You sign a contract with a builder to add an addition to your home, or a plumber to fix your leaking pipes. Maybe you buy a pre-owned car from a dealer or from a person you find on an advertisement in a weekly newspaper. If any of these contractors or vendors do a lousy job, misrepresent their services or products, or fail to finish the job or deliver the product; can you sue them personally? This blog will discuss this topic as well as personal liability for negligence under tort law but I will not discuss the (possible) applicability of the N.J. Consumer Fraud Act.
The issue of personal liability under a contract
N.J. law on the topic of this blog offers conflicting answers regarding whether personal liability can be assessed against business owner for economic loss under N.J. tort law. Some cases seemed to hold that tort law damages for breach of contract claims was not suited to address economic losses, applying the “economic loss doctrine”. Some recent cases I found stated that tort law can apply to economic losses in contract cases and can result in the personal liability of corporate officers, LLC managers and others.
Let’s begin with some clarity on the economic loss doctrine itself. The economic loss doctrine prohibits a plaintiff from recovering in tort (generally a tort refers to personal injury or a non-contract claim) which results in economic losses.
Based on this doctrine, it would seem as though tort law would rarely apply to cases involving a breach of contract. For example, one case held that “a commercial buyer seeking damages for economic loss resulting from the purchase of defective goods may recover from the immediate seller and a remote supplier in a distributive chain for breach of warranty under the U.C.C., but not in a strict liability or negligence”.
In another case, plaintiff’s causes of action against a corporation and its officers for negligence arose out of a contract between the plaintiff and the corporation and thus were not causes of action in tort. The court found that the officers were not personally liable under the participation theory. Essentially, “the participation theory holds that a corporate officer can be held personally liable for a tort committed by the corporation when he or she is sufficiently involved in the commission of the tort. A predicate to liability is a finding that the corporation owed a legally required duty of care to the victim, this duty was delegated to the officer of the corporation and the officer breached the duty of care by his or her own conduct.” The court found that a tort remedy can flow from a contractual relationship when the breaching party owes an independent duty imposed by law and not just a duty imposed by the contract itself. This case provided the following examples of parties with legal duties to the public as a matter of law: physicians, attorneys, insurance brokers, and product manufacturers. In the absence of any of these situations being present, if the court is unable to ascertain a duty independent of the one imposed by the contract itself, courts generally find that tort law is inapplicable and breach of contract is the controlling doctrine and remedy to the injured party.
Examples of cases where tort law may impose personal liability upon a party to a contract
Even cases that do not apply tort law themselves leave open the possibility that tort law may be extended to include economic losses if strict liability for damages is imposed by law. For example, in Monsanto Co. v. Alden Leeds, Inc., a plaintiff sued for damages resulting from a fire caused by allegedly defective chemicals. The court held that because the case involved property damage, which is recoverable under strict liability tort law was applicable.
Consider also the following cases that provided for the applicability of tort law to economic losses. In Durr Mechanical Construction, Inc. v. PSEG Fossil, LLC, the court held that when misrepresentation (fraud) induces an individual to enter the contract, the economic loss doctrine will not bar a tort claim if such a claim is distinct from the breach of contract claim. Additionally, in A-Leet Leasing Corp. v. Kingshead Corp., responsibility for economic losses may arise under strict liability in tort law as well as under the Uniform Commercial Code or by agreement between the parties. See 150 N.J. Super. 384, 390 (App. Div. 1977) (citing Herbstman v. Eastman Kodak Co., 68 N.J. 1, 7, 342 A.2d 181 (1975)) Finally, Cinnaminson Township Board of Education v. U.S. Gypsum Co., the court held that damages for economic loss are recoverable under a strict liability in tort theory.
Overall, it seems as though it is possible to extend tort law to encompass breach of contract cases. But remember this: if there is a contract in place, courts may find that contract law is better suited to the case than tort law. It is unlikely that a court will find a contractor owes a duty of care to the client beyond what is detailed in the contract, thus tort law may be inapplicable.
To discuss your NJ business /contract, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Limited Liability Company Attorney