When a general contractor’s actions with its subcontractors seem to be incompetent, unreasonable, nasty and even dishonest, what are your remedies?

In traditional contract law, a breach is a breach, even if is intentional and done in “bad faith,” whatever that term means. If a breach is proven, you can recover your excess costs, or most of them. The general principle is that, if you can prove a breach of contract, you will be made whole with respect to the cost of contract performance. 

But can you recover something more, such as so-called punitive or exemplary damages, which are meant to punish the wrongdoer for economic harm to your business? Traditional contract law says you cannot, but times are changing, and so are the attitudes of the courts.

Consider the following situations

The general contractor knows that the owner is about to issue a major design change, but keeps this information from you, so you bid the job on a design that will not be used.

The general contractor has already obtained from the owner an extension to the project’s completion date, yet does not tell you, and you bid to an already outdated schedule.

In a recent case, both of these “lies” were made by the general to the subcontractor. The advantages for the general were obtaining a lower bid from the sub and restricting the sub’s subsequent claims to the limitations of the subcontract’s changes clause. The hard question before the court was whether the subcontractor should get any special damages because of the dishonesty.

Courts around the country have reacted to this question in a variety of confusing ways. They have tried to compare a contractor’s fraudulent representations on a construction job (a contract for services) to cases involving a seller’s misrepresentation to a buyer about a product. With the sale of goods or products, you cannot normally recover special damages unless the goods caused personal injury or property damage. That limitation is called the “economic loss doctrine.” Applying this doctrine to construction means that a general’s lies about the scope of work or the schedule are treated as simple breaches of contract.

If you are not an attorney, this comparison of construction services to a sale of goods may make no sense. I am a contracts attorney, and it makes no sense to me either. A recent decision from the Tennessee Supreme Court agrees that the doctrine is nonsense as applied to construction contracts.

A real-life case

Let’s look at the facts of that Tennessee case, Commercial Painting Co. v. The Weitz Co. LLC, Tenn. Sup. Ct., 11/2023. Commercial Painting Co. (CPC), a drywall sub, bid on a multibuilding retirement community. The general was The Weitz Co. Before CPC was asked to bid, Weitz had already gotten a 6-month time extension from the owner, in part due to some scope changes, and Weitz intentionally did not tell CPC. During the job, Weitz demanded that CPC accelerate its work to keep up with the bogus, nonadjusted schedule and denied CPC’s change order requests for the design modifications. 

At trial, it was shown that Weitz was also hoping to get an early completion bonus promised by the owner by telling the sub that it was behind schedule and needed to accelerate.

CPC sued to recover its acceleration costs and its unpaid change orders. When CPC learned about the lies Weitz had told it about the schedule and scope of work, CPC added a claim for fraud in its lawsuit. It was proven at trial that Weitz deliberately made false representations to CPC about the timing and amount of work to mislead CPC into giving it a low bid. 

The question presented to the court was whether CPC was limited to traditional contract damages or could also get damages for fraud (which is a claim in tort, not contract). In other words, did the economic loss doctrine apply?

The Tennessee Supreme Court, in a lengthy opinion, discussed this confusing area of law. The court analyzed decisions from courts across the country and then developed an approach similar to the one used by California courts. The Tennessee court held that the traditional concept of limitation of recovery under contract law “does not merit protecting if one party commits fraud to induce the contract.” The result was that CPC was awarded its direct contract damages, and it also received a sizable punitive damages award in tort against Weitz for the lies.

This decision is important, but it appears to be limited to frauds that induce someone to enter a contract and not to lies told during contract performance, which would remain as just breaches of contract. Does this limitation to “fraud in the inducement of contract” makes sense? Or, is this decision a proverbial foot in the door to future contract fraud claims? As with all changes in the law, it is now a matter of wait and see.

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