The Economic Loss Rule: When a Contract Dispute Can Also Be a Fraud Claim

Last updated: November 2026

The economic loss rule in California keeps a contract dispute inside contract law. If the only wrong is a failure to perform, and the only harm is money, the plaintiff gets contract damages and nothing more. The rule does not protect a party who lied. Fraud, whether by affirmative misstatement or by concealment, can be sued as a tort alongside the contract claim if its elements stand on their own. Kolmogorov Law, P.C. litigates this line for businesses in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss whether your contract dispute is also a fraud case.

What the economic loss rule does

Contract damages compensate for the detriment the breach proximately caused, or that would be likely to result in the ordinary course of things. (Civ. Code, § 3300.) Tort damages compensate for all detriment proximately caused, whether or not it could have been anticipated. (Civ. Code, § 3333.) Punitive damages are available only for breach of an obligation not arising from contract. (Civ. Code, § 3294, subd. (a).)

Those three sections explain why the fight exists. A plaintiff who can call the dispute a tort gets wider damages and possibly punitive damages. A defendant who keeps it in contract limits exposure to what the bargain contemplated.

The economic loss rule is the line between them. In its traditional form it bars tort recovery for negligently inflicted economic losses that are unaccompanied by physical injury or property damage, where the parties' relationship is defined by contract. (Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, 922.) A party that merely breaches a commercial contract, in good faith or bad, pays contract damages only. (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 516.)

Our breach of contract damages page explains what those contract damages include.

The fraud exception: Robinson Helicopter

The leading case involved a parts supplier that shipped nonconforming helicopter clutches and issued false certificates stating that the parts met specifications. The California Supreme Court held that the economic loss rule did not bar the buyer's fraud and intentional misrepresentation claims, because the false certificates were tortious conduct separate from the breach itself. (Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979, 991.)

The court was careful about scope. It described the holding as narrow and limited to affirmative misrepresentations on which the plaintiff relies and which expose the plaintiff to liability for personal damages independent of its economic loss. (Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979, 993.)

Concealment during performance: Rattagan v. Uber

In 2024 the Supreme Court answered the question Robinson left open: can a plaintiff sue in tort for fraudulent concealment that occurred while a contract was being performed? The answer was yes, with two conditions. The elements of fraudulent concealment must be established independently of the parties' contractual rights and obligations. And the conduct must have exposed the plaintiff to a risk of harm beyond what the parties reasonably contemplated when they contracted. (Rattagan v. Uber Technologies, Inc. (2024) 17 Cal.5th 1.) The court also described Robinson's reference to personal-damages liability as one illustration of such harm rather than a separate requirement.

The court laid out a three-part inquiry. First, determine the full scope of the contract. Second, ask whether an independent tort duty exists apart from it. Third, ask whether the plaintiff can prove every element of the tort without relying on the contract's rights and duties.

The practical message is that intentional fraud is not something a contract is presumed to have allocated. Negligent performance is.

How it comes up for business owners

A software vendor falls behind on a development contract. The customer sues for breach and adds a fraud count alleging the vendor never intended to perform. Without specific facts showing that intent at the time of contracting, the fraud count is a contract claim with a different label, and the economic loss rule will usually dispose of it.

A supplier ships product that fails testing, then issues compliance paperwork it knows is false so the customer will accept the shipment. That is the Robinson pattern.

A buyer of a business learns after closing that the seller knew of a pending regulatory investigation and said nothing. If the seller had a duty to disclose that stands apart from the purchase agreement's warranties, and the risk was not one the parties allocated, Rattagan supports a concealment claim. If the agreement expressly allocated regulatory risk, the claim probably sounds in contract.

What the rule does not cover

Fraud in the inducement sits outside the rule entirely. A lie that caused the plaintiff to sign is a wrong committed before any contract existed, and the plaintiff may affirm the contract and sue for the fraud.

Negligent misrepresentation is harder. Because it is a negligence-based tort and the harm is usually economic, defendants argue that the economic loss rule bars it between contracting parties. Courts have gone both ways depending on whether the misstatement induced the contract or occurred during performance. Our negligent misrepresentation page covers that claim.

Why it matters: the remedies

If the fraud claim survives, tort damages replace the contract measure, and punitive damages become available on clear and convincing proof of fraud, which the statute defines as intentional misrepresentation, deceit, or concealment of a material fact. (Civ. Code, § 3294, subds. (a), (c)(3).) Our page on punitive damages in business cases explains the procedure.

What we do, and where these cases are heard

On the plaintiff side, we look for the statement or omission that stands apart from the breach: the false certificate, the concealed defect, the known problem that was never mentioned. We plead it with the specificity California demands. On the defense side, we test the fraud count at the demurrer stage, because a fraud claim that is really a breach claim should not survive to discovery.

Cases are filed in the Superior Court: for Orange County, the Central Justice Center in Santa Ana; for Los Angeles, the Stanley Mosk Courthouse. Commercial cases with diverse parties often proceed in the Central District of California. The breach of contract hub and the business fraud hub describe the related practice.

What to bring to the first meeting

The contract, with every amendment and statement of work. The specific communication you believe was false, with its date. Any document showing the other side knew the truth at the time. Proof of what you lost, separated into the value of the bargain and the losses that flowed from the misstatement.

Frequently asked questions

What is the economic loss rule in California?

It is a doctrine that limits a party whose only loss is economic, and whose relationship with the defendant is defined by contract, to contract remedies. It bars negligence claims for purely financial harm between contracting parties. It does not bar intentional torts like fraud when the elements can be proven independently of the contract.

Can I sue for both breach of contract and fraud?

Yes, if the fraud is a separate wrong. A lie that induced the contract, a false certification during performance, or a concealment of a fact the other party had an independent duty to disclose can support both claims. A broken promise by itself is breach of contract only.

Does the economic loss rule apply to fraudulent concealment?

Not as a bar. The California Supreme Court held in 2024 that a plaintiff may sue for fraudulent concealment during a contractual relationship. The elements must be established independently of the contract, and the concealment must have exposed the plaintiff to harm beyond what the parties contemplated. Risks the contract expressly allocated remain contract matters.

Can I get punitive damages for breach of contract?

No. Punitive damages are available only for breach of an obligation not arising from contract. If the same facts support an independent fraud claim and you prove fraud by clear and convincing evidence, punitive damages become possible on the fraud claim.

Talk to a California business fraud attorney

If you are weighing whether a contract dispute is also a fraud case, or defending a fraud count that belongs in contract, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents businesses in Orange County, Los Angeles, and throughout California.

Related reading: fraudulent inducement and breach of contract damages.

This page provides general information about California law and is not legal advice. Outcomes depend on the contract, the facts, and the court.