Present: Koontz, Kinser, Lemons, Goodwyn, Millette, and Mims
JJ., and Russell, S.J.
PHILLIP ABI-NAJM, ET AL.
v. Record No. 091546 OPINION BY JUSTICE DONALD W. LEMONS
September 16, 2010
CONCORD CONDOMINIUM, LLC
FROM THE CIRCUIT COURT OF ARLINGTON COUNTY
Benjamin N.A. Kendrick, Judge
In this appeal from the dismissal of an action alleging
breach of contract, fraud in the inducement, and violation of
the Virginia Consumer Protection Act, Code §§ 59.1-196 et seq.
(“VCPA” or “the Act”), we consider whether the trial court
erred when it sustained the demurrers of Concord Condominium,
LLC (“Concord”) to the complaints of Phillip Abi-Najm (“Abi-
Najm”) and other purchasers of residential condominiums
(collectively, “the Purchasers”) from Concord on the grounds
that the Purchasers’ breach of contract claims were barred by
the merger doctrine, and their fraud in the inducement and VCPA
claims were barred by the economic loss doctrine.
I. Facts and Proceedings Below
This appeal is comprised of two civil actions filed
against Concord in the Circuit Court of Arlington County. 1 The
first action was brought by Laura and Bradford Reed, and the
1
Pursuant to Rule 5:9, the two actions were consolidated
in this appeal.
second action was brought by Abi-Najm and 24 co-plaintiffs
(“the Abi-Najm Complaint,” collectively “the Complaints”). The
substantially similar suits contain three counts: (i) breach
of contract, (ii) violation of the VCPA, and (iii) fraud in the
inducement. 2 The following factual recitation is taken from the
Abi-Najm Complaint.
The Purchasers alleged that they were interested in
purchasing a condominium and met with sales agents for the West
Village of Shirlington in Arlington County in 2005 and 2006.
The Purchasers entered into separate purchase agreements
(“Contracts”), each containing a schedule of standard finishes
(“Schedule A”) and various addenda. In pertinent part,
Schedule A provided that the flooring of each condominium would
be “Bruce Oak hardwood, 3/4”.” Schedule A also contained the
following language: Concord “may substitute substantially
equivalent materials and finishes for those specified herein.”
Paragraph 22(a) of the Contract, entitled “MISCELLANEOUS,”
contained the following provision pertinent to this appeal:
Notwithstanding anything to the contrary herein,
acceptance of the deed at settlement shall
2
In the Complaints, the fraud in the inducement count is
labeled “Common Law Fraud,” but the facts alleged are more
accurately characterized as a claim for fraud in the
inducement. At oral argument, counsel for the Purchasers
referred to this count as fraud in the inducement, and we will
do the same herein. Abi-Najm and certain of his co-plaintiffs
also alleged counts for breach of contract and trespass in the
Abi-Najm Complaint. Those counts are not part of this appeal.
2
constitute Purchaser’s acknowledgment of full
compliance by [Concord] with the terms of this
Agreement. The terms hereof shall be merged
into and extinguished by delivery of the deed at
settlement except for Sections 4(b), 5, 17, 18,
21, 22 and 23 which shall survive delivery of
the deed and shall not be merged therein.
At the center of this litigation is the Purchasers’
allegation that instead of the three-quarter-inch Bruce Oak
hardwood flooring set forth in Schedule A, Concord delivered
“prefabricated engineered hardwood, 3/8” [flooring],” and this
substitution was “not substantially equivalent to Bruce Oak
hardwood, 3/4”.” The Purchasers alleged that they did not
learn of this substitution until after closing on the
condominiums, nor would a “normal visual inspection” reveal the
substitution. The Purchasers alleged that this substitution
constituted a material breach of the contract for which they
sought damages in the amount of at least $50,000 per
condominium, in addition to prejudgment interest and costs.
