New Jersey Contract Law Issues: The Economic Loss Doctrine, Fraud in the Breach Versus Fraud in the Inducement, and the Duty of Good Faith and Fair Dealing

Our attorneys represent people and businesses in all aspects of contract law, including contract negotiations, drafting, review and contract litigation.  One of the more complex areas of contract law if the interplay of contract and tort law when fraud and contracts intersect.  While this issue is complex, there are several basic rules and principles.

The Economic Loss Doctrine – Fraud in the Performance of a Contract

New Jersey contract law adheres, if somewhat loosely, to the “economic loss doctrine.”  What this rule says is that after two parties enter into a contract governing their relationship, their remedies for economic loss are limited to breach of contract.  They cannot sue for torts (civil wrongs) such as fraud.  Thus, as a hypothetical example, after a contract is signed for ABC Company to pay XYZ, LLC $10,000 for the manufacture and delivery of ten motors, if XYZ takes the money and then keeps telling ABC that the motors are coming “soon” knowing full well it is never going to deliver, ABC is limited to suing XYZ for breach of contract when the motors aren’t delivered.  ABC cannot sue for fraud in the performance of the contract.  This is the heart of the economic loss doctrine.  The practical difference is that punitive damages are available if a party is found guilty of fraud, but punitive damages are not available for breach of contract.

There are many exceptions to this rule, as New Jersey law generally disfavors denying parties remedies for intentional torts such as fraud.  There are also exceptions based on the status of the parties.  For example, New Jersey law places an extra duty on doctors and insurance procurers which allows for suits based on professional negligence, or malpractice even when there is a contract.  Also, New Jersey’s Uniform Commercial Code (known as the UCC), which governs the sale of certain goods and other transactions, provides for suits for fraud and the recovery of punitive damages, even when there is a contract.

Fraud in the Inducement

Regardless of the economic loss doctrine, “fraud in the inducement” is always actionable in suits for torts and an award of punitive damages.  Fraud in the inducement occurs when there has been a material, intentional misrepresentation made and the intention that the other party rely on it so that it will go ahead and sign the contract in the first place.  In other words, one party is misleading the other into entering into the contract in the first place, as opposed to fraud in the performance which occurs after the contract is already signed.

The Duty of Good Faith and Fair Dealing

Regardless of the economic loss doctrine, in our example above, XYZ, LLC, might be liable to ABC for breach of the duty of good faith and fair dealing.  Our courts have interpreted New Jersey contract law as imposing a duty beyond the four walls of the contract which requires the parties to act in good faith to ensure that the other party receives the benefit of the bargain for which it entered into the contact.  A party can breach this duty even though it is complying with the letter of the contract, but nonetheless failing to cooperate with the other party in good faith.  However, just as a breach of contract, punitive damages are not available for breach of fiduciary of good faith and fair dealing.

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Our New Jersey business lawyers help people and businesses in all aspects of business law, including contract drafting, negotiation, review and legitimation.  Call (973) 890-0004 or email us to speak with one of our attorneys.