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Kaloti Enterprises7/8/2005
h voluntarily chooses his contracting partner, each trusts the other's willingness to keep his word and honor his commitments, and in which they define their respective obligations, rewards and risks. Under such a scenario, it is appropriate to enforce only such obligations as each party voluntarily assumed, and to give him only such benefits as he expected to receive; this is the function of contract law."
Not only is the Huron Tool fraud rule deficient as a matter of principle, it is inherently defective because it cannot be applied in a principled way. The fraud rule with which the majority opinion is enamored is as follows: If the fraud is "extraneous" to the contract, the economic loss doctrine will not bar the plaintiff's tort claims. If the fraud is "interwoven" with the contract, the economic loss doctrine applies to bar the plaintiff's tort suit.
Judges cannot agree about the meaning or the application of the Huron Tool fraud exception. "Critics contend that the exception is dead on arrival because almost all actionable misrepresentations will deal with the contract matter, and thus be 'interwoven,' for purposes of the Huron Tool exception and therefore, barred by the economic loss doctrine." The Huron Tool rule "renders the fraud in the inducement exception a nullity" as this limitation "is so broad that it swallows the exception whole."
As one court noted:
In all fraud in the inducement cases the alleged fraudulent misrepresentations will either concern the quality and characteristics of the underlying subject matter, because that is the definition of "fraud in the inducement itself." . . . Because the contract concerning the "particular thing" will always be considered "interwoven" with the deceit under Huron, fraud in the inducement claims will always be barred. The tort, after all, is inducing someone to enter into a contract, so to say it does not apply where the tort involves the contract or its subject matter analytically makes no sense.
In applying the Huron Tool rule to the instant case, I conclude that Kellogg's fraudulent misrepresentations can easily be classified as either extraneous or interwoven.
The majority opinion concludes that Kellogg's change in marketing strategy was "extraneous to" the contract. Why? Because the fraud did "not regard the quality or character of the NutriGrain and Rice Krispie Treat products that Kellogg sold to Kaloti." Furthermore, the "alleged misrepresentation concerned a matter whose risk was never contemplated to be a part of the contract to purchase Kellogg's products." Under the approach the majority opinion takes, marketing has nothing to do with the parties' sale and purchase of the products, so the fraud is extraneous to the contract and the economic loss doctrine does not apply.
An alternative view of the instant case applying Huron Tool is that Kellogg's marketing strategy is interwoven with the contract. When Kaloti agreed to purchase the products from Kellogg, Kaloti thought it was buying a product Kaloti could sell to stores (as it had in the past) and that Kellogg would continue its marketing practices so as not to interfere with Kaloti's resale of the products purchased. Kellogg's change in marketing related to the performance of the contract; performance of the contract is generally viewed as interwoven with the contract.
To help determine how central Kaloti's ability to sell the product was to the contract, imagine that during contract negotiations the alleged fraudulently omitted information was disclosed. Here is how the conversation might have gone:
Kaloti: I'd like to order $124,000 in tasty treats for the upcomi
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