In their VCPA count, the Purchasers alleged that their
purchase of the condominiums was a consumer transaction as
defined by the Act, and Concord’s intentionally false and
misleading information concerning the flooring constituted
misrepresentations of a material fact, and fraudulent acts in
violation of the VCPA. The Purchasers also alleged that
Concord had knowledge that the information concerning the
flooring was untrue, that Concord acted with the intent to
3
deceive the Purchasers, and that Concord willfully concealed
the flooring substitution. Finally, the Purchasers alleged
that Concord “knew or reasonably should have known that its
disclosure of [the actual flooring material] would have caused
the [Purchasers] to reconsider or renegotiate the Contracts.”
As in their breach of contract count, the Purchasers claimed
damages of $50,000 per condominium, treble damages pursuant to
Code § 59.1-204(A), and $350,000 in punitive damages, in
addition to prejudgment interest and costs including attorney’s
fees.
In their fraud in the inducement count, the Purchasers set
forth substantially similar allegations as were made in the
VCPA count, particularly that Concord knowingly misrepresented
the quality of the flooring it would deliver and that this
misrepresentation involved a material fact. The Purchasers
further alleged that they relied upon those misrepresentations,
and absent those misrepresentations they would not have entered
into the Contracts. They further alleged that in the
alternative, they would have renegotiated the Contracts. The
Purchasers alleged damages of $50,000, and they sought punitive
damages of $350,000 per condominium, prejudgment interest,
costs and attorney’s fees under this count.
In response Concord filed demurrers to the Complaints,
arguing that the breach of contract claims were barred by
4
merger, and the VCPA and fraud in the inducement claims were
barred by the economic loss rule. The trial court held a
hearing on Concord’s demurrers, at the conclusion of which it
held: “With respect to the merger clause, if you look at
paragraph 22(a) of the [Contract], it is pretty clear that the
merger clause applies. And claims that merge into the deed
can, in fact, and do exist in this case. And as such, there is
no breach of contract.” With respect to the Purchasers’ fraud
in the inducement and VCPA claims, the trial court held that “a
separate tort . . . does not exist,” and therefore the
“economic [loss doctrine] as [stated] in Sensenbrenner”
precludes those causes of action. Accordingly, the trial court
entered orders sustaining Concord’s demurrers to the
Complaints.
The Purchasers timely filed their notice of appeal and we
granted an appeal on the following assignments of error:
1. The trial court erred when it granted respondent’s demurrer
and dismissed petitioners’ breach of contract claim on the
grounds that the claim was barred by the merger doctrine.
2. The trial court erred when it granted respondent’s demurrer
and dismissed petitioners’ claims under the Virginia
Consumer Protection Act and for fraud in the inducement on
the grounds that the claims were barred by the economic
loss doctrine.
5
II. Analysis
A. Standard of Review
We apply well-established principles guiding our review of
a trial court’s judgment sustaining a demurrer.
“The purpose of a demurrer is to determine
whether a motion for judgment states a cause of
action upon which the requested relief may be
granted.” Tronfeld v. Nationwide Mut. Ins. Co.,
272 Va. 709, 712, 636 S.E.2d 447, 449 (2006)
(citing Welding, Inc. v. Bland County Serv.
Auth., 261 Va. 218, 226, 541 S.E.2d 909, 913
(2001)). “A demurrer tests the legal sufficiency
of facts alleged in pleadings, not the strength
of proof.” Glazebrook v. Board of Supervisors,
266 Va. 550, 554, 587 S.E.2d 589, 591 (2003).
Accordingly, we accept as true all properly pled
facts and all inferences fairly drawn from those
facts. Id. “Because the decision whether to
grant a demurrer involves issues of law, we
review the circuit court’s judgment de novo.”
Dreher v. Budget Rent-A-Car Sys., 272 Va. 390,
395, 634 S.E.2d 324, 326-27 (2006) (citing
Glazebrook, 266 Va. at 554, 587 S.E.2d at 591.)
