Why All the Attempts to Allege Construction Cases as Fraud? Limitations and Economic Loss Rule

Real Estate, Land Use & Construction Law

Why All the Attempts to Allege Construction Cases as Fraud? Limitations and Economic Loss Rule

Aug 16, 2010 | Real Estate, Land Use & Construction Law

Question markMany plaintiffs attempt to allege fraud claims in construction cases. These attempts generally fail in Virginia because a claimant must allege a basis for a fraud claim that arises outside the context of a contractual duty. This theory was clearly established in the Richmond v. McDevitt Street Bovis case in 1998, but we still see it regularly playing out in Virginia state and federal courts.

Fraud claims have a couple interesting features. First, they must be pleaded with specificity and particularity. Second, a host of case law establishes that the types of “representations” that can support a fraud claim are quite limited. These first two features mean that a plaintiff can expect extensive aggressive motions practice attacking their offensive pleading and courts often throw out fraud cases. Third, fraud claims have an elevated burden of proof. Rather than proving fraud by a preponderance of evidence, the plaintiff must prove fraud by clear and convincing evidence. Fourth, fraud claims allow recovery of punitive damages in egregious cases. Fifth, fraud claims can also allow recovery of attorney’s fees in some circumstances.

Why invite all this hassle and increased expense and effort into a case? The reality is that recovery of punitive damages is extremely rare and punitive damages are capped in Virginia at $350,000. The potential for attorney fee recovery is nice and may represent leverage in negotiations, but in my estimation this is not the driving issue. The two biggest reasons in my mind are 1) attempting to gain the benefit of a discovery accrual trigger for statute of limitations, and 2) finding ways to circumvent the economic loss rule.

As we recently discussed, Virginia law has a hair trigger on when the limitations clock starts to run. Unlike neighboring Maryland and DC, Virginia uses a damage trigger instead of starting from when a plaintiff knows they have a problem. In construction cases, many elements of the project are covered up and defective work can take years to manifest in observable damages.

Fraud also may offer a way to sidestep the economic loss rule. We have often discussed the economic loss rule which is critical to analyzing who can be sued for what. In cases where a party is not in contract with the plaintiff, options are limited under Virginia law. Fraud is one way to potentially get around that boundary, but it is a very narrow passage and subject to significant obstacles.

That being said, many plaintiffs seem to use the kitchen sink method of pleading and allege every cause of action that exists in Virginia. This may not only be risky from a perspective of good faith pleading, it can be a strategic nightmare. Why drive up litigation costs, invite hosts of well taken motions, and lost credibility in a case just to stretch to allege a claim that will ultimately fail?

Links to recent fraud posts by Heidi Meinzer:

Broken Promises Won’t Get You a Fraud in the Inducement Claim

Broken Promises, Part 2

Construction Law Musings Reply: Fraud and Construction Contracts: Like Oil and Water?

Image by Marco Bellucci


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