Client Alert: Florida Supreme Court Downsizes the Economic Loss Rule
In a sweeping decision, the Florida Supreme Court changed Florida law by limiting the economic loss rule to product liability cases only. Tiara Condominium Assoc., Inc., etc. v. Marsh & McLennan Cos., No. SC10-