Receding from the Economic Loss Rule: How a Major Shift in Contract and Tort Law Could Affect You
/For decades, Florida courts applied a rule that prohibited plaintiffs from recovering damages for economic losses where there existed a contract between the plaintiff and defendant. The economic loss rule arose in the products-liability context to protect manufacturers from liability for economic damages caused by a defective product beyond those damages contemplated under the product’s warranty. Over the years, the rule was expanded to eliminate torts for purely economic losses where the parties were in contractual privity. The rule became so broad that it was frequently applied by courts to dismiss claims so long as a contract covering the same general subject matter existed, without much regard to the actual intellectual underpinnings of the rule. This drastically changed in 2013, when the Florida Supreme Court receded from prior precedent by limiting the economic loss rule to the products-liability context. Whether you are a consumer or a business-owner, this change in the law could impact you.
A general understanding of contract and tort law is essential to understanding the economic loss rule. For the uninitiated, a tort is a civil wrong. Examples include negligence or fraud. The law treats torts differently from breaches of contract. A tort claim is generally based on the breach of a common law or statutory duty owed by the defendant to the plaintiff, whereas a breach of contract claim is based on the failure to honor a contractual obligation. Economic losses are generally defined as “disappointed economic expectations,” as opposed to damages such as physical injury or damage to other property. The rationale behind the economic loss rule in the context of contract law is that the parties are in contractual privity, and therefore addressed or could have addressed the remedies for any wrong arising from their relationship.
This rationale caused courts to apply it to bar many tort claims (with some exceptions for torts arising independent of the contract, such as fraudulent inducement). Plaintiffs would often have their cases dismissed or decided by summary judgment before ever getting their full “day in court.” The rule was criticized by many lawyers and judges for being too rigid in its application.
In the case Tiara Condominium Ass'n, Inc. v. Marsh & McLennan Companies, Inc., 110 So.3d 399 (Fla. 2013), the Florida Supreme Court confronted the “unprincipled expansion” of the economic loss rule. In its ruling, the Court detailed the history of the rule, emphasizing that the rationale for the rule grew out of the products-liability context and the need to protect manufacturers from purely economic damages not covered by their product warranties. The Court then addressed its concern that many well-established causes of action, including the claim for professional negligence at issue in Tiara, were being essentially eliminated by the rule. In what was a landmark decision for plaintiffs all over the state, the Court expressly limited the rule to the products-liability context.
The impact of this ruling is significant for consumers and businesses alike. For consumers, this may mean that you have the opportunity to claim and recover additional damages in litigation. For business owners, this change in the law may expose your business to additional liability. Business owners may be able to contract away some of these risks by having more comprehensive contracts. The risks which cannot be contracted away can be minimized in ways such as adopting better operating procedures and ensuring optimal insurance coverage. In addition to protecting the business itself, proper business organization and mindful planning and operation will minimize the exposure of the owners and officers.
