells filed suit in late January 2020, claiming Deluca was liable for fraudulent inducement, constructive fraud, breach of contract and violations of the Virginia Consumer Protection Act, or VCPA.

After a bench trial in July 2022, Deluca asserted several affirmative defenses, including failure to mitigate and that the prevention doctrine limited damages.

Unfulfilled promises

O’Grady explained that fraud “cannot be predicated on unfulfilled promises or statements as to future events,” and that the economic loss rule prevents tort actions based on contracts.

However, the judge also said that an exception applied if the defendant “‘did not intend to perform at the time of contracting.’”

The Harrells said Deluca made four statements that fraudulently induced them to enter into the contract: that the work was permitted, the roof was original slate, a custom tile deposit had been made and the square footage of the home was roughly 6,500 square feet.

They reasoned that Deluca’s extensive construction experience and alleged failure to apply for building permits were indicative of an intent to mislead, as was an allegedly false statement on an insurance application.

Deluca testified that he still wished he could finish the renovations, which was reinforced by emails he sent to the realtor, and that he stayed in contact with county officials about permitting after the relationship broke down.

O’Grady agreed with the Harrells that “the Defendant was incredibly unorganized, did not communicate effectively, and may have possibly cut corners in the building permitting process.”

However, he concluded, the plaintiffs had failed to show “that the Defendant had the intent not to complete performance on the contract or intended to defraud the Plaintiffs.”

The judge also dismissed the Harrells’ constructive fraud claim by applying the economic loss and source-of-duty rules, which prevent tort claims from arising where damages are solely “disappointed economic expectations” or where a duty is based on a contract.

Consumer Protection Act

The Harrells contended that Deluca’s misrepresentations and false promises established a violation of the VCPA.

For the same reasons that he dismissed the fraud claims, O’Grady found that Deluca didn’t have the requisite fraudulent intent about completing the work that would enable him to be found liable for promissory construction fraud.

“Further, there is zero evidence that the Defendant ever refused to complete construction until the Plaintiffs prevented his performance … and threated legal action to rescind the contract,” the judge wrote.

O’Grady rebuffed the Harrells’ argument that Deluca misrepresented the square footage of the home’s interior space, finding that it “was a general estimate of a future condition.”

“The evidence at trial undisputedly shows that the Defendant performed a substantial amount of work on the Property … especially in consideration of the amount that the Defendant’s performance was substantially hindered by the Plaintiffs.”

– U.S. District Judge Liam O’Grady

The judge also rejected allegations about the permitting process or tile deposits because the only resulting damages were not being able to move in on time and the Harrells weren’t entitled to consequential damages.

Finally, O’Grady found that because the Harrells could freely inspect the roof at all times, they couldn’t claim that Deluca misrepresented its condition.

Substantially hindered

The judge said the parties’ agreement to complete certain items by Aug. 1, 2019, was material to the contract and that Deluca’s failure to do so was a breach.

But recission wasn’t a proper remedy because the Harrells premised their argument on a finding of fraud, O’Grady said, noting that “unless a defendant’s failure of performance is ‘total or substantial’” recission will not be granted.

“The evidence at trial undisputedly shows that the Defendant performed a substantial amount of work on the Property … especially in consideration of the amount that the Defendant’s performance was substantially hindered by the Plaintiffs,” the judge said.

O’Grady then refused to award consequential damages because the prevention doctrine limits recovery of damages for a party who interferes with the completion of the performance of a contract.

After reviewing expert testimony from both parties, the judge on balance sided with Deluca’s expert and awarded actual damages of $181,762.87 to the Harrells.

‘Nature of construction’

Andrew Burcher, a shareholder with Walsh Colucci in Prince William, represents Deluca.

“This case was never about a breach of contract, it was about fraud and recission,” he told Virginia Lawyers Weekly. “The fraud claims certainly diverted things in a way that the relationship deteriorated such that they couldn’t compromise or resolve the construction.”

He added that “it’s just not the nature of construction to expect the contractor to deliver exactly on a specific anticipated date.”

And while his client was liable for damages, Burcher felt the amount was de minimis compared to what the plaintiffs sought at trial — and was significantly less than what his client offered early in the case.

Whether that amount remains the extent of Deluca’s liability may be an open question, as the plaintiffs have appealed.

Attorneys for the plaintiffs did not respond to requests for comment before deadline.