Attorneys for Appellant
Attorneys for Appellee
James E. Ayers Todd H. Belanger
Wernle, Ristine & Ayers Jennifer D. McNair
Crawfordsville, Indiana Wood Tuohy Gleason Mercer & Herrin
Mann Law Firm Harry A. Siamas
Terre Haute, Indiana Collier Homann & Siamas
S. Bryan Donaldson
Attorney for Amicus Curiae
Indiana Builders Association, Inc.
William W. Gooden
Pastore & Gooden, P.C.
Appeal from the Montgomery Circuit Court, No. 54C01-9705-CP-153
The Honorable Thomas K. Milligan, Judge
On Petition To Transfer from the Indiana Court of Appeals, No. 54A01-0009-CV-300
November 5, 2003
Over the course of renovations, the Estelles questioned the quality of work
being performed. Eventually, the two parties deadlocked on the issue of payment
for the substandard work, and suit was filed. The Estelles alleged that
both Allen Construction and Greg Allen breached the contract and were negligent.
Because he was acting as president and employee of Allen Construction, the trial
court found that Allen was not individually liable to the Estelles. The
Court of Appeals disagreed, holding that because Allen participated in and supervised the
negligent acts, he was personally liable in tort. Greg Allen Constr. Co.
v. Estelle, 762 N.E.2d 760 (Ind. Ct. App. 2002).
Chief Judge Brook dissented, saying that because the Estelles suffered only economic loss,
their remedy lied exclusively in contract:
The theory of negligence protects interests related to safety or freedom from physical harm, including not only personal injuries, but also damage caused by defective personal property. . . . [W]here there is no accident, and no physical damage, and the only loss is a pecuniary one, through loss of value . . . or the cost of repairing it, the courts have adhered to the rule . . . that purely economic interests are not entitled to protection against mere negligence, and so have denied recovery.
Greg Allen Constr. Co., 762 N.E.2d at 784 (Brook, C.J., dissenting) (citation omitted)
(emphasis in original).
(R. at 10.)
The whole of the alleged wrong, deficient home improvements, centered on the performance
required by the contract created by Allen Construction and the Estelles. Any
duty Allen had to perform his individual duties flowed solely from this contract.
Whatever negligence is attributed to Allen was performed in the course of his duties as an employee of the corporation. Under the traditional respondeat superior doctrine, if Allen is liable in negligence to the Estelles, then so is his principal, the corporation. See e.g., Hess v. Lowrey, 122 Ind. 225, 23 N.E. 156 (1890); Plumlee v. Monroe Guar. Ins. Co., 655 N.E.2d 350 (Ind. Ct. App. 1995). That result would convert most breach of contract claims into negligence claims.
This is not a new issue. Because a tort may
produce more generous damages and open the door to the possibility of punitive
damages, there is obvious incentive to seek to frame a contract breach as
a negligence claim. See, e.g., Prosser and Keeton on the Law of
§ 92 (W. Page Keeton, Dan B. Dobbs, Robert E. Keeton &
David G. Owen, eds., 5th Ed. 1984) at p. 658, (observing the more
or less inevitable efforts of lawyers to turn every breach of contract into
a tort.) Plaintiffs here have pleaded a separate tort claim, but the
issue is not whether they have adequately pleaded a negligence claim.
The basic theory underlying the distinction between contract and tort is that tort
liability is imposed by law and that contract liability is the product of
an agreement of the parties. But only the principal, who is a
party to the contract, has agreed to perform the obligations of the agreement.
To impose the same liability on the agent is to make the
agent the promisor when the parties had arranged their affairs to put the
principal, and only the principal, on the line.
A defendants exposure to tort liability is best framed in terms of what
the defendant did. The proper formulation of the reason Allen is not
liable here is that his negligence consisted solely of his actions within the
scope of his authority in negligently carrying out a contractual obligation of the
corporation as his employer. Nothing he did, and therefore nothing the corporation
did, constituted an independent tort if there were no contract. Under those
circumstances the Estelles should be remitted to their contract claim against the principal,
and they should not be permitted to expand that breach of contract into
a tort claim against either the principal or its agents by claiming negligence
as the basis of the breach.
To the extent that a plaintiffs interests have been invaded beyond mere failure
to fulfill contractual obligations, a tort remedy should be available. If so,
damage to person or property or to economic interests may be recoverable.
But here there is no claim of injury that the law would protect
if there were no contract. Without a contract, the Estelles would have
no other claim for any
structure negligently or otherwise constructed, and they do
not assert any harm to their persons, no harm to any other property
and any invasion of any other protectible interest.
