Breaking NewsLaw.com and associated brands will be offline for scheduled maintenance Friday Feb. 26 9 PM US EST to Saturday Feb. 27 6 AM EST. We apologize for the inconvenience.

 
X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The concept behind the economic loss doctrine is ostensibly simple: Tort law protects against and compensates for personal injury and property damage, while contract law protects bargained-for expectations and compensates for “economic” losses and lost “benefit of the bargain.” Thus, when an allegedly defective product causes solely economic loss or lost benefit of the bargain, there can be no recovery in tort. Recent decisions demonstrate, however, that courts can have difficulty applying the economic loss doctrine. These decisions often reflect a spirited debate about the fundamental purposes underlying products liability and contract law. But like it or not, the basic premise of the economic loss doctrine is widely accepted. Wisconsin Chief Justice Shirley Abrahamson recently remarked that, “[l]ike the ever-expanding, all-consuming alien life form portrayed in the 1958 B-movie classic ‘The Blob,’ the economic loss doctrine seems to be a swelling globule on the legal landscape of this state.” Grams v. Milk Prods. Inc., 2005 Wisc. Lexis 347 (Wis. July 8, 2005) (Abrahamson, C.J., dissenting). APPLYING CONTRACT LAW ONLY MAY BAR A CLAIM ENTIRELY The question whether rules of tort or contract govern a claim can have important consequences. When the economic loss doctrine precludes the application of tort law, provisions of the Uniform Commercial Code involving statutes of limitation, privity, notice of claim and disclaimers may apply to bar a claim entirely. See Restatement (Third) of Torts: Products Liability � 21, cmt. a. For example, in Tarrant County Hospital District v. GE Automation Services Inc., 156 S.W.3d 885 (Texas App. 2005), a hospital district sued the provider of a power supply system that allegedly was not weatherproofed and ultimately failed. The theories of recovery included negligence, gross negligence and products liability, as well as breach of contract and breach of express and implied warranties. The court applied the economic loss doctrine to affirm summary judgment on the tort theories, and then held that the warranty and contract claims were barred by the UCC’s four-year statute of limitations. Courts and commentators explaining the purposes underlying the economic loss doctrine typically harken back to East River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858 (1986). In that case, ship charterers sued the manufacturer of their ships’ turbines in strict liability because the turbines repeatedly failed and required repair. The court held that when a product only damages itself, the remedy lies in commercial law, not products liability law. The court noted that products liability law grew out of a desire to provide the public more protection from dangerous products than was provided by warranty law, but that “if this development were allowed to progress too far, contract law would drown in a sea of tort.” Id. at 866. There is a need, the court observed, “to keep products liability and contract law in separate spheres and to maintain a realistic limitation on damages” when the only harm is economic. Id. at 871. Although claims for bodily injury or property damage may significantly implicate the public-safety rationale underlying products liability law, claims for purely economic harm — including damage to the product itself — do not. The court in East River Steamship highlighted aspects of contract law that would be imperiled if products liability claims for pure economic loss were allowed. First, it would interfere with the parties’ ability to contractually assign risks and, by making the manufacturer the virtual insurer of its products’ satisfactory performance, increase the products’ cost to the public. Second, allowing tort-based claims for pure economic loss would vastly expand the available damages in ways that manufacturers could neither anticipate nor adequately insure against. Tort law generally offers a broader array of damages, including punitive damages and attorney fees. In contract, manufacturers can limit their liability for consequential and other damages, and punitive damages generally are not available. Although a few courts have limited the economic loss doctrine’s application to parties in contractual privity, the court in East River Steamship applied the doctrine even though there was no contractual privity between the parties. The economic loss doctrine generally precludes tort claims for injury to the product itself and consequential damages flowing therefrom, as that is merely disappointed expectations resulting in economic loss. See, e.g., Atlas Air Inc. v. General Elec. Co., 791 N.Y.S.2d 620 (N.Y. App. Div. 2005); C.A. Johnson Trenching L.C. v. Vermeer Mfg. Co., 2005 Utah App. 94 (2005). But the doctrine does not preclude tort claims for injury to property other than the product itself. Defining what “other property” is, however, can be difficult when the product is a component of a system or in other ways integrated into something else. The Wisconsin Supreme