The Virginia Business Litigation Blog
Virginia courts apply the “source of duty” rule to distinguish contract claims from tort claims. A contracting party may recover in tort only if the breached duty arises independently under common law, not merely from the parties’ contract. If the duty exists only because of the contract, the plaintiff is limited to contract remedies. A persistent question in Virginia commercial litigation is whether a defendant’s affirmative wrongdoing (e.g., a lie or a forged invoice) transforms what would otherwise be a breach of contract into an independent tort. Surely fraud, by its nature, lies outside the contract, the plaintiff’s argument typically goes. The Court of Appeals of Virginia took up this question earlier this month in Precision & Performance Auto Care, LLC v. James River Petroleum, Inc. Affirmative wrongdoing is necessary to escape the source-of-duty rule, it held, but wrongdoing alone is not sufficient to avoid application of the source-of-duty rule. The wrongdoer’s state of mind matters, but so does the source of the duty he violated. Tort claims will generally be barred unless the plaintiff can point to a common-law duty independent of the contract, a special relationship between the parties, fraudulent inducement (not just fraudulent breach), or damages that differ in kind from contract damages.
The facts of the opinion describe the following scheme. James River Petroleum, a fuel distributor, issued WEX-backed credit cards to commercial customers. Two cardholders used their cards to “buy” goods and services from SS&B Distributor, LLC, an entity owned by Sharon Britt, and from a separate auto dealership Britt also owned. The relationships among the players were close: Britt jointly owned a residence with one of the cardholders, and she lived on the same street as the other. By late 2023, monthly nonfuel charges across James River’s customer base had spiked from a few thousand dollars to roughly half a million, with the two cardholders responsible for approximately 99 percent of those charges. Fuel purchases showed identical gallon counts at identical per-gallon prices across multiple dates (a forensically improbable pattern given that fuel prices fluctuate). The cardholders ultimately defaulted on more than half a million dollars in card balances.
James River sued for breach of contract, fraud, tortious interference, and business conspiracy. The Hanover County Circuit Court ruled for James River across the board. The Court of Appeals affirmed the breach-of-contract and tortious-interference judgments but reversed the fraud and business-conspiracy counts on source-of-duty grounds.
Virginia “consistently adhere[s]” to the source-of-duty rule to “avoid turning every breach of contract into a tort.” (See MCR Federal, LLC v. JB&A, Inc., 294 Va. 446, 458 (2017)). Under the rule, “in order to recover in tort, the duty tortiously or negligently breached must be a common law duty, not one existing between the parties solely by virtue of the contract.” (Id. (quoting Dunn Construction Co. v. Cloney, 278 Va. 260, 267 (2009))). In Tingler v. Graystone Homes, Inc., 298 Va. 63 (2019), the Supreme Court of Virginia identified three factors that guide the analysis: (1) the level of blame, (2) the nature of the relationship between the parties, and (3) the source of the duty allegedly breached.
The first factor recognizes “escalating degrees of blameworthiness.” (Tingler, 298 Va. at 83). The traditional rule is that a claim sounds solely in contract when it is based on “an act of omission or non-feasance which, without proof of a contract to do what was left undone, would not give rise to any cause of action.” (See Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 256 Va. 553, 558 (1998)). By contrast, “a tort claim based on an affirmative wrongdoing may not be so limited.” (Tingler, 298 Va. at 84). The plaintiff argued that 
because fraud amounts to affirmative wrongdoing, the source-of-duty rule did not apply. The Court of Appeals rejected that logic.
The cardholders in Precision had certainly engaged in textbook affirmative wrongdoing by, according to the evidence, using the cards to charge transactions for goods and services that were never provided and by submitting false invoices supporting those charges. The court acknowledged this directly: “there is no question that using the credit cards to buy nonexistent goods and services constituted an affirmative wrongdoing.” This fact, the court explained, merely “leav[es] open the possibility that the source-of-duty rule does not preclude any of the tort claims.” It does not end the inquiry.
What does end the inquiry? The second and third Tingler factors. Having found affirmative wrongdoing, the court turned to whether the wrongdoing “ar[ose] solely out of a contractual relationship.” That inquiry is governed by the second and third Tingler factors. The second factor asks whether the parties owed each other any duties outside the contract; whether a “special relationship” existed that might impose a duty of care “irrespective of the contract.” Here, the cardholders’ relationship to James River was solely contractual. There was no fiduciary tie, no special relationship, no common-law duty operating independently of the cards’ terms of service.
The third factor asks whether the duty allegedly breached arose solely from the contract. Tingler identifies several useful guideposts here: the timing of the misrepresentation, whether the plaintiff alleges fraudulent inducement of a new contract, and the nature of the damages suffered. If the damages alleged in tort are the same as those alleged in contract, courts assume that the contract is the sole source of the duty owed. Here, the damages were identical across counts: the unpaid card balances. The misrepresentations occurred during performance (through invoices and charges submitted under an existing contractual relationship), not in the contract-inducement phase. James River was, according to the court, seeking to establish a tort action based solely on the (admittedly fraudulent) breach of a contractual duty with no corresponding common law duty. The source-of-duty rule therefore barred the fraud and conspiracy counts.
One important qualification deserves mention. Fraudulent inducement is treated differently from mere broken promises. Quoting Harrell v. DeLuca, 97 F.4th 180 (4th Cir. 2024), the court noted that Virginia “distinguishes between a statement that is false when made and a promise that becomes false only when the promisor later fails to keep his word. The former is fraud, the latter is breach of contract.” Had James River pleaded that the cardholders applied for the cards intending never to pay, the fraud claim might have survived. But misrepresentations during performance—however dishonest—remain breaches of contract.