Opinion
No. X10-UWYCV-02401221S.
January 4, 2007.
MEMORANDUM OF DECISION
Presently before the court is the counterclaim defendant, American Progressive ("AP")'s motion for summary judgment on counts two and four of the counterclaim filed by all of the counterclaim plaintiffs (being all of the original defendants). Because of the impending trial date, at the request of counsel, the court is issuing a truncated memorandum of decision to address all of the issues in an expedited fashion.
The first count of the counterclaim is a claim for breach of contract arising out of an agreement by which Better Benefits ("BB") sold AP's insurance products as an agent for AP. BB and its owners assert in the first count that AP refused to pay those commissions and other monies they claim are due and owing under the general agency agreement ("Agreement") and an associated incentive program ("Program").
The second count of the counterclaim sounds in CUTPA and the fourth count asserts a claim of tortious violation of an implied covenant of good faith and fair dealing. AP has moved for summary judgment on these two counts claiming as a matter of law that the application by this court of the economic loss doctrine mandates summary judgment for AP on these counts.
The counterclaim plaintiffs resist this claim and argue that the economic loss doctrine is not applicable here, and, that its allegations support, in any case, a finding by the court that AP engaged in conduct outside of the contractual relationship that supports the CUTPA and tort actions. As to the latter, a simple examination of the pleadings leads the court to reject that contention.
The parties submitted no affidavits or any other documentary evidence in support of or opposition to the pending summary judgment motion. "Practice Book [§ 17-49] provides that summary judgment shall be rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law . . . In deciding a motion for summary judgment, the trial court must view the evidence in the light most favorable to the nonmoving party . . . The party seeking summary judgment has the burden of showing the absence of any genuine issue [of] material facts which, under applicable principles of substantive law, entitle him to a judgment as a matter of law . . . and the party opposing such a motion must provide an evidentiary foundation to demonstrate the existence of a genuine issue of material fact." (Internal citations omitted.) Appleton v. Board of Education, 254 Conn. 205, 209, 757 A.2d 1059 (2000).
The pleadings of count two and four include no allegations of conduct by AP that is outside the context of the contract between the parties. The only conduct of AP in the complaint alleged, beyond the failure to pay the sums claimed due, is " a letter to BB and the individual plaintiffs purporting to have terminated the Agreement by alleging multiple false allegations of misconduct on the part of BB and the individual plaintiffs under the agreement and stating that all compensation rightfully due under the Agreement was forfeited." (Emphasis added.) The counterclaim plaintiffs go on to allege that this conduct of AP breached the terms of the Agreement and the [incentive] Program by breaching the implied covenant of good faith and fair dealing. These pleadings fail to allege any conduct of AP outside the contractual relationship with BB and its owners. Accordingly, the court rejects this ground as a basis for denial of the motion for summary judgment as to both counts.
Next the court considers whether the conduct alleged as grounds for breach of contract in count one also supports a claim for CUTPA (count two) and for tortious violation of an implied covenant of good faith and fair dealing (count four). The court considers these claims in turn.
The fate of the count of tortious violation of the implied covenant of good faith and fair dealing is dependent on the court's interpretation of the breath of the economic loss doctrine. The economic loss doctrine, in a nutshell, precludes recovery under tort law for conduct wholly regulated by contract law. The trial bench has a split of authority as to whether the Supreme Court's recognition of the economic loss doctrine in Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 126, 709 A.2d 1075 (1998) should be expanded to business relationships not regulated by the Uniform Commercial Code (UCC). AP urges the court to follow the reasoning of several superior court judges that have found where the allegations are restricted to matters arising out of the party's contract and the parties are both sophisticated, the economic loss doctrine should apply. The court finds the logic of these cases irresistible.
