The Lawletter Vol. 43 No. 2
The Virginia Supreme Court recently reiterated its position that in Virginia, the source-of-duty rule prohibits suing in tort when the only basis for the duty breached lies in contract. In MCR Federal, LLC v. JB&A, Inc., 294 Va. 446, 808 S.E.2d 186 (2017) decided on December 14, 2017, the seller of a government contracting business brought breach of contract and fraud claims against the buyer of their firm. As part of the parties' agreement, the buyer warranted that there were no adverse suits, investigations, or government actions against it at the time the parties signed the contract. The contract also required that the buyer deliver to the seller a "bring down certificate" reaffirming those warranties at closing.
While the warranties were accurate at the time of contracting, they were no longer accurate at the time of closing. In the period between contracting and closing, the United States Air Force launched an investigation into the buyer for their actions pertaining to a contract unrelated to the contract between seller and buyer and suspending the buyer from government contracting. Because of this investigation, the business did not meet earnings thresholds set forth in the contract, which resulted in the seller not receiving additional payments. The seller sued the buyer, claiming the "bring down certificate" produced at closing was a breach of contract and fraud because it did not reveal the Air Force investigation. After a lengthy bench trial, the circuit court found in favor of the seller on both the fraud and breach of contract claims.
The buyer appealed, arguing, in relevant part, that the trial court erred in allowing the seller to sue in tort for fraud based on the allegedly false contractual representations. In evaluating this assignment of error, the court first noted the difference between tort and contract claims:
"The law of torts provides redress only for the violation of certain common law and statutory duties involving the safety of persons and property, which are imposed to protect the broad interests of society" . . . [whereas] "the major consideration underlying contract law is the protection of bargained for expectations." . . . "Losses suffered as a result of the breach of a duty assumed only by agreement, rather than a duty imposed by law, remain the sole province of the law of contracts."
The court then articulated the "source of duty" rule in Virginia that to determine whether a cause of action sounds in contract or tort, the source of the duty violated must be ascertained and that "'[t]o avoid turning every breach of contract into a tort, . . . we have consistently adhered to the rule that, in order to recover in tort, the duty tortiously or negligently breached must be a common law duty, not one existing between the parties solely by virtue of the contract.'" Id. at 458, 808 S.E.2d at 193 (quoting Dunn Constr. Co. v. Cloney, 278 Va. 260, 266, 682 S.E.2d 943, 946 (2009)).
The seller argued that the delivery of the allegedly false "bring down certificate" was fraud, not a breach of contract, because the certificate was a condition precedent to closing rather than a contractual duty. The Court disagreed, finding that the source of the duty breached was the parties' contract, in which the seller made the warranty that was reaffirmed in the certificate. The court found that "[t]he representation and warranty breach in this case existed solely because of the contractual relationship between the parties," and thus held that the seller did not bring proper claims for actual or constructive fraud. Id. at 460, 808 S.E.2d at 194.
This ruling illustrates the Virginia Supreme Court's strong and deep-seated intolerance of mixing tort and contract claims. They reiterated that "we cannot permit 'turning every breach of contract into an actionable claim for fraud.'" Id. (quoting Dunn Constr. Co. v. Cloney, 278 Va. 260, 268, 682 S.E.2d 943, 947 (2009)). In light of this definitive rule, litigants should be certain to determine the source of the duty breached and bring their claims accordingly. As is clear from this case, ignorance of the "source of duty" rule will lead to swift reversal by the Supreme Court.