Augusta Mutual Ins. Co. v. Mason, 274 Va. 199, 204, 645 S.E.2d
290, 293 (2007).
B. The Merger Doctrine
The trial court sustained Concord’s demurrer to the
Purchasers’ breach of contract action, holding that Section
22(a), the Contracts’ merger clause, caused Concord’s
obligations under Schedule A to be merged into and extinguished
by the deed. The Purchasers argue that the merger doctrine is
inapplicable to this case. For the reasons stated herein, we
agree with the Purchasers.
6
The merger doctrine has been long-recognized by this
Court. See Woodson v. Smith, 128 Va. 652, 104 S.E. 794 (1920).
“The merger doctrine deals with extinguishing a previous
contract by an instrument of higher dignity,” the deed. Empire
Mgmt. & Dev. Co. v. Greenville Assocs., 255 Va. 49, 52, 496
S.E.2d 440, 442 (1998). “However, provisions which are
collateral to the passage of title and not covered by the deed
are not merged into the deed and survive its execution.” Beck
v. Smith, 260 Va. 452, 455, 538 S.E.2d 312, 314 (2000) (citing
Empire Mgmt., 255 Va. at 54, 496 S.E.2d at 443; Davis v.
Tazewell Place Assocs., 254 Va. 257, 262-63, 492 S.E.2d 162,
165 (1997); Miller v. Reynolds, 216 Va. 852, 854-55, 223 S.E.2d
883, 885 (1976); and Woodson, 128 Va. at 656, 104 S.E.2d at
795).
In discussing the doctrine of merger, we have
explained that a deed “is a mere transfer of
title.” Miller, 216 Va. at 855, 223 S.E.2d at
885. The deed is the final expression of the
agreements between the parties as to “every
subject which it undertakes to deal with,” and
any conflicts between the terms of prior
agreements and the terms of the deed are
resolved by the deed. Woodson, 128 Va. at 656,
104 S.E. at 795.
Id. at 456, 538 S.E.2d at 314-15.
In Woodson, one of our earliest cases addressing the
merger doctrine, a seller of two parcels of real estate entered
into two separate contracts of sale, each of which reserved in
7
the seller a right of possession until November 15, 1919. 128
Va. at 653-54, 104 S.E. at 794. On February 27, 1919, the
seller delivered the deeds, which “contain[ed] no reference to
the antecedent contracts” of sale. Id. at 654, 104 S.E. at
794. The trial court held that the contracts of sale merged
into the deeds, thereby entitling the grantees to immediate
possession of the property. Id. at 655, 104 S.E. at 795.
We affirmed, observing that the deeds in Woodson
“contained covenants which by statute in Virginia . . . meant
that the grantee ‘might at any and all times thereafter,
peaceably and quietly enter upon and have, hold, and enjoy the
land conveyed by the deed,’” and therefore “[t]he stipulations
in the contracts and the covenants in the deeds, as related to
the question of possession, [were] in patent and irreconcilable
conflict.” Id. (quotation marks omitted). Despite the outcome
in Woodson, we noted, “[d]oubtless many cases may arise in
which distinct and unperformed stipulations contained in a
contract for sale will not be merged in or discharged by deed
where that instrument is silent upon the subject of such
stipulations.” Id. at 656, 104 S.E. at 795.
Since our decision to uphold the doctrine of merger in
Woodson, its narrow scope and disfavored status are evident in
our repeated refusal to apply it to extinguish agreements that
are not addressed in the deed and collateral to the passage of
8
title. See Empire Mgmt., 255 Va. at 53-54, 496 S.E.2d at 442-
43 (reversing the trial court’s application of the merger
doctrine to a rent guarantee in a sales contract, holding that
the rent guarantee was not covered in the deed and was
collateral to the passage of title); Davis, 254 Va. at 263, 492
S.E.2d at 165 (an express warranty contained in a contract for
sale did not merge with the deed and was enforceable); and
Miller, 216 Va. at 854, 223 S.E.2d at 884-85 (a condition in
the purchase contract making the sale contingent upon the
land’s suitability for percolation and its qualification for a
building permit did not merge into the deed).