Court recently addressed such a problem by focusing on the parties’ expectations for the product to determine whether the claim should be governed by commercial law or products liability law. In Grams, supra, the plaintiffs raised and sold calves. They sued the seller of a milk substitute that they had fed to the calves, alleging that the product had poor nutritional value and tripled their calves’ mortality rate. The court affirmed the dismissal of the warranty claim because the plaintiffs were not in privity with the manufacturer, and affirmed dismissal of the four tort claims under the economic loss doctrine. The plaintiffs urged that the product — the milk formula — had injured other property: their calves. Thus, they argued, the economic loss doctrine should not bar their tort claims. The court disagreed. First, it noted that Wisconsin already had determined that when a defective component of an integrated system damages other parts of the integrated system, that is not damage to “other property” and the economic loss doctrine still applies to bar tort recovery. And while the situation confronting the court in Grams was somewhat different, the underlying concept was the same: The damage was “disappointed expectations” about the product’s performance that could have been negotiated between the parties. Thus, the court concluded, in determining whether the “other property” exception applies, courts should consider the “purpose or thrust of the bargain and the contractual expectations of the parties” so that “the economic loss doctrine will apply when ‘prevention of the subject risk was one of the contractual expectations motivating the purchase of the defective product.’ ” Id. at 42-43 (citation omitted); but see Gunkel v. Renovations Inc., 822 N.E.2d 150 (Ind. 2005) (tort recovery available when separately acquired fa�ade damaged home). Courts also have struggled with the issue of whether the economic loss doctrine bars fraud and misrepresentation claims. Generally, alleged misrepresentations that relate to the product’s characteristics “are merely a restatement of a breach of warranty claim and are therefore barred by the economic loss rule.” American Law of Products Liability 3D � 60:45 (2004). But not always. In Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979 (Calif. 2004), the court allowed a helicopter manufacturer to pursue an intentional misrepresentation claim against a supplier that had allegedly changed the level of hardness of its sprag clutches while providing written certifications that the clutches met the buyer’s different specification. The clutches did not injure any person or property, but prompted the plaintiff to spend significant sums on an investigation and recall. The jury had awarded compensatory damages and $6 million in punitive damages. The court held that because the supplier’s certifications were affirmative misrepresentations that were independent of the act that breached the contract (i.e., supplying nonconforming clutches), the economic loss doctrine did not bar the fraud claim. The court said its holding was narrow “and limited to a defendant’s affirmative misrepresentation on which a plaintiff relies and which expose[s] a plaintiff to liability for personal damages independent of the plaintiff’s economic loss.” Id. at 993. It also admonished trial courts to enforce the pleading requirements that the elements of such fraud be pleaded specifically with facts showing ” ‘how, when, where, to whom, and by what means the representations were tendered.’ ” Id. (citation omitted). Justice Kathryn Werdegar issued a thoughtful dissent, countering the majority’s stated desire to discourage fraudulent conduct with an exposition of why under contract law the consequences of a breach — an efficient or inefficient breach — must be predictable and not subject to expansive tort and punitive liability when the sole harm is economic. As she described it, the plaintiff’s claim was nothing more than a “bad faith denial of breach” that should not be actionable in tort. Id. at 995. A NARROW FRAUD-IN-THE-INDUCEMENT EXCEPTION In contrast, Wisconsin courts have held that the doctrine bars claims based on negligence and strict liability for alleged misrepresentations about the character and quality of the product. See Tietsworth v. Harley-Davidson Motor Co., 677 N.W.2d 233 (Wis. 2004). Recently, however, the Wisconsin Supreme Court adopted a narrow fraud-in-the-inducement exception to the economic loss doctrine. See Kaloti Enterprises Inc. v. Kellogg Sales Co., 2005 Wisc. Lexis 348 (July 8, 2005). A misrepresentation is actionable in tort only when it was made before the contract was formed and was ” ‘extraneous to, rather than interwoven with, the contract.’ ” Id. at 42. As these opinions demonstrate, the economic loss doctrine will continue to be a much-litigated defense that implicates important public policies at the intersection of the law of tort and contract. J. Russell Jackson is a partner in the complex mass torts group at New York’s Skadden, Arps, Slate, Meagher & Flom. Rebecca Ferrante, an associate at the firm, provided research assistance for this column.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.