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Judge Wallace Allows Contract Claims to Proceed while Dismissing Duplicative Implied Covenant Claims and Addressing Novel Issue Regarding Application of the Economic Loss Doctrine to Intentional Torts

August 7, 2019

In a lengthy bench ruling, Judge Wallace partially granted and partially denied a plaintiff’s motion to dismiss a first-amended counterclaim, and denied a motion to strike an affirmative defense. Smart Sand, Inc. v. US Well Services LLC, C.A. No. N19C-01-144 PRW [CCLD] involved a dispute over a contract for frac sand. The counter-claimant alleged that the counter-claim defendant had misappropriated its confidential information (as defined under the contract) and used that information to poach customers. Accordingly, the counter-claimant brought claims for breach of the implied covenant of good faith and fair dealing (Count I), tortious interference with business relationships or expectancies (Count II), tortious interference with existing customer contracts (Count III), breach of contract (Count IV), and declaratory judgment (Count V). The counter-claim defendant moved to dismiss.

In ruling on the motion to dismiss, Judge Wallace dismissed the implied covenant claim, holding that there was no “gap” in the contract for the implied covenant to fill. In so holding, Judge Wallace noted that courts are becoming increasingly skeptical and “a little more restrictive in the use of the implied covenant,” particularly where such a claim is arguably “overlapping” or a “repackaged” breach of contract claim. Judge Wallace also dismissed the two tortious interference claims, finding that the claims were predicated on the same facts as the breach of contract claim that survived dismissal. Specifically, Judge Wallace noted, “The economic loss doctrine is a judicially created doctrine that prohibits recovery in tort for losses purely economic in nature. . . . Delaware courts have long recognized that the economic loss doctrine is especially suited to contract dispute, and especially here where there is a breach of contract claim made on the same issue, use of confidential information.” Although the counter-claimant had argued that the Superior Court’s 2009 decision of Commonwealth v. Endecon precluded application of the economic loss doctrine to intentional torts, Judge Wallace disagreed and found that Endecon had “important differences”; in Endecon, there was no contract under which the plaintiff could seek recovery—unlike the instant case. Accordingly, Judge Wallace dismissed the tortious interference claims, but allowed the contract claim and declaratory judgment claims to stand because the counter-claimant had pled the requisite elements.

Separately, Judge Wallace also denied the motion to strike one of the counter-claimant’s affirmative defenses that asserted that certain of the charges at issue were invalid liquidated damages. In so holding, the court noted that it was “rare” for the court to grant such motions and explained that such instances typically address formal defects. The court also described how motions to strike are not appropriate for any determination of substantive questions of law, and, accordingly, denied the motion.

Analysis: The court’s decision in Smart Sand is notable for a number of reasons. First, it demonstrates the court’s renewed scrutiny on claims for breach of the implied covenant of good faith and fair dealing, and highlights that the court can and will dispose of such claims at the motion to dismiss stage. Second, Judge Wallace addressed a novel issue of law: whether the economic loss doctrine applied to intentional torts such as tortious interference. In addressing the issues, Judge Wallace acknowledged that Commonwealth Construction Co. v. Endecon, Inc., 2009 WL 609426 (Del. Super. Ct. Mar. 9, 2009), refused to apply the economic loss doctrine based on an “emerging trend” across the country refusing to apply the doctrine to intentional torts. Judge Wallace, however, declined to expand Endecon’s holding to all intentional torts. Rather, Judge Wallace held that where there was a contractual relationship between the parties (unlike Endecon), the economic loss doctrine could still apply to preclude tortious interference claims. Third, Judge Wallace denied a motion to strike consistent with well-established authorities and held that such a motion could not be used as a procedural vehicle to require the court to make substantive legal determinations.

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