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By Jerry Carter.  In its recent opinion in Road and Highway Builders, LLC v. Northern Nevada Rebar, Inc., 128 Nev. Adv. Op. 36 (August 9, 2012), the Nevada Supreme Court attempted to elucidate the sometimes blurry line between breach of contract and fraudulent inducement.

The general contractor was the successful bidder on a freeway construction project for the Nevada Department of Transportation (“NDOT”).  One of the subcontractors quoted the general contractor a fixed per-unit price to deliver 2.7 million pounds of rebar to the project.  Most of the rebar was to be used in reinforced concrete boxes (“RCBs”) that would be poured in place.

Unbeknownst to the subcontractor, after being awarded the bid, the general contractor decided to use precast RCBs supplied by a different company.  This decision dramatically lowered the number of pounds of rebar that would be required from the subcontractor.  The subcontractor signed the subcontract before learning about the general contractor’s decision to use precast RCBs.  The subcontract set the non-modifiable unit price of the rebar while at the same time recognizing that the final quantities of rebar would match NDOT’s quantities unless otherwise agreed to in writing.  The subcontract stated that the general contractor “may, at any time or from time to time, order additions, deletions or revisions in the Work to be performed.”  It also stated that the general contractor “reserves the right to make an change, including additions of omissions, in the Work to be performed.”  In addition, the general contractor was granted the absolute right to terminate the agreement at any time and for any reason, and the parties expressly agreed that, in the event of such a termination, the subcontractor’s sole remedy would be payment for the work that it had performed up to the termination date.  The parties agreed that the written agreement was their only agreement, and that any contrary oral understandings were precluded.

When the subcontractor learned about the general contractor’s intent to use precast RCBs, the subcontractor unsuccessfully sought a price modification.  While this issue was pending, the subcontractor performed work under the subcontract.  Eventually, the general contractor terminated the subcontract and sued the subcontractor.  The subcontractor counter-sued for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraudulent inducement.  The subcontractor argued that it was fraudulently induced into offering a lower unit price because of the large amount of rebar needed for the project.  The jury found in the subcontractor’s favor and awarded compensatory damages of $700,000 for the materials, labor, and profits related to the subcontractor’s pre-termination work.  The jury also awarded $300,000 in punitive damages.

The Nevada Supreme Court affirmed the breach of contract award, primarily on the basis of the pre-termination work performed by the subcontractor, for which the general contractor had not yet paid.  However, the Nevada Supreme Court overturned the fraudulent inducement claim and the punitive damage award.  The Court stated that there could be no fraudulent inducement because “the parties contemplated a potential alteration in the scope” of the work to be performed.  The Nevada Supreme Court further explained:

“The Subcontract specified that Builders [the general contractor] could, at any time, order additions, deletions, omissions, or revisions to NNR’s [the subcontractor’s] work. While the Subcontract specified that the final quantities of rebar would match NDOT’s quantities unless otherwise agreed to in writing, the Subcontract also allowed for Builders to order revisions to NNR’s work, regardless of any changes to the rebar work provided under the NDOT contract. Moreover, the Subcontract provided that the total price would be subject to additions and deductions for changes in the work and other adjustments, but that the unit prices were set to remain in force regardless of quantity. Therefore, while Builders might have breached the contract by unilaterally making alterations to the scope of work without an agreement in writing, this cannot form a basis for fraud under these circumstances. The parties contemplated a potential alteration in the scope of work, which NNR impliedly admits in its answering brief when it affirmatively quotes from the contract provision that “[f]inal quantities may vary and will match [NDOT’s] quantities to [Builders] unless otherwise agreed to in writing” in support of its argument. Based on this, NNR’s fraudulent inducement claim directly contradicts the terms of the contract, at least one of which NNR itself admits is an accurate representation of the parties’ bargain. While Builders may have acted improperly by failing to obtain a written agreement before making changes in the scope of work, this amounts to a breach of contract, not a fraud. In light of the foregoing, we conclude that NNR’s fraudulent inducement claim fails as a matter of law.”

The Nevada Supreme Court’s footnote number two suggests a related argument that should be considered in a future case of this type: “The parties in this case failed to raise the argument that the risk of this type of problem was allocated in the contract; since the matter is incorporated into and not collateral to the contract terms themselves, breach of contract claims should prevail over tort claims. Because this argument was not raised, it will not be discussed further.”