Greg Allen Const. Co., Inc. v. Estelle

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
Indianapolis, Indiana
Max Goodwin
Mann Law Firm Harry A. Siamas
Terre Haute, Indiana Collier Homann & Siamas
Crawfordsville, Indiana
S. Bryan Donaldson
Crawfordsville, Indiana

Attorney for Amicus Curiae
Indiana Builders Association, Inc.
William W. Gooden
Pastore & Gooden, P.C.
Indianapolis, Indiana
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In the
Indiana Supreme Court
_________________________________

No. 54S01-0207-CV-400

Greg Allen Construction
Company, Inc., and Greg Allen,
Appellant (Plaintiff below),

v.

Daniel L. Estelle and Sondra E.
Estelle,
Appellees (Defendants below).
_________________________________

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
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November 5, 2003

Shepard, Chief Justice.

A corporation breached its contract with private homeowners by
performing substandard work on renovations. The trial court granted breach
of contract damages against the corporation, but not against the
corporation’s president, who did most of the work. The Court of Appeals
held that the corporation’s president was individually liable for the
negligent work. We granted transfer and now affirm the trial court.

Facts & Procedural History

Daniel and Sondra Estelle contracted with Greg Allen Construction,
Inc. for renovations to the Estelles’ home in Ladoga, Indiana. Greg Allen,
president, shareholder, and employee of Allen Construction, signed the
contract in his representative capacity. Allen did all the electrical,
plumbing and carpentry work, and supervised the other facets of the
project.

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).

Discussion

The Estelles and Allen Construction entered into a contract under
which Allen Construction would provide home renovations. The claimed wrong
is Allen Construction’s failure to satisfy its part of the agreement – a
quintessential contract claim. The Estelles’ complaint says:
Defendant Company has breached its contract with Plaintiffs in the
following respects:
a) Defendant failed or refused to complete the work on schedule as
agreed.
b) Defendant’s materials and workmanship are of poor quality and
Plaintiffs will be forced to hire another contractor to redo
Defendant’s negligent and poor quality work.
c) Defendant’s work does not meet construction code requirements nor does
it meet normal construction industry standards in many respects and
necessary code permits have not been secured.
. . . .
. . . Plaintiffs have suffered damages and will suffer damages in an
amount which cannot be determined at this time but include unnecessary
interest charges on their construction loan, the cost of repair and
completion of the work, the cost of redoing Defendants’ faulty work,
and attorney fees and costs.

(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 Torts § 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 defendant’s 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 plaintiff’s 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.”[1] 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 agent’s 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 Comm’n 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 defendant’s 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 agent’s 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 neighbor’s 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 law’s 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.

Conclusion

We affirm the judgment of the trial court as to Greg Allen’s personal
liability. In all other respects, we summarily affirm the decision of the
Court of Appeals. Ind. Appellate Rule 58(A)(2).

Sullivan, Boehm, and Rucker, JJ., concur.
Dickson, J., concurs in result.
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[1] See Choung v. Iemma, 708 N.E.2d 7, 14 (Ind. Ct. App. 1999); Jordan v.
Talaga, 532 N.E.2d 1174, 181 (Ind. Ct. App. 1989) (both citing W. Prosser,
Handbook on the Law of Torts, § 101 at 665 (4th Ed. 1971)).