Transforming One Cause of Action into Another: Negligence CAN become Breach of Contract

Perry v. Robertson (1988) 201 Cal.App.3d 333 (“Perry“) is a case most brokers are not aware of, and should be.

Plaintiffs, based on Perry, without pleading a claim of “breach of contract” have been able to transform a claim of “negligence” into “breach of contract” solely to collect attorneys fees. And they’ve done it after a trial is over, and no defense to the breach of contract claim has been made by the broker.

In Perry, the plaintiff, a seller of property, sued a real estate agent, pleading the negligent reduction to writing of an oral agreement for the sale of the property. The plaintiff in that case, plead the substantive terms of the listing agreement within the cause of action for negligence. Plaintiff prevailed on the negligence cause of action and sought attorney’s fees according to the listing agreement. Defendants challenged the request for attorney’s fees on the basis that plaintiff did not prevail on a contract claim. The court held that plaintiff pled all the elements of a breach of contract cause of action, putting the contract theory in issue.

Additionally, the court noted “that defendants were given actual notice that [plaintiff] intended to pursue a theory of breach of contract.” One of the means by which the court noted that defendants were so notified was a letter from plaintiff to defendants stating that attorney’s fees were sought.

The sole issue the court decided was “whether the complaint pled a claim in contract and whether [plaintiff] elected a consistent remedy.” The court found that the contract claim was pled and the remedies were the same for both tort and contract, except for the attorney’s fees and, as to the attorney’s fees, defendants were on notice of plaintiffs election to seek those.

The court held that the facts from which a cause of action arise must be pled and no technical form of action is required. We have no dispute with that contention. But what about the other way around? What if the “contract” claim fails – can a broker then be sued for “negligence” for the sole purpose of salvaging a lost cause of action on the eve of trial.

It is not disputed that the same act can be both a breach of contract and a tort (like “negligence”). Perry, supra, at 340. Furthermore, in such cases the plaintiff “may pursue both legal theories of recovery until an occasion for an election of remedies arises. (Ibid., emphasis added.) “Where the remedies sought are inconsistent, a pleading should segregate the allegations requisite for each theory in distinct counts. (Ibid., emphasis added.) Witkin adopts this view (Witkin, California Procedure, 139) as does Matthew Bender (10-104 California Forms of Pleading and Practice–Annotated 104.41.)

Breach of Contract CAN NOT become Negligence

Where Plaintiffs’ counsel elects to seek contract remedies (i.e., attorney’s fees) and fails to segregate the tort and contract causes of action, it’s another story.

Plaintiffs’ counsel, have no excuse as to this issue. In one instance, Plaintiffs’ counsel who were both trial and appellate counsel in Perry, presented a case to the court for consideration where they tried to do just that (after claiming they had “forgotten” to mention Perry in their pleading). It was argued, in opposition, that Plaintiffs’ counsel were familiar with the court’s instruction in Perry, and the Court was left with the possible conclusions that counsel (1) never intended to claim negligence and were raising this issue on the eve of trial to salvage their case; (2) never intended to claim negligence and were attempting to mislead the court and opposing counsel by their contention that the claim has been sufficiently raised by a complaint that did not set forth negligence as a separate count; or (3) intended that the claim of negligence be stated in the claim, but intentionally left their complaint vague for the purpose of misleading defendants until a last-minute amendment.

The first option would be understandable, but should not be allowed due to prejudice to the Defendants to allow an amendment of a complaint on the eve of trial (literally, in this particular instance, the day of trial). The other options involve such chicanery that neither can be condoned. Defense counsel would presume that a negligence claim was not intended, since the only way it could have been intended would mean that Plaintiffs’ Counsel also intended to mislead Defense counsel and the court. As it is clear that one should not infer wrongful intent based only on the end result we must conclude that no negligence was intended to be pled.

