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'Quasi-contract' not enough in fraud suit

March 28, 2016

The 7th Circuit Court of Appeals said a “quasi-contract” was not enough to pursue damages in a fraud case where one additive was unknowingly substituted for another.

Lubrizol Corp. substituted an additive it distributes to American Commercial Lines, a company that makes boats and barges, for another after it found its supplier, VCS Chemical Corp., engaged in unethical practices. However, Lubrizol did not tell ACL about the change, and ACL filed a diversity suit. It settled with VCS, but continued with its suit against Lubrizol. The District Court dismissed part of the suit on Lubrizol’s motion to dismiss and the rest on its motion for summary judgment.

ACL’s claims included that VCS was an apparent agent of Lubrizol, so Lubrizol should be responsible. It also argued ACL was a third-party contract beneficiary between VCS and Lubrizol, and that ACL had a quasi-contract with Lubrizol to supply the additive. It also argued Lubrizol committed civil deception.

Judge Richard Posner, who wrote the decision in the case, said the main problem was there was no legally binding contract for Lubrizol to supply the specific additive to ACL. “A manufacturer has no duty at common law to protect the customers of its distributors from misconduct by a distributor” Posner wrote. “ACL could have asked Lubrizol, which it knew to be VCS’ supplier, for a contractual guaranty against VCS’s failing to perform its contract with ACL. It didn’t ask for a guaranty, apparently trusting VCS.”

Posner wrote ACL was not a third-party beneficiary between VCS and Lubrizol, because that interpretation is too broad. Likewise, VCS being an agent of Lubrizol is too broad.

 “Every bar which advertises that they sell a particular brand of beer is not the agent of the brewery whose name they advertise,” Posner wrote, citing Leon v Caterpillar Industrial Inc., supra, 69 F.3d at 1336.

ACL claimed it had a “special relationship” with Lubrizol and that gave rise to “good faith and fair dealing,” making the substitution “constructive fraud,” and that all this made for a quasi-contract.

However, Posner said a quasi-contract is not a real contract, and is therefore only enforceable in extreme circumstances.

“ACL treats it as if it were synonymous with contract, whereas the term ‘quasi-contract’ actually denotes absence of a contract, coupled with a sense that there would have been a contract if not for some unexpected intervening event,” Posner wrote.

He said there was no unexpected event in this case, and therefore the quasi-contract was not enough.

The case is American Commercial Lines LLC v. The Lubrizol Corp., 15-3242. 

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