Tag: discovery rule

The Negligent Misrepresentation Exception to Economic Loss Rule: The Information v. Tangible Product Dichotomy

The economic loss rule bars recovery in tort where the claim is essentially one for breach of contract.  Lincoln Park West Condominium Association v. Mann, Gin, Ebel & Frazier, 136 Ill.2d 302, 307 (1990)(economic loss rule generally).  “Economic loss” means (i) damages for inadequate value, (ii) costs of repair and replacement of the defective product, (iii) consequent loss of profits without any claim of personal injury or damage to other property or (iv) the diminution in the value of the product caused by its defect.   Id.

Where a contract governs the parties’ relationship, the proper remedy for a breach is generally a breach of contract action; not a negligence claim.  A crude example: plaintiff enters into contract for defendant to supply 50 pieces of computer hardware.  Defendant fails to do so.  Plaintiff’s remedy is a breach of contract suit; not a negligence action.

The main exceptions (meaning, situations where the economic loss rule won’t defeat a tort claim) to the economic loss rule are (1) the fraud exception: the claim is based on defendant’s fraudulent conduct; (2) the sudden or dangerous occurrence exception: plaintiff’s claim results from a calamitous event (like a flood or explosion); (3) the “extra-contractual” exception: attorneys and accountants owe clients fiduciary duties that go beyond the scope of the contract; and (4) the negligent misrepresentation exception: a tort claim will lie against a defendant who makes a negligent misrepresentation and who is in the business of providing information for the guidance of others in their business transactions. 

In Stewart Title Guaranty Company v. Inspection and Valuation International, Inc., 2013 WL 5587293 (N.D.Ill. 2013), the Court found that the negligent misrepresentation exception did not apply to deficient construction management services on a hotel renovation project.

The plaintiff – assignee of mortgage lender on hotel development – sued a construction manager for negligence in failing to properly monitor the hotel development.  A written contract required the construction manager to manage all aspects of the project.  The plaintiff alleged the defendant failed to properly supervise the project and misrepresented the project’s status, budget issues and quality of the work.

The defendant moved to dismiss the negligent misrepresentation claim based on the economic loss rule.  The defendant’s key argument was that since a written contract governed the parties’ relationship (the construction management contract), the plaintiff’s remedy was a breach of contract action; not a claim for negligence claim. 

Held: motion to dismiss granted.  Plaintiff’s negligent misrepresentation claim is barred by economic loss rule.

Why?

The negligent misrepresentation exception to the economic loss rule applies where (1) defendant is in business of supplying information for the guidance of others in their business dealings; (2) defendant provided information that constitutes a misrepresentation; (3) defendant supplied information for guidance in plaintiff’s business dealings.  *5.

The critical question in determining whether the exception applies is whether the parties’ relationship will culminate in the creation of a tangible product.  If it does, the economic loss rule will bar recovery.  If it doesn’t (meaning, the end product is intangible “services”), the plaintiff may have a viable negligence claim.  

The First District sided with the defendant and held that, as part of its contractual management duties, the defendant was hired to cull engineering and architectural drawings, plans and data and incorporate that information into a tangible product – namely, the renovated hotel.  Any information supplied by the defendant was incidental to and merged into the building itself. 

The Court rejected plaintiff’s argument that defendant was an information-producing “consultant” to the project whose main role was to “advise” the plaintiff.  The Court ruled that since any information provided by defendant was incorporated into the hotel structure, any information provided was insignificant.

Comments: Where the main purpose or end result of a given contract is a palpable product – as opposed to advice giving, consulting or information – the economic loss rule will apply and defeat a tort suit.  The Court does acknowledge though that in certain instances, a contract involving an architect, engineer or contractor – usually quintessential tangible product contracts – can meet the  negligent misrepresentation test if the contract is purely for consulting/advising. 

Discovery Rule Saves Plaintiffs’ Fraud Claims Against Investment Firm (IL – 2d Dist)

Rasgaitis v. Waterstone Financial Group, Inc., 2012 IL App (2d) 111112-U, a 20-plus page Second District case, presents a detailed synopsis of Illinois agency law, the discovery rule and the “forward-looking” fraud rule (statements of future intent or opinion do not equal fraud).