Our most recent case examining the merger doctrine, Beck,
concerned a “contract for sale [that] provided that any utility
easement would ‘not materially and adversely [affect the
buyers’] intended use of the Property.’ ” 260 Va. at 455, 538
S.E.2d at 314. The contract for sale also provided that “the
representations and warranties of the seller contained in the
contract ‘SHALL BE DEEMED MERGED INTO THE DEED DELIVERED AT
SETTLEMENT AND SHALL NOT SURVIVE SETTLEMENT.’ ” Id. None of
the quoted language was repeated in the deed. Id.
In Beck, we observed, “not all agreements between the
parties regarding the purchase and sale of . . . property are
contained in the deed.” Id. at 456, 538 S.E.2d at 315. “Such
agreements are considered collateral to the sale if they are
9
distinct agreements made in connection with the sale of the
property, if they do not affect the title to the property, if
they are not addressed in the deed, and if they do not conflict
with the deed.” Id. Notwithstanding the language of the
purchase agreement calling for representations and warranties
to be merged into the deed, we held, “the agreement in the
contract for sale regarding the impact of utility easements on
the [buyers’] intended use of the property was collateral to
the transfer of title, was not merged into the deed, and
survived the execution of the deed.” Id.
In the case before us, the deeds are simply instruments
intended to convey title to the condominiums to the Purchasers.
The deeds are silent as to Schedule A. Therefore, unlike in
Woodson, in this case there is no “patent and irreconcilable
conflict” between the Contracts and the deeds. 128 Va. at 655,
104 S.E. at 795.
Turning to the Contracts themselves, the flooring
agreement set forth in Schedule A “is a distinct agreement,
does not affect the validity or nature of the title conveyed,
is not addressed in the deed, and does not conflict with the
terms of the deed.” Beck, 260 Va. at 456, 538 S.E.2d at 315.
Accordingly, we hold that the representations in Schedule A are
collateral to the transfer of title, they are not merged into
the deed, and therefore they survive delivery of the deed.
10
Based on the foregoing, the trial court erred when it sustained
Concord’s demurrer to the Complaints on the ground that the
merger doctrine precluded enforcement of the Contracts. 3
C. The Economic Loss Doctrine
The trial court sustained Concord’s demurrers to the
Purchasers’ VCPA and fraud in the inducement claims on the
ground that the economic loss doctrine precluded such claims.
In determining whether the economic loss doctrine precludes an
action in tort, we have observed:
The law of torts is well equipped to offer
redress for losses suffered by reason of a
“breach of some duty imposed by law to protect
the broad interests of social policy.” Kamlar
[Corp. v. Haley, 224 Va. 699, 706, 299 S.E.2d
514, 517 (1983).] Tort law is not designed,
however, to compensate parties for losses
suffered as a result of a breach of duties
assumed only by agreement. That type of
compensation necessitates an analysis of the
damages which were within the contemplation of
the parties when framing their agreement. It
remains the particular province of the law of
contracts. See id.
3
In the trial court and on appeal to this Court, Concord
asserts that the language in Schedule A permitting it to
“substitute substantially equivalent materials and finishes”
precludes the Purchasers’ breach of contract action, and that
the flooring substitution was not material to the contract.
However, in reviewing a circuit court’s ruling sustaining a
demurrer, “we accept as true all properly pled facts and all
inferences fairly drawn from those facts.” Augusta Mutual, 274
Va. at 204, 645 S.E.2d at 293. The Purchasers alleged that the
actual flooring installed by Concord was “not substantially
equivalent,” and that the substitution was material to the
Contracts. Therefore, at this stage of the litigation, a court
is required to accept the truth of the pleadings,
notwithstanding what a fact-finder ultimately may determine.
