The Florida court limited the economic loss rule to product liability cases and rejected the doctrine of privity of contract, which provides that only a party to a contract has standing to sue to enforce it even if the contract confers benefits on others in some fashion. Prior to this ruling, Florida courts routinely barred parties in privity of contract from asserting tort claims for purely economic loss where a defendant had not committed a breach of duty apart from a breach of contract.
The Rule’s Judicial Origins and Application
The economic loss rule provides that a tort claim is prohibited and will be dismissed if the only damages suffered are economic losses. The court-created rule was originally designed to prevent parties to a contract from circumventing the allocation of risks and responsibilities set forth in the contract by bringing an action for economic loss in tort.
Florida courts recognized the rule as “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.” Thus, generally speaking, in Florida, to establish a tort, the plaintiff must assert and prove personal injury or property damage in addition to pure economic damages.
Approximately 26 states, including New York, New Jersey, Indiana, Maine, and Hawaii follow a similar strict “economic loss” rule. Approximately 16 other states, including Illinois, Michigan, and California apply a hybrid version of the rule.
Contractual Privity Bar and Other Exceptions Rejected
Over the last 20 years, Florida courts have narrowed the economic loss rule from its original design to include several exceptions, meaning there are certain tort claims that can be brought even though there are only economic damages. One such exception was the “contractual privity” exception, which was the exception the plaintiffs alleged applied in the Tiara case. There were so many other exceptions that the economic loss rule had been watered down. It had become unworkable for courts to understand what was and was not covered by the rule, and many cases involved arguments (like Tiara) over whether an exception did or did not apply.
The court decided to cut to the chase and issue a bright line opinion as to when the economic loss rule would apply, ultimately holding that it only applied in one specific kind of case—the products liability context. The majority 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.”
Opening the Tort Claim Floodgates?
A dissenting opinion warns that this decision seriously undermines Florida’s contract law and that Florida now faces the prospect of having every breach of contract claim being accompanied by a tort claim. Another dissent opines that the Tiara decision “obliterates the use of the doctrine when the parties are in contractual privity, greatly expanding tort claims and remedies available without deference to contract claims.”
Providing a more balanced perspective, a concurring opinion reasoned that Florida’s tort law was not expanded nor was contract law undermined. Instead, he explained, “[b]asic common law principles already restrict the remedies available to parties who have specifically negotiated for those remedies, and, contrary to the assertions raised in dissent, our clarification of the economic loss rule’s applicability does nothing to alter these common law concepts. The concurring opinion clarified, “[f]or example, in order to bring a valid tort claim, a party still must demonstrate that all of the required elements for the cause of action are satisfied, including that the tort is independent of any breach of contract claim.”
Seasoned Florida litigators and Section leaders acknowledge that the Tiara case will affect Florida cases but disagree with the ultimate significance. The court’s decision may be a “retrenchment,” says Merrick L. Gross, Miami, codirector of the ABA Section of Litigation’s division on substantive areas of litigation. In other words, “many defenses remain viable and, going forward, defendants seeking to dismiss tort claims formerly barred under the rule must now rely on these defenses, or on the ‘basic common law principles’ to which Justice Pariente referred in his concurring opinion,” Gross believes. “Initially, we can expect to see an increase in case filings until the appellate courts weigh in.”
Others believe Tiara is a significant ruling from a commercial litigator’s perspective. “As commercial litigators, we take pains to negotiate, specifically identify, and clearly explain the risks and responsibilities in contracts on behalf of our clients,” says Tiffani G. Lee, Miami, cochair of the 2014 ABA Annual Meeting. “Pre-Tiara, if confronted with a tort claim, the economic loss rule was an efficient tool to eliminate the claim at the motion to dismiss stage. Post-Tiara, though the basic common law principals are still available to the parties, the potential prevention of the parties from relying on what was negotiated in the contract is increased,” opines Lee.
Both Gross and Lee agree that the ultimate effect of the Tiara ruling is that parties in contractual privity are now permitted to sue each other under tort theories to potentially recoup damages in excess of the recoverable breach of contract damages and/or to avoid contractual provisions and remedies. Plaintiffs will now attempt to elevate the value of potential claims by pursuing claims precluded pre-Tiara and argue that Tiara permits them to seek consequential damages in tort, despite the express exclusion of consequential damages under the contract. Defendants will now have to be much more precise in framing and basing their arguments on the “basic common law principles” and not on the rejected rule.
Oran F. Whiting is an associate editor Litigation News.