What Is The Economic Loss Rule, And How Does It Affect Business Contracts?
The Economic Loss Rule provides that any party who only suffers from economic harm may only recover under a contractual claim, not under tort recovery, as torts traditionally only cover issues related to personal injury and/or property damage.
Regardless, parties who feel that they have been harmed in a business-related dispute will still often seek to bring negligence claims against businesses from time to time. While the Eleventh Circuit (which includes Alabama) recently upheld the Economic Loss Rule, it is important to be aware of this in drafting, negotiating, and reviewing contracts for use with clients, customers, and vendors.
What It Is
The Economic Loss Rule reflects early contract law and the fundamental concept that any claim for damages in contracts is limited to what was or should have been contemplated by the parties at the time of contracting. In other words, in a contractual relationship, the rule prevents one party from bringing a negligence claim against the other simply due to defeated expectations. Of course, there is an exception when personal injury or injury to property is involved, which opens up the door to tort-related claims. For example, under circumstances in which a product does not work, but also does not cause harm to anyone or property damage, the Economic Loss Rule would apply; i.e. the plaintiff can sue for breach of contract, but not under any product liability action. However, if that product does cause injury, the injured party can bring a product liability claim against the manufacturer.
While this may sound simple, in fact, it is still a source of litigation, and has been shaped over time: For example, in 2013, a decision that came out of the Florida Supreme Court (in response to a question posed by the Eleventh Circuit) limited the application of the rule to circumstances whereby the parties were not in privity with each other; in other words, while the historical application of the rule only allowed a tort claim where there was no contractual relationship, this decision resulted in completely barring any product liability claims for parties who had an existing contractual relationship.
Most recently, the Eleventh Circuit affirmed the Economic Loss Rule by preventing a plaintiff from filing a negligence claim against a manufacturer. The negligence claim was brought against an electronics manufacturer by a radiologist claiming that the company had been negligent because the radiologist’s MRI scanner was out of date. The radiologist claimed that the machine failed to work due to negligent repairs, however, the contract that existed between the radiologist and the manufacturer featured a servicing date that had long expired before the claim was even filed. The court dismissed the claim, as this was clearly a contract claim attempting to be recast as a negligence claim.
Draft Contracts Strategically With Experienced Attorneys
While the courts have been clear, throughout time, that the Economic Loss Rule prevents recasting contract claims as negligence claims, in order to avoid going to court in the first place, it behooves businesses to spell these terms out in contracts with clients, customers, and vendors, so as to save themselves litigation expenses, even if that litigation simply involves filing a motion to dismiss an improperly-filed claim for negligence.
At Cloud Willis & Ellis, our experienced Birmingham Business litigation attorneys can assist you with all aspects of providing counsel and guidance in navigating simple and complex contracting situations. Contact us today to set up a consultation.