A new California Supreme Court decision holds that tort recoveries, including punitive damages, are available in some circumstances for intentional misrepresentations made by a contracting party in a certificate of due performance required by the contract. Many commercial agreements involve statements or certificates about performance given by one party to the other. This decision greatly increases the stakes for and the exposure of the party making the representations.
Background
On December 23, 2004, in Robinson Helicopter Co. v. Dana Corp., the California Supreme Court concluded that the economic loss rule does not bar tort recovery (including punitive damages) for intentional misrepresentation or fraud in the performance of a contract, where there are affirmative misrepresentations that are relied upon by the plaintiff and that "expose a plaintiff to personal damages independent of the plaintiff's economic loss."1
Generally, liability for breach of contract does not include exposure to recovery in tort, including liability for punitive damages. In part, this outcome is the consequence of the "economic loss rule" in tort law. In a nutshell, this rule prohibits negligence or strict liability recovery based on supplying a defective product unless there is personal injury or property damage other than to the product itself.2 If the only damage is to the product itself, then the purchaser's remedy is in contract only. The Robinson decision recognizes an exception to this rule.
The Robinson Case
In 1984, Robinson contracted to purchase from Dana parts for the helicopters Robinson manufactures. Dana initially delivered parts that complied with the contract specifications. Between July 1996 and October 1997, without notifying Robinson or obtaining the approval required by the FAA, Dana temporarily changed the process of manufacturing the parts. During this period, Dana provided contractually required written certificates with each delivery of parts that the parts had been manufactured "in conformance with Robinson's written specifications,"3 even though Dana knew that as a result of the change in the manufacturing process the parts did not conform to the specifications.
The nonconforming parts suffered a much higher failure rate than did conforming parts. Dana did not disclose that it had changed its manufacturing process until three months after Robinson had notified Dana of the higher failure rate. Dana later disputed whether the deviation from specification was the cause of the increased failure rate.
Though in theory failure of a nonconforming part might have caused physical injury or property damage, there were no accidents or other incidents of injury or property damage caused by the failure of the nonconforming parts supplied by...
