The “Economic Loss Rule” or “ELR” is a judicially created doctrine, which stands for the proposition that if there is a contract between two parties, then absent physical property damage or bodily injury, those parties rights to sue for things related to that contract are, in essence, limited to a lawsuit for breach of contract. In other words, they cannot to sue for a tort such as unjust enrichment. Stated differently, the Economic Loss Rule bars a tort claim such as negligence or fraud when the losses or damages are purely economic.
The original intent behind the rule was to limit actions in the products liability context. Therefore, where a defect in a product damaged only itself, i.e. caused no physical injuries or other property damage, the ELR prohibited claims against the seller or manufacturer to recover damages beyond those provided by warranty law. Over the years, however, courts had applied the Economic Loss Rule to non-product liability cases – specifically those in which the parties have a contractual relationship and one of the parties seeks to recoup economic losses in tort for matters arising from the contract.
For example, in AFM Corp. v. Southern Bell Telephone & Telegraph Co., AFM contracted with Southern Bell to place some advertising in the yellow pages. Southern Bell listed the wrong telephone number for AMF. Claiming only economic losses, AMF sued Southern Bell for negligence instead of breach of contract. The court held that AFM’s contract with Southern Bell “defined the limitation of liability through bargaining, risk acceptance, and compensation.” The court concluded that the economic loss rule prohibited AMF from recovering on a negligence theory.
Tiara and its Impact
On March 7, 2013, the Florida Supreme Court significantly restricted the breadth of the ELR. In Tiara Condominium Association, Inc. V. Marsh & McLennan Companies, the Court held that the Economic Loss Rule only applied to product liability cases.
Before the Tiara decision, contracting parties could limit their liability for economic losses to the remedies outlined in the contract. Although courts had slowly chipped away at the economic loss rule by carving out exceptions to it over time, the parties could still rest fairly assured that they would not also be liable for tort damages that were purely economic. That is not the case now. Tiara essentially allows a party to plead around the limitations of liability provisions of the contract.
In that regard, the Tiara decision may have effectively nullified certain sections of Florida’s Uniform Commercial Code. For example, section 672.719 (3) of the UCC allows parties to limit or exclude consequential damages. The Tiara ruling may have neutered this section because contracting parties are now allowed to bring negligence claims for damages that are not limited by the contract.
Because of Tiara, a party pursuing a breach of contract lawsuit may want to explore the possibility of bolstering the case by adding fraud claims. Claims of fraud in the inducement have always been permitted, however claims of fraud in the performance of a contract, which were previously barred by the economic loss rule, will likely be permitted now. Moreover, in breach of contract actions, punitive damages were not traditionally available. By permitting tort claims arising from a contractual relationship, the Tiara ruling arguably has made contracting parties vulnerable to punitive damage claims.
If you are still confused, think of it like this:
If you are a plaintiff in a case involving a breach of a contract, your ability to recover is no longer limited by the contract; you can also seek damages by asserting tort claims such as negligence, fraud or unjust enrichment.
If you are a defendant in a breach of contract suit, you could now be liable under more than just a breach of contract theory – damages may also lie if the plaintiff asserts claims for negligence, fraud or unjust enrichment.