11
Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 236
Va. 419, 425, 374 S.E.2d 55, 58 (1988).
More recently we observed, “[t]he law of torts provides
redress only for the violation of certain common law and
statutory duties involving the safety of persons and property,
which are imposed to protect the broad interests of society.”
Filak v. George, 267 Va. 612, 618, 594 S.E.2d 610, 613 (2004).
“[L]osses suffered as a result of the breach of a duty assumed
only by agreement, rather than a duty imposed by law, remain
the sole province of the law of contracts.” Id.
Based on the foregoing, the question whether the economic
loss doctrine applies requires a court first to determine
“whether a cause of action sounds in contract or tort,”
ultimately by ascertaining “the source of the duty violated.”
Richmond Metro. Auth. v. McDevitt Street Bovis, Inc., 256 Va.
553, 558, 507 S.E.2d 344, 347 (1998).
Notwithstanding the limitations on certain tort actions
created by the economic loss doctrine, it is well-established
that
a single act or occurrence can, in certain
circumstances, support causes of action both for
breach of contract and for breach of a duty
arising in tort, thus permitting a plaintiff to
recover both for the loss suffered as a result
of the breach and traditional tort damages,
including, where appropriate, punitive damages.
12
Foreign Mission Bd. v. Wade, 242 Va. 234, 241,
409 S.E.2d 144, 148 (1991).
Dunn Construction Co., Inc. v. Cloney, 278 Va. 260, 266-67, 682
S.E.2d 943, 946 (2009).
As this recapitulation of the law reveals, the question
before this Court is whether the Purchasers alleged that
Concord breached a duty owing to them independent of any duties
assumed by Concord pursuant to the Contracts. We turn now to
the Purchasers’ respective claims.
i. The Virginia Consumer Protection Act
Concord argues that any statutory duties arising under the
Act “are duties that arise solely by virtue of the [Contracts]
entered into between the [Purchasers] and Concord.” We
disagree.
The VCPA was enacted with “the intent of the General
Assembly that [it] shall be applied as remedial legislation to
promote fair and ethical standards of dealings between
suppliers and the consuming public.” Code § 59.1-197.
Pursuant to Code § 59.1-200(A)(6), the VCPA makes it unlawful
for “a supplier in connection with a consumer transaction” to
“[m]isrepresent[] that goods or services are of a particular
standard, quality, grade, style, or model.” In pertinent part,
Code § 59.1-198 defines a “[c]onsumer transaction” as “[t]he
advertisement, sale, lease, license or offering for sale, lease
13
or license, of goods or services to be used primarily for
personal, family or household purposes.” “Goods” are defined
as “all real, personal or mixed property, tangible or
intangible.” Id. (emphasis added). Lastly, a “[s]upplier” is
defined as “a seller, lessor or licensor who advertises,
solicits or engages in consumer transactions.” Id.
Based on the plain language of the VCPA, it is unlawful to
misrepresent that goods are of “a particular standard, quality,
grade, style, or model.” Code § 59.1-200(A)(6). This duty not
to misrepresent the quality, grade, or style of goods is a
statutory duty that exists independent of the Contracts entered
into between the parties to this litigation, viz., the duty is
“not one existing between the parties solely by virtue of the
contract.” Dunn Construction, 278 Va. at 267, 682 S.E.2d at
946. Because the Purchasers have alleged that Concord breached
a duty existing independent of the Contracts, we hold that the
trial court erred when it sustained Concord’s demurrers to the
Purchasers’ VCPA claims.
ii. Fraud in the Inducement
“ ‘[A] false representation of a material fact,
constituting an inducement to the contract, on which the
purchaser had a right to rely, is always ground for rescission
of the contract.’ ” George Robberecht Seafood, Inc. v.
Maitland Bros. Co., 220 Va. 109, 111-12, 255 S.E.2d 682, 683
14
(1979) (quoting Wilson v. Carpenter, 91 Va. 183, 187, 21 S.E.
