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Fraudulent Concealment Tort May Be Based on Conduct Relating to Contract—S.C.
Corrigan Says Party May Assert Cause of Action if Harm, Elements of Tort Can Be Shown Independent of Contractual Obligations
By a MetNews Staff Writer
A plaintiff may assert a tort claim for fraudulent concealment based on conduct occurring in the course of a contractual relationship if the elements of the claim can be established independently of the parties’ rights under the agreement and the tortious actions expose the plaintiff to a risk of harm beyond that contemplated by the parties at the time of execution, the California Supreme Court held yesterday.
The holding comes by way of a certified question from the Ninth U.S. Circuit Court of Appeals which, as modified by the Supreme Court to better address the dispositive issue, asks:
“Under California law, may a plaintiff assert a tort claim for fraudulent concealment arising from or related to the performance of a contract?”
The question arose after Michael R. Rattagan, an international corporate law attorney licensed to practice in his home country of Argentina and New York state, sued Uber Technologies Inc. after the relationship between the parties soured following a botched roll-out of Uber services in Argentina. Rattagan was retained by two Dutch subsidiaries of the rideshare company to provide incorporation services in Argentina.
Rattagan also agreed to act as the subsidiaries’ registered legal representative in the country, as required for foreign entities by Argentinian law.
Rattigan’s Allegations
The attorney contends that between December 2015 and April 2016, Uber representatives repeatedly met—without his knowledge—with Buenos Aires officials, who warned Uber not to launch its platform in the city unless certain criteria were met. According to the complaint, Uber secretly decided to launch in April 2016 even though neither incorporation nor tax registration had yet been completed.
After the official launch was announced on April 12, 2016, violent demonstrations broke out in the streets and Rattagan’s office was surrounded by protestors who blocked the exits to the building for hours. In April 2017, Rattagan was formally charged with aggravated tax evasion, subjecting him to criminal booking procedures and the imposition of a temporary ban from traveling abroad.
He alleges that the travel ban negatively affected his international law practice and harmed his reputation.
Tort Claims
Rattagan’s complaint asserts causes of action against Uber for fraudulent concealment, negligence, and breach of the implied covenant of good faith and fair dealing.
Senior District Court Judge Edward M. Chen of the Northern District of California granted the defendant’s motion to dismiss and judgment in its favor was entered on Aug. 19, 2020. Chen ruled that the fraudulent concealment causes of action are foreclosed by the economic loss rule—as interpreted by the 2004 California Supreme Court case of Robinson Helicopter Co. v. Dana Corp.—limiting the recovery on tort causes of action between parties to a contract.
The remaining claims were dismissed as time-barred, rulings that Rattagan does not challenge.
Justice Carol Corrigan authored the opinion for the unanimous court, finding that Chen misapplied the principles established in Robinson and answering the certified question as follows:
“Under California law, a plaintiff may assert a cause of action for fraudulent concealment based on conduct occurring in the course of a contractual relationship, if the elements of the claim can be established independently of the parties’ contractual rights and obligations and the tortious conduct exposes the plaintiff to a risk of harm beyond the reasonable contemplation of the parties when they entered into the contract.”
Economic Loss Rule
Noting the “often elusive boundary line between tort and contract law,” Corrigan said that the economic loss rule is a device for helping courts determine the distinction. She pointed out that contract actions are created to enforce the intentions of the parties to the agreement and tort law is primarily designed to vindicate social policy.
As a result of these distinct purposes, recovery for a contractual breach is generally limited to those damages reasonably foreseeable by the parties; tort recovery, on the other hand, allows exemplary or punitive damages.
Due to this boundary line, the jurist explained that the “guiding and distinguishing principle” of the economic loss rule requires a nuanced analysis.
She said:
“[U]nder the economic loss rule, tort recovery for breach of a contract duty is generally barred…unless two conditions are satisfied. A plaintiff must first demonstrate the defendant’s injury-causing conduct violated a duty that is independent of the duties and rights assumed by the parties when they entered the contract. Second, the defendant’s conduct must have caused injury to persons or property that was not reasonably contemplated by the parties when the contract was formed.”
She continued:
“If the alleged breach is based on a failure to perform as the contract provides, and the parties reasonably anticipated and allocated the risks associated with the breach, the cause of action will generally sound only in contract because a breach deprives an injured party of a benefit it bargained for. However, if the contract reveals the consequences were not reasonably contemplated when the contract was entered and the duty to avoid causing such a harm has an independent statutory or public policy basis, exclusive of the contract, tort liability may lie.”
Robinson Case
She pointed to the Robinson case as the court’s “first opportunity to address whether, and to what extent, the economic loss rule applies to an intentional tort, specifically fraudulent misrepresentation in the performance of a contract.” The case involved alleged affirmative misrepresentations by a supplier to the purchaser regarding the contracted-for product’s compliance with governing regulations.
In an opinion by then-Justice Janice Rogers Brown (now retired), the court in Robinson overturned the reversal of a jury verdict award of punitive damages to the plaintiff based on the affirmative fraudulent misrepresentation theory, but expressly declined to address whether the defendant engaged in acts of fraudulent concealment in withholding certain information.
Corrigan remarked:
“[T]he district court granted Uber’s motion to dismiss, in part, based on its misreading of Robinson. The district court understood Robinson to bar the assertion of a fraud claim based on concealment as opposed to affirmative deception, even when the tort arises independently of the parties’ contract. But the Robinson majority expressly declined to decide that issue.”
Concealment Versus Deception
The justice said that there is no difference under California law between affirmative deception or concealment and reasoned:
“[W]e see no principled reason to treat fraudulent concealment claims in the performance of a contract any differently from those based on affirmative misrepresentations, so long as a plaintiff can establish all the required elements of the cause of action independently of the parties’ contractual rights and obligations and can demonstrate an exposure to risks of harm beyond those that would be reasonably expected as the result of a contractual breach. However, certain unique aspects of a claim of fraudulent concealment related to a contractual performance must be considered when making such a determination.”
Noting that a duty to disclose a material fact in support of a fraudulent concealment claim often arises due to a preexisting relationship between the parties, Corrigan commented that this area of law frequently involves both contract and tort principles.
She opined:
“When a potential injury stemming from a nondisclosure is determined to have been within the reasonable contemplation of known risks to the parties before entering into their agreement and the parties accounted for that risk….a plaintiff asserting a fraudulent concealment claim in the performance of a contract generally cannot demonstrate that the defendant violated a tort duty independent of the parties’ contractual rights and obligations. If, on the other hand, an independent duty to disclose certain material facts arises for a party in the course of a contractual relationship but the party intentionally conceals or suppresses such facts, inducing detrimental reliance and exposing the other party to risks of harm not reasonably contemplated when the contract was formed, the party suffering the injury may assert [a] tort action….”
The justice declared that “[o]f course, it will remain for the federal courts to test the adequacy of Rattagan’s complaint in light of the answer to the certified question that we provide here.”
The case is Rattagan v. Uber Technologies Inc., 2024 S.O.S. 2894.
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