Business Litigation Update: The Economic Loss Rule Exiled to its Humble Beginnings

Mar 11, 2013   

Florida’s “economic loss doctrine” (or, the “Rule”), which bars recovery in tort where a contract exists between the parties, is one of Florida’s most hotly contested legal doctrines. The doctrine appears to be fluid, changing with the times and sculpted on a case-by-case basis. Florida’s Supreme Court has expended inordinate time creating, expanding, retracting, retreating, narrowing, and reclassifying the doctrine over the past twenty-five years.

On March 7, 2013, in Tierra Condominium Ass’n vs. Marsh & McLennan Cos., SC10-1022, 38 Fla. L. Weekly S151a (March 7, 2013), the Florida Supreme Court announced the bright line rule for its narrow applicability: “[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.” The Tierra decision can be read in full here.

The economic loss rule is a judicially created doctrine whose roots are found in product liability litigation. In East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 871 (1986), the United States Supreme Court determined that tort law should not, absent loss to person or personal property, supplant warranty law. Borrowing from East River, the Tierra Court noted, “when the damage is to the product itself, ”˜the injury suffered — the failure of the product to function properly — is the essence of a warranty action, through which a contracting party can seek to recoup the benefit of its bargain.’” The Court continued:

Contract law, and the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements. The manufacturer can restrict its liability, within limits, by disclaiming warranties or limiting remedies. In exchange, the purchaser pays less for the product.

Id. (citing East River at 872-73 (emphasis in original). With the intention to avoid “contract law . . . drown[ing] in a sea of tort,” the Supreme Court held that “a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself.” Id.  The Florida Supreme Court adopted this reasoning in Florida Power & Light Co. v. Westinghouse Elec. Corp., 510 So. 2d 899 (Fla. 1987), and reiterated its application in Casa Clara Condominium Ass’n, Inc. v. Charley Toppino and Sons, Inc., 620 So. 2d 1244 (Fla. 1993) (the economic loss rule is “the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care and thereby encourages citizens to avoid causing physical harm to others.”).

From there, Florida jurisprudence was engulfed in a “sea of litigation” over the expansion of the principles. Virtually every tort was attacked by creative defense counsel in every facet of civil transactions. Defense counsel continuously endeavored to ensure victims were limited to fundamental contractual remedies, whereas equally creative plaintiffs’ counsel fought to poke holes in the judicially created rule. Cases dragged on for years, and the appellate courts reported mixed and confusing decisions interpreting the reach of the Rule.

In 1996, the Florida Supreme Court tried to resolve the “sea of confusion” in HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So.2d 1238, 1239 (Fla. 1996), by holding, “Where a contract exists, a tort action will lie for either intentional or negligent acts considered to be independent from acts that breached the contract.” The next phase of litigation thus circumnavigated the emerging confusion over the word “independent.”

Volumes of opinions centered around what constituted “independence.” Reasoned jurists addressed the distinctions between “fraud in the performance,” which was the judicial equivalent of breach of contract, with “fraud in the inducement,” which translated into the common law fraud designed to induce one to enter into the contract, and thus independent from the contractual breach. See, i.e., Hotels of Key Largo, Inc. v. RHI Hotels, Inc., 694 So.2d 74, 78 (Fla. 3d DCA 1997). Individual courts then attempted to create bright line rules on what exactly determined whether a “fraud” claim was independent from the essence of the parties’ agreement. See Dantzler Lumber & Export Co. v. Bullington Lumber Co., Inc., 968 F.Supp. 1543, 1546-47 (M.D. 1997), Samuels v. King Motor Co. of Fort Lauderdale, 782 So.2d 489, 498 (Fla. 4th DCA 2001).

Likewise, courts of every district were asked to decide whether the Rule proscribed statutory causes of action when a contract co-existed between the parties. The Florida Supreme Court resolved the conflicts in Comptech International, Inc. v. Milam Commerce Park, Ltd., 753 So. 2d 1219 (Fla. 1999). In addition, the courts were asked to review whether professional negligence cases against professionals would survive when the professional was engaged pursuant to a contract. The Supreme Court announced the final rule in Moransais v. Heathman, 744 So. 2d 973, 984 (Fla. 1999). In short, virtually every commercial tort has been under attack by the Rule since its indoctrination into Florida jurisprudence, and the Supreme Court has regularly been called upon to end divisive conflict.

Having had enough, the Florida Supreme Court decided to fully retreat from the over-expansion of the Rule, and return its use to its original products liability beginnings. The Court explicitly held:

Having reviewed the origin and original purpose of the economic loss rule, and what has been described as the unprincipled extension of the rule, we now take this final step and hold that the economic loss rule applies only in the products liability context. We thus recede from our prior rulings to the extent that they have applied the economic loss rule to cases other than products liability.

Tierra, supra.

Now that our Court has made this bold move, what does it mean?  Will our courts drown contract law in “a sea of torts”?  Probably not.  Even before the Economic Loss Rule Revolution, our courts recognized the limitations against suing for tort theories when no duty has been breached apart from breach of contract.  See Weimar v. Yacht Club Point Estates, 223 So.2d 100 (Fla.1969) (where defendant has not committed a breach of duty apart from breach of contract there can be no action in tort); Ginsberg v. Lennar Florida Holdings, Inc., 645 So. 2d 490, 495 (Fla. 3d DCA 1994); See further Ginsberg v. Lennar Fla. Holdings, Inc., 645 So. 2d 490, 494 (Fla. 3d DCA 1994) (“Where damages sought in tort are the same as those for breach of contract a plaintiff may not circumvent the contractual relationship by bringing an action in tort.”); Rosen v. Marlin, 486 So. 2d 623, 626 (Fla. 3d DCA 1986)(“Where the compensatory damages requested in a count for tort are identical to the compensatory damages sought in a count for breach of contract, compensatory damages and punitive damages for the tort are not recoverable.”); Rolls v. Bliss, 408 So.2d 229 (Fla. 3d DCA 1981) (award of contractual damages may not form basis for an award of tort damages), review dismissed, 415 So.2d 1359 (Fla.1982); Overseas Equipment Company, Inc. v. AcerosArquitectonicos, 374 So.2d 537 (Fla.3d DCA 1979) (same).  However, wherever there is a rule, there stands a clever lawyer waiting to punch holes and create exceptions.

Stay tuned for future developments.