The Economic Loss Doctrine: Intrinsic Or Extrinsic Fraud

The economic loss doctrine provides that when a product is sold and results in economic loss for the buyer (no property or personal injury), the buyer’s sole remedy is to sue for breach of contract, not in tort. The two exceptions to the economic loss doctrine are contracts that are predominately for services and contracts where a party is fraudulently induced to enter into the contract. Fraudulent inducement occurs when one party either fails to disclose a material fact or knowingly misrepresents a significant fact, and thereby induces the other party to enter into a contract. The fraudulent inducement, however, may only be asserted as a claim against the fraudulent perpetrator if the court determines that the fraud is extraneous fraud and not intrinsic fraud.

In other words, the fraud claim cannot be raised against the tortfeasor in subsequent litigation if the fraud is determined to be intrinsic fraud. This Article serves two purposes. First, the Article explains the difference between intrinsic fraud and extraneous fraud as required by the economic loss doctrine. Second, the Article offers two recommendations that attorneys must adopt to protect their client from intrinsic fraud if the client is fraudulently induced to enter into a contract.

Otherwise, the other party’s fraudulent conduct will go unpunished.