Business Litigation Update: Suddenly, Contracting Parties Face Tort Risks in Florida
A recent Florida Supreme Court ruling could open the door to unforeseen liabilities for individuals and companies entering into contracts governed by Florida law.
On March 7, 2013, in Tierra Condominium Ass’n vs. Marsh & McLennan Cos., SC10-1022, 38 Fla. L. Weekly S151a (March 7, 2013), the Court limited the application of the “economic loss doctrine” (or, the “Rule”) to product liability cases. This ruling went largely unreported – except for our blog entry that you can read here – and was probably ignored by anyone who wasn’t a builder or a lawyer. Yet this ruling actually has a profound impact on anybody who has entered into a contract in which Florida law applies.
In usual circumstances when a party is the victim of a contract breach, the offended party sues under the contract seeking damages. Now enter the economic loss doctrine. Generally speaking, the Rule provides that someone suffering only economic damages in the breach of a contract may recover for those damages based only upon the provisions of the contract, such as warranties. Other “tort theories,” such as negligence or strict liability that seek to circumvent mundane and defined contractual remedies, were not. This was to prevent – as the U.S. Supreme Court said in one seminal case – “contract law . . . drown[ing] in a sea of tort.” East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 873 (1986). Therefore, as a result of the economic loss doctrine, an aggrieved contract party cannot recover for things like personal injury or property damage.
Not so fast, says the Florida Supreme Court. In its March 7, 2013 ruling, the court held, “[T]he application of the economic loss rule is limited to products liability cases. Therefore, we recede from prior case law to the extent that it is inconsistent with this holding.” What the Florida court was “reced[ing] from” was 25 years of jurisprudence in which the court expanded the application of the Rule well beyond its humble beginnings in product liability law. With the ruling in Tierra, however, the court has gone back to the roots of the Rule. The Tierra decision can be read in full here.
Implication for Florida Contracts
So let’s say that you have a supply/distribution contract governed under Florida law, and that contract provides that a party cannot seek damages for the supplier failing to deliver a product in a timely fashion. When the merchandise shows up late at the distributor’s warehouse, the Miami court house doors are opened. Before Tierra, the court would have said that the distributor cannot sue under the contract for damages because of the applicable provision. Now, with the Tierra ruling, the distributor may be able seek damages from the supplier alleging that the supplier was negligent in not properly delivering the merchandise. While it is unclear whether other long standing doctrines from which the economic loss rule expanded will continue to bar such remedies, a wave of new litigation is fully expected to test Tierra ramifications.
It is precisely because of this “wave of uncertainty” businesses should consult with their counsel to revisit existing contractual language. From a drafting standpoint, business lawyers for years have worked clauses into contracts to limit their clients’ liability. Accommodating the ruling in Tierra is no exception. Now, in addition to specifically disclaiming certain warranties and waiving liability for indirect, consequential, incidental and special damages, the contract will have to contain waivers for damages under tort theories as well. The inclusion of certain provisions should be able to provide an effective breakwater against the sea of tort litigation that is expected after Tierra.
This ruling has other implications of which companies should be aware. For example, it is sound business practice that when risks cannot be managed through contracts, private insurance is employed to mitigate the exposure. The question now arises whether a company’s commercial general liability (“CGL”) policy covers these new tort liabilities. The commonly used Insurance Services Office’s CGL policy (2007 form) lists 16 specific exclusions from coverage, including a “Contractual Liability” exclusion, which excludes coverage for a contractual breach. So even though a CGL policy typically covers tort claims such as personal injury and property damage claims directly against the insured, such a policy may not cover these claims when they arise out of a contract. It is incumbent upon businesses to review their respective policies to discern whether the policies exclude tort claims arising from contractual duties. And if that is the case for the insurance in your business, you may want to see if you can obtain specific “Contractual Liability Insurance.”
It is certain that the ripple effects of the Florida Supreme Court’s ruling in Tierra will be felt in the business and legal communities for years to come. The important message here is to be prepared. Whether seeking to mitigate your risks of tort damages through effective contractual drafting, or through insurance, or a combination thereof, effective legal guidance on this critical issue is essential.
Even an older, executed contract can be amended to accommodate the changes brought about by the Florida Supreme Court’s ruling. To perform a check–up, contact one our experienced business attorneys today.