243, 244 (1895)). “Fraud in the inducement of a contract is
also ground for an action for damages.” Id. at 112, 255 S.E.2d
at 683; see also Augusta Mutual, 274 Va. at 204, 645 S.E.2d at
293.
In Lloyd v. Smith, 150 Va. 132, 145, 142 S.E. 363, 365
(1928), we said that “an action based upon fraud must aver the
misrepresentation of present pre-existing facts, and cannot
ordinarily be predicated on unfulfilled promises or statements
as to future events. Were the general rule otherwise, every
breach of contract could be made the basis of an action in tort
for fraud.” See also Boykin v. Hermitage Realty, 234 Va. 26,
29, 360 S.E.2d 177, 178 (1987). However, “Lloyd placed
[qualifications] upon the general rule.” Boykin, 234 Va. at
29, 360 S.E.2d at 178.
“[A]n action in tort for deceit and fraud may
sometimes be predicated on promises which are
made with a present intention not to perform them
. . . . [T]he gist of fraud in such case is not
the breach of the agreement to perform, but the
fraudulent intent . . . . [T]he fraudulent
purposes of the promisor and his false
representation of an existing intention to
perform . . . is the misrepresentation of a fact
. . . . [T]he state of the promisor’s mind at the
time he makes the promise is a fact, and . . . if
he represents his state of mind . . . as being
one thing when in fact his purpose is just the
contrary, he misrepresents a then existing fact.”
15
Id. at 29, 360 S.E.2d at 178-79 (quoting Lloyd, 150 Va. at 145-
46, 142 S.E. at 365-66).
In support of its position, Concord cites to a number of
this Court’s cases where we concluded that the allegations were
legally insufficient to support an actionable tort claim
because a contract or an agreement was the source of the duty
allegedly breached. See Dunn Construction, 278 Va. at 268, 682
S.E.2d at 947 (“The fact that the representation was made in
order to obtain payment . . . does not take the fraud outside
of the contract relationship.”); Augusta Mutual, 274 Va. at
206, 645 S.E.2d at 294 (“The duties that [the agent for the
insurance company] allegedly violated by making fraudulent
representations . . . arose solely by virtue of the Agency
Agreement.”); Filak, 267 Va. at 618, 594 S.E.2d at 613 (“[T]he
plaintiffs’ claim . . . merely sought recovery for losses
allegedly suffered as a result of [the defendant’s] failure to
fulfill her oral contract.”); and Richmond Metro. Auth., 256
Va. at 560, 507 S.E.2d at 348 (“Nothing in the record suggests
that [the defendant] did not intend to fulfill its contractual
duties at the time it entered into the [contract].”).
Unlike these cases, in the instant case the Purchasers
alleged that Concord had knowledge that its representations
concerning the flooring were untrue, that Concord acted with
the intent to deceive the Purchasers, and that Concord
16
willfully concealed the flooring substitution. The Purchasers
also alleged that Concord “knew or reasonably should have known
that its disclosure of [the actual flooring material] would
have caused the [Purchasers] to reconsider or renegotiate the
Contracts.” In short, the Purchasers alleged that Concord made
misrepresentations of the flooring it promised to install “with
a present intention not to perform” its obligations. Boykin,
234 Va. at 29, 360 S.E.2d at 178. The fraud alleged by the
Purchasers was perpetrated by Concord before a contract between
the two parties came into existence, therefore it cannot
logically follow that the duty Concord allegedly breached was
one that finds its source in the Contracts. Based on the plain
language of the Complaints, we hold that the Purchasers have
alleged an actionable claim for fraud in the inducement.
III. Conclusion
We hold that the trial court erred when it sustained
Concord’s demurrers. Accordingly, we will reverse the
judgments of the trial court in each case and remand these
cases for further proceedings consistent with this opinion.
Reversed and remanded.
17