A review of Perry shows that it has been cited in both judicial opinions and secondary treatises. However, in none of those instances, was it cited for the proposition that a negligence cause of action can be found where only a breach of contract has been pled. The primary reasons for which Perry has been cited are: (1) where a tort action is pled and the prevailing party seeks to recover attorney’s fees under the contract from which the tort claim arose (where the contract has been pled in substance)1; and (2) for the proposition that the same act may be both a breach of contract and a tort and a plaintiff may plead both causes of action.2

In the only instance where the court was required to determine whether a plaintiff prevailed on a tort or contract theory, the court held that the complaint was for breach of contract, as pled, not for fraud and upheld the award of attorney’s fees under the contract. (Boyd v. Oscar Fisher Co. (1989) 210 Cal.App.3d 368.) In any similar instance, the court would be being asked to interpret the complaint to include a negligence cause of action or allow amendment of the complaint to state a negligence cause of action.

In either event, Defendants are generally prejudiced severely. No timely notice is usually given that the plaintiffs plan to proceed on a tort theory until the request for amendment3. It becomes important when the agent is not a party to the “broker-client” contract, but would presumably be required to defend against a tort claim for negligent performance of that broker-client contract. When no defense has been prepared to a negligence cause of action, because none was plead, it creates a severe hardship upon the agent.

The Same Logic Applies to “Fraud” vs. “Constructive Fraud” Claims.

Amendment is not allowed to transform one cause of action into another. In Winberry v. Lopez (1960) 178 Cal.App.2d 672 [3 Cal.Rptr. 245], intentional fraud was pled and evidence came in to prove elements of intentional fraud. The appellant asked for an amendment according to proof, to change his pleading to a theory of constructive fraud. “Having pleaded and tried his case upon the theory of actual fraud, appellant cannot be heard to say now that he made out a case for constructive fraud . . .” (Id. at 678.) In its reasoning, the court looked to the prejudice that the amendment would cause to the opposing party, in this case shifting the burden unfairly which would have been highly prejudicial to the opposing party. (Id.)

What is the difference? An intentional fraud requires that the plaintiff prove intent and reliance on the misrepresentation before the plaintiff can receive an award of damages. In a constructive fraud claim, the plaintiff need only prove the existence of a “fiduciary” relationship, and the burden then shifts to the defendant to prove that the defendant met the standard of care. In addition, and more importantly, “reliance” is not an element in a constructive fraud case. The plaintiff could win, even if it is shown that the plaintiff did NOT rely on the misrepresentation !

When a Plaintiff seeks to transform their intentional fraud claim to one of constructive fraud, they are really seeking to unfairly shift the burden and to allege a cause of action for breach of fiduciary duty. To allow them to do so at this late juncture would severely prejudice the Defendants and is not allowed under Winberry.

See, e.g., International Billing Services v. Emigh (2000) 84 Cal.App.4th 1175; Exxess Electoniss v. Heger Realty Corp. (1998) 64 Cal.App.4th 69 (where complaint was pled as a tort action and court denied attorney’s fees as outside of contractual attorney’s fees clause); Lerner v. Ward (1993) 13 Cal.App.4th 155 (limiting recovery of attorney’s fees to those related to the contract action).

See, e.g., Lynch v. Warwick (2002) 95 Cal.App.4th 267 (involving a claim of legal malpractice in a criminal matter, where plaintiff failed to prove innocence); Fairchild v. Park (2001) 90 Cal.APp.4th 919; Michaelis v. Benavides (1998) 61 Cal.App.4th 6 (court did not allow negligence claim against corporate officer to be recharacterized as a contract action; N. Am. Chem. Co. v. Superior Court (1997) 59 Cal.App.4th 764.

It is anticipated that Plaintiffs may contend that notice of a negligence claim was given by use of the phrase in paragraph 18 of their 2nd Am. Comp. “They failed to act in a competent . . . manner to secure plaintiffs’ financing.” This phrase does not give notice that there is a negligence claim being made because it is wholly irrelevant to even the breach of contract claim as securing financing was not an obligation under the “verbal agreement” . . . “to act as a dual agent” . . . “in the transaction.” In the role of loan or broker, there is no “dual” agency. The verbal agreement can only have applied to the role of real estate broker. In addition, the failure to plead any additional terms of the alleged verbal agreement negates any argument that there was adequate notice of plaintiffs’ claim.

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