Facts: The plaintiffs sued the defendant financial services firm and two of its agents for fraud and other tort claims based on defendants’ misrepresentations in connection with selling investment and insurance products to plaintiffs.  (¶ 10).  Defendants moved to dismiss, arguing that the claims were time-barred, were non-actionable statements of future intent and was too conclusory to show an agency relationship between the individuals and the investment firm.  The trial court agreed and dismissed all 15 complaint counts.

Held: The Second District reversed the trial court on 14 of the 15 counts (the Court sustained dismissal of negligent supervision claim based on economic loss rule) and held that plaintiffs’ suit was timely based on the discovery rule.

Reasoning:

The discovery rule stops the running of the statute of limitations until a plaintiff knows or should know of his injuries and that the injuries were caused by defendant’s wrongful conduct. (¶ 31).  The rule generally presents a fact question (the question being – when did the plaintiff reasonably know he was injured?) but can be an issue of law where the key facts are undisputed.  Id.

Here, the Court held that while the defendants’ underlying misrepresentations were made in 2005 and 2006, and plaintiffs didn’t sue until 2010, the plaintiffs still pled they didn’t learn of the false promises until 2009 when they learned that the chosen investment vehicle wasn’t as good as advertised.  And since plaintiffs filed suit approximately 14 months after they discovered the defendants’ wrongful conduct (in April 2010) – the complaint was timely under the two and three-year limitations periods for suits based on the sale of life insurance policies and annuities.  ¶¶ 24, 32,  735 ILCS 5/13-214.4, 815 ILCS 5/13.

Fraud Claim Analysis

The Second District also sustained plaintiffs’ fraud claims against defendants’ various Section 2-615 arguments.  While acknowledging that statements of opinion, future intent or financial projections are generally not actionable, the Court focused on the context, not the content of defendants’ statements.  (¶ 43)  The Court held that the plaintiffs sufficiently alleged that the defendants’ statements (that plaintiffs’ funds were 100% safe and the investment plan was proven to be successful) were sufficiently factual to state statutory and common law fraud claims under Illinois pleading rules. (¶ 44).

 Agency Analysis

Sustaining the plaintiffs’ agency allegations (and therefore upholding the claims against defendants’ 2-615 motion attack), the Court provided an agency law primer:

– agency is a fiduciary relationship where the principal can control the agent’s conduct and the agent can act on the principal’s behalf;

– an agent’s authority can be actual or apparent;

– actual authority can be express or implied;

– express authority = principal explicitly grants the agent authority to perform a given act;

implied authority = actual authority proved by circumstantial evidence of the agent.  That is, the principal’s conduct reasonably leads the agent to believe that the principal wants the agent to act on the principal’s behalf;

– apparent agency = principal holds out agent as having authority to act on principal’s behalf and a reasonably prudent third party would assume the agent’s authority based on the principal’s conduct.

(¶¶ 49-51).

Applying these rules, the Court held that the plaintiffs pled sufficient facts to establish an agency relationship between the two individual financial agents and the investment firm.  Factors the court considered in its agency calculus included that the defendants used the corporate employer’s offices, business cards and same phone number. ¶ 51.  The Court also cited the fact that plaintiffs had multiple meetings with the individual defendants at the corporate defendant’s office – something that would likely lead a reasonable person to assume that the individual defendants were authorized to act for the corporate principal.  As a result, plaintiffs’ stated colorable claims under Illinois fact-pleading rules.  14 of plaintiff’s 15 claims were reinstated.

Take-aways: The discovery rule applies to common law and consumer fraud claims.  The more detailed a plaintiff’s allegations, the better chance they will survive a limitations defense.  Fraud claims cannot be based on future intent, opinions or financial forecasts unless the statements are sufficiently present-tense and factual.   The case is also instructive on what agency allegations will and won’t satisfy Illinois fact-pleading rules where a plaintiff attempts to impute an agent’s conduct to a corporate principal.