The court in Flagg Energy relied on the economic loss doctrine that had been developed in other states and other federal courts. Notable among them is the matter of Princess Cruises, Inc. v. General Electric, 950 F.Sup. 151 (E.D.Va. 1996). In Princess Cruises the defendant allegedly failed to perform its contractual obligations adequately resulting in Princess having to cancel two ten-day cruises. Count four of Princess' complaint sounded in negligence to which the defendant General Electric moved for summary judgment. In granting summary judgment the Virginia district court relied upon the reasoning in East River S.S.Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986). "Contract law, and the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements. The manufacturer can restrict its liability, within limits, by disclaiming warranties or limiting remedies. In exchange, the purchaser pays less for the product. Since a commercial situation generally does not involve large disparities in bargaining power, we see no reason to intrude into the parties' allocation of the risk." (Citation omitted.) East River S.S.Corp. v. Transamerica Delaval, Inc., supra, 872-73, 106 S.Ct. at 2303. In citing to East River, which involved a contract for the manufacture of goods, the court in Princess Cruises recognized "[t]he economic loss doctrine has since been applied to contracts for repair services . . . and contracts for services rendered as part of the construction or manufacture of products." (Citations omitted.) Princess Cruises, Inc. v. General Electric, supra, 154.
In Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 126, 709 A.2d 1075 (1998) the plaintiff claimed that the defendant had delivered defective gas turbine engines causing the plaintiff to suffer losses. The complaint contained counts charging misrepresentation and breach of CUTPA which were stricken when the trial court granted the defendant's motion to strike. On appeal the plaintiff ". . . argued that the trial court improperly applied the economic loss rule because . . . the rule does not apply to claims for negligent misrepresentation . . . or to claims for unfair trade practices." (Internal quotations omitted.) Flagg Energy Development Corp. v. General Motors Corp., supra, 153. Our Supreme Court rejected this argument holding ". . . that commercial losses arising out of the defective performance of contracts for the sale of goods cannot be combined with negligent misrepresentation." Flagg Energy Development Corp. v. General Motors Corp., supra, 153. Although the contract in Flagg Energy is covered by the UCC the language in the court's decision does not limit its holding only to cases involving the UCC.
The economic loss doctrine has been extended to contracts involving construction in a number of superior court cases. In Worldwide Preservation Services, L.L.C. v. The IVth Shea, L.L.C., Superior Court, complex litigation docket at Stamford, Docket No. X05 CV98 0167154S (February 1, 2001, Tierney, J.) ( 29 Conn. L. Rptr. 1), "[t]he plaintiff argue[d] that the economic loss holding in Flagg Energy is only limited to the sale of goods, stating that it is a UCC case. This court does not see that limitation in Flagg Energy. Flagg Energy involved not a pure contract sale of goods, but the manufacturing off-site of large components . . ." Worldwide Preservation Services, L.L.C. v. The IVth Shea, L.L.C., supra. Citing Princess Cruises the trial court recognized "[t]he parties are sophisticated corporations familiar with the type of services rendered, and the consequences . . . likely to result from a failure to perform the contract as promised." Princess Cruises. Inc. v. General Electric, supra, 155.
Likewise in Morganti National, Inc. v. Greenwich Hospital Association, Superior Court, complex litigation docket at Waterbury, Docket No X06 CV99 0160125 (September 27, 2001, McWeeney, J.), the court applied the economic loss doctrine stating "[t]he court views this case as a prime example of a scenario in which application of the economic loss rule is most compelling. The parties are sophisticated corporations who entered into a contract involving a major construction project. The contract specifically . . . addresses risks of loss and limitations on damage claims. Allowing the parties to avoid their bargain, by casting their economic loss claims in tort language, would defeat the legitimate expectations underlying contract law." Morganti National, Inc. v. Greenwich Hospital Association, supra.
In the instant case there is a contractual dispute between an insurance company, AP, and an agency company, BB, and its owners over the conduct of their business relationship in the context of the Agreement between them which is a payment for service contractual relationship. Simply stated BB is selling a service provided by AP and in return they receive a commission. Following the logic of Worldwide Preservation Services, L.L.C. and Morganti National, Inc., the determinative factor is not simply the nature of the contract between the parties but rather the sophistication of the parties who entered into the contract. Although BB points out that AP is a much larger entity holding a national market position and that BB is a small insurance agency, both, however, are sophisticated business entities. BB is a regulated insurance agency. Its pleadings disclosed that it was a top producer sophisticated in the global world of insurance products, the premiums paid for the same and the agency arrangement that it entered into with AP. "Almost any contract breach can be conceived of in terms of a negligent or intentional tort claim. When, through the negligence of one of the parties, the subject of the transaction physically injures a person, or damages the property of someone not a party to the contract, the law of tort properly provides a cause of action. But to permit a party to a broken contract to proceed in tort where only economic losses are alleged would eviscerate the most cherished virtue of contract law, the power of the parties to allocate the risks of their own transactions." Princess Cruises, Inc. v. General Electric, supra, 155. To allow a sophisticated party here, BB, to proceed on a tort claim where there is only economic loss would only serve to weaken the autonomy of the parties in a bargained for exchange. The marketplace allowed AP and BB to negotiate the allocation of the risks in the contract between them. They were free to anticipate any type of situation that could arise and impede the performance of the contract as well as alter the contract to account for unintended events.
