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Fraud is not a Viable Claim for Breach of Contract

Fraud is not a Viable Claim for Breach of Contract Unless Separate Tort Claim Exists

by Jo A. Tatarko

Lucarell v. Nationwide Mutual Ins. Co.

In a recent case, the Ohio Supreme Court resolved the law relating to the recovery of punitive damages for breach of contract and clarified other defenses.

Lucarell v. Nationwide Mutual Ins. Co. provides insight into a situation involving multiple contracts in which the parties attempted to renegotiate the terms to salvage their relationship.

The Facts of the Case

In 2005, Plaintiff Lucarell entered the Agency Executive Program (the “Program”) designed by Nationwide Mutual Insurance Company to recruit new agents.

Based on a business plan presented to her, Lucarell anticipated revenues of $200,000 per year, but nonetheless, Nationwide disclaimed any guarantee of revenue in its agreements with Lucarell.

As part of the Program, Nationwide financed a loan for Lucarell to start her agency.  Lucarell was also required to sign a performance agreement, which had minimum production requirements and with which she had to comply in order to waive repayment of that loan.

Eventually when agents, including Lucarell, were unable to meet the minimum production requirements, Nationwide offered opportunities for them to exit the Program without any further liability.  However, Lucarell entered a memorandum of understanding in which she received more funding from Nationwide in consideration for a complete release of all claims against it.

Lucarell testified that she had no choice but to sign the memorandum of understanding because, if she did not, she would have been terminated and her loan would have become due in full.

Subsequently, she entered into another modified agreement with Nationwide in which she acknowledged she had been given the opportunity to exit the Program, but declined and was under no economic duress and entered into the agreement voluntarily.  The agreement also contained a release.

Nationwide increased Lucarell’s monthly disbursements but also increased her minimum production requirements.  Eventually, Lucarell failed to meet those requirements and resigned.

An Award for Lost Profits and Punitive Damages

The trial court awarded Lucarell over $2 million in lost profits and over $10 million in punitive damages, despite the fact that her fraudulent misrepresentation claim had been resolved by a directed verdict in Nationwide’s favor.

The Court of Appeals reduced the amount of punitive damages and remanded the case for a new trial on the fraud to include punitive damages.

Nationwide’s Appeal to the Supreme Court

Nationwide appealed to the Supreme Court arguing that punitive damages are not recoverable in a breach of contract claim.  The Court explained that “punitive damages may not be awarded for breach of contract, no matter how willful the breach.”  Further, it denounced the exception created by several appellate courts that allowed punitive damages if a breach of contract is accompanied by a connected, but independent tort.

A Harm Separate from a Breach of Contract

The Court explained “although we have noted that the conduct constituting a breach of contract can also constitute a tort, we have made clear that punitive damages are available only when the claimant ‘suffered a harm distinct from the breach of contract action and attributable solely to the alleged tortious conduct.’”

Further, any punitive damages are subject to the statutory limitations in the Ohio Revised Code.  Thus, a request for punitive damages must be related to a harm suffered that is separate from any harm from breach of contract.

Good Faith & Fair Dealing

The Court also addressed whether a separate claim for failure to enforce or perform a contract in good faith exists.  While the Court acknowledged that every contract imposes an implied duty of good faith and fair dealing in its performance and enforcement, good faith is a duty not to take advantage in a way that had not been contemplated at the time of drafting.

The Court held that a violation of the implied duty only occurs if there is a breach of a specific obligation imposed by the contract.  Thus, there is no independent cause of action for breach of the implied duty of good faith and fair dealing apart from breach of the underlying contract.

Proving Duress

The Court also examined Lucarell’s claims that she was subject to duress when she signed the contracts with Nationwide.  In order to prove duress, specifically economic duress, a person “must show he or she was subjected to ‘* * * a wrongful or unlawful act or threat,* * *’ and that it ‘* * * deprive[d] the victim of his unfettered will.’”

The real question is whether the party had freedom of exercising his/her will.

What Constitutes Fraud

The Court also clarified that fraud cannot be promised “on predictions or projections relating to future performance; rather, we have long recognized that to be actionable, a misrepresentation must involve a matter of fact that relates to the past or present.”

The Court denied Lucarell’s appeal on her fraud claim because she admitted the $200,000 figure was a projection, rather than a promise of income.

In Summation

Under Lucarell, punitive damages are not available for a breach of contract, unless there is a separate tort action.  Further, a court will not find breach of contract for not performing in good faith without an underlying breach of the contract terms.  Whether fraud and duress are viable causes of action/defenses will depend on the facts of each case.

If you have questions about your legal claims or defenses, you should speak to an attorney directly.

The information presented in this post is not legal advice and does not form a lawyer/client relationship. Laws and circumstances can differ and change.
Please contact us for a personal review of your situation

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