To be sure, a number of authorities have expressed the point in terms
of economic loss.
Section 357 of the Second Restatement of Agency provides
that [a]n agent who intentionally or negligently fails to perform duties to his
principal is not thereby liable to a person whose economic interests are thereby
harmed. This follows the more general rule of Section 352 that [a]n
agent is not liable for harm to a person other than his principal
because of his failure adequately to perform his duties to his principal, unless
physical harm results from reliance upon performance of the duties by the agent,
or unless the agent has taken control of land or other tangible things.
Illustration two under Section 352 is this case:
P, who has agreed to build a house for T, employs A to build it. A is careless in the construction of the house, so that the house does not conform to the contract. A is not thereby liable to T for the failure to construct the house in accordance with the contract.
Together, these Restatement sections lead to the conclusion that an agent is not liable for economic loss to anyone except his principal. See also McAdams v. Dorothy Edwards Realtors, Inc., 604 N.E.2d 607, 612 (Ind. 1992) (quoting Wilson v. Haimbaugh, 482 N.E.2d 486, 487 (Ind. Ct. App. 1985)) (agent who negligently fails to perform duties owed to her principal is not liable to a person whose economic interests are thereby harmed); Krawczyk v. Bank of Sun Prairie, 553 N.W.2d 299, 303 (Wis. Ct. App. 1996) (negligent agent not liable for economic losses he has caused to persons other than his principal); Sound of Market Street v. Continental Bank Intern., 819 F.2d 384, 391 (3rd Cir. 1987) (agent not liable for economic harm to a person other than its principal because of its negligent failure to adequately perform its duties, although it is liable if physical harm resulted from reliance on the agents performance).
Nevertheless, phrasing this issue in terms of nonliability for economic loss overstates the point somewhat. In certain statutory settings, an agent may be liable for torts committed by the agent within the scope of his employment. See State Civil Rights Commn v. County Line Park, 738 N.E.2d 1044, 1050 (Ind. 2000). And there are some common law fields, for example product disparagement by negligent communication of a known false statement, in which a wrong may inflict only economic loss but may nevertheless be tortious. See Restatement (Second) of Torts § 630, cmt. a. Similarly, negligent misrepresentation may be actionable and inflict only economic loss. See Restatement (Second) of Torts § 552; see also Eby v. York-Division, Borg-Warner, 455 N.E.2d 623, 629 (Ind. Ct. App. 1983) (negligent misrepresentation is recognized in Indiana only under section 552 of the Restatement and only in very limited employment cases). If so, the agent/servant may be individually liable. See Restatement (Second) of Agency § 343, cmt b ([a]n agent who . . . defames . . . another . . . is not excused by the mere fact that he is acting as an agent.)
The issue is also sometimes framed as whether the duty arises solely from contract. See, e.g., Grynberg v. AgriTech, Inc., 985 P.2d 59, 62-63 (Colo. 1999) (in determining whether a cause of action in tort exists, a court should consider both the source of a defendants duty to act, that is, whether such duty arises from a contract or from some other source, and the nature of the remedy sought by the plaintiff.) When the parties have, by contract, arranged their respective risks of loss, however, the tort law should not interfere. Putting the issue in terms of the source of the duties of the agent may lead to overstating the agents non-liability, and is largely tautological.
It may be the case that the only relationship between Allen, as an
individual, and the Estelles derives from the contractual relationship between the corporation and
the Estelles. To be sure, Allen could be individually liable to the
Estelles if he negligently burned their house down while working with a blowtorch
whether this work was on the Estelles house under a contract with them,
or the project was a neighbors house and had no contractual relationship to
the Estelles. The reason is that this negligence goes beyond failure to
perform up to contractual standards, and constitutes a tort even if there were
no contractual relationship between the Estelles and either Allen or his corporation. Moreover,
describing the reason for the non-liability in this case (and liability for the
fire in that hypothetical) as turning on the presence or absence of duty
states the conclusion without giving a reason.
The same result can be restated as the laws imposing a duty to
avoid injury to person or property. The rule of law is that
a party to a contract or its agent may be liable in tort
to the other party for damages from negligence that would be actionable if
there were no contract, but not otherwise. Typically, damages recoverable in tort
from negligence in carrying out the contract will be for injury to person
or physical damage to property, and thus economic loss will usually not be
recoverable. But that is only the usual case, not the uniform rule.
Sullivan, Boehm, and Rucker, JJ., concur.
Dickson, J., concurs in result.