Death of The Conomic Loss Rule -- Or Just a Case Of Legal Semantics?

The Death of the Economic Loss Rule -- or

a Case of Judicial Semantics?

By: Larry R. Leiby, Esquire and Ian T. Kravitz, Esquire

The economic loss rule has been a long evolving judicial doctrine that served as a basis to prohibit people from suing for damages that result from nonperformance of a contract under a tort theory. Simply put, you could not sue in tort (i.e. for negligence) for breaches of a contract. Contractual remedies apply to breach of a contractual duty, and one was (and still is) prohibited from seeking damages in tort for breach of contract economic losses. The right to sue for personal injury and property damage was never an object of the economic loss rule.

The economic loss rule began as a doctrine applicable to products liability cases where a defective product caused economic damages. The doctrine was established to limit available remedies when a defective product damaged only itself, and not other property. The rationale was that contract and warranty principles should apply to such cases, and not tort principles. Over time however, courts had expanded the economic loss rule restricting all contract related tort claims where the parties to the dispute were in privity of contract. Courts consistently held that the economic loss rule would preclude tort claims where the damages complained of were to the property or services furnished pursuant to the contract, and would limit such cases to a determination of available remedies for breach of contract.

The courts went on to create exceptions to the economic loss rule. For example, if the alleged wrongdoing was independent of a contractual obligation, tort principles would still apply, and thus tort remedies would be available for the breach of the independent (of the contract) obligation to parties having a contract with each other. Examples include when one party induces the other to enter into the contract based on fraud; or when the damages caused were caused to property other than that provided under the contract. An example of a tort independent of contractual obligations would be if you hired a painter to paint your walls, and the painter damaged your windows through negligent acts. Tort principles would apply to allow one to seek damages in tort for the damages caused by such negligence, since the windows were not the object of the contract.

Over the years, the economic loss rule has been raised as a defense to countless lawsuits where parties in privity of contract sued the other in tort. Courts would regularly dismiss such tort claims and limit the parties to their contractual bargained for remedies under a breach of contract theory.

In March of 2013, however, the Florida Supreme Court took up the question as to whether the economic loss rule would bar a suit between parties in privity of contract, when the damages sought were solely economic damages resulting from negligent performance of a non-contractual duty in relation to the contract. The case was referred to the Supreme Court by the Federal Eleventh Circuit asking a certified question. The Florida Supreme Court was so inclined to restrict the current state of the economic loss rule that it rephrased the question. In Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc., 2013 WL 828003, the Florida Supreme Court took the legal world by surprise when it concluded that the economic loss rule would not bar tort claims under the economic loss rule except in a products liability setting, as the economic loss rule should only apply in cases involving defective products.

Many lawyers have proclaimed that the economic loss rule is dead as we knew it. The confusion with the decision is in all of the things that the court said in its majority opinion leading up to the conclusion. One principle that the majority opinion said was:

The economic loss rule has not eliminated causes of action based upon torts independent of the contractual breach even though there exists a breach of contract action. Where a contract exists, a tort action will lie for either intentional or negligent acts considered to be independent from the acts that breached the contract. Fraudulent inducement is an independent tort in that it requires proof of facts separate and distinct from the breach of contract.

The majority opinion went on to make its key conclusion: "We thus recede from our prior rulings to the extent that they have applied the economic loss rule to cases other than products liability."

While the Florida Supreme Court majority opinion did explicitly provide that the economic loss rule would only apply to products liability cases, the concurring opinion of Justice Pariente sought to clarify why such a holding really should not change things very much.[1] Justice Pariente said that while the economic loss rule was not being applied to cases other than products liability cases, the principles that precluded tort claims between parties in privity of contract for damages caused pursuant to contract, still apply.

Justice Pariente reminded the legal world that "common law principles already restrict the remedies available to parties who have specifically negotiated for those remedies. . . [the Court's ruling] does nothing to alter these common law concepts." In order for a party to bring a tort claim, Justice Pariente explains, all of the elements of that claim must be satisfied, including proving that the alleged "tort is independent of any breach of contract claim." Unless the alleged tort is independent of a breach of contract, common law principles still prohibit such a tort claim from being made. "It is only when the breach of contract is attended by some additional conduct which amounts to an independent tort that such breach can constitute negligence."

The law remains that "when the parties have negotiated remedies for nonperformance pursuant to a contact, one party may not seek to obtain a better bargain than it made by turning a breach of contract into a tort for economic loss." While the majority opinion restricts the economic loss rule per se as a means to dismiss tort claims arising outside of the products liability context, the concurring opinion suggests that the same principles remain intact, but without the catchy title.


 

[1] It is important to note that the Pariente concurring opinion was not the opinion of the majority of the court.

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[1] It is important to note that the Pariente concurring opinion was not the opinion of the majority of the court.