The counterclaim plaintiffs were aware themselves of potential outcomes unfavorable within the contractual relationship. Paragraph 28 of count one, breach of contract, which is incorporated into counts two and four states ". . . the plaintiffs have suffered, and continue to suffer, consequential damages that were fully within the contemplation of the parties at the time of the Agreement was entered into . . ." Supplanting the terms of the contract with tort claims would result in one party receiving more than it bargained for and the other party receiving less. The case before the court is a logical and principled extension of the reasoning which supported the Supreme Court's recognition of the economic loss doctrine in Flagg Energy.
In extending the Princess doctrine to the facts of this case, the court does not intend to imply that there will never be an instance in which the economic loss doctrine would not be extended to contracts involving services. Cases that have limited the economic loss doctrine generally have been factually more complex and distinct, from the current case; they typically have involved negligence, nonperformance, inadequate performance, malfeasance, misfeasance and/or allegations of fraud. In Diversified Technologies Consultants, Inc. v. Sentinel Equities Corp., Superior Court, judicial district of New Haven, Docket No. CV 05 4012681S (August 11, 2006, Silbert, J.) [ 41 Conn. L. Rptr. 813], the plaintiff was engaged to develop construction documents relating to site improvement, state traffic control commission compliance and development of the project. Although the plaintiff represented that the documents complied with all applicable local, state and federal, regulations and codes the documents were incomplete, inaccurate and did not comply with all the codes and regulations. The court noted that there was not only inadequate or nonperformance of the services contract, but also misrepresentations that resulted in monetary damages in addition to actual economic loss. In the instant case, the contract granted BB the right to sell the counterclaim defendant's insurance products in exchange for a commission. Inadequate performance, nonperformance or misrepresentations were not an issue; under the contract and agreement, inadequate performance on the part of BB would have only resulted in less commission earned.
See also Riggs-Brewer Industries, Inc. v. Shelton Senior Housing, Inc., judicial district of New Haven at Meriden, Docket No. CV 04 4000365S (June 6, 2006, Taylor, J.), [ 41 Conn. L. Rptr. 471] where the plaintiff was a third-party beneficiary of a contract for services who alleged negligence, malfeasance or misfeasance in regards to the services contracted for.
In Metcoff v. NCT Group, Inc., Superior Court, complex litigation docket at Waterbury, Docket No. X04 CV 04 0184701S (January 7, 2005, Alander, J.) the plaintiffs were the majority shareholders in Midcore Software, Inc. which merged with NCT Midcore, Inc., a wholly owned subsidiary of defendant NCT Group, Inc. In that case the allegations go far beyond the failure to pay commission fees, including alleged negligent and intentional misrepresentations in connection with the merger agreement, stock and property transactions designed to defraud the plaintiffs.
The court turns to the remaining count. Count two of the counterclaim alleging a violation of CUTPA based on the breach of contract must also fail. "We have held that not every contractual breach rises to the level of a CUTPA violation. 'Even if, as the plaintiffs claim, the defendants breached a contract, such a breach is not sufficient to establish a CUTPA violation.' " (Citations omitted.) Hudson United Bank v. Cinnamon Ridge Corp., 81 Conn.App. 557, 571 (2004). In paragraph 30 of count two BB claims the actions of AP ". . . were oppressive, immoral, unscrupulous and in violation of public policy . . ." BB has alleged nothing more than the failure of AP to pay the commissions owed and a letter stating the commissions were forfeited due to alleged misconduct. To allow a CUTPA claim based upon the sole act of failing to pay commission would turn every breach of a sales contract where the commission has not been paid into a CUTPA violation.
Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 126, 709 A.2d 1075 (1998) contained a CUTPA claim which alleged that misrepresentations by the defendant had induced the plaintiff to purchase the engines. The trial court granted the motion to strike this count. On appeal the ruling was upheld.
For the forgoing reasons the defendant's motion for summary judgment on counts two and four of the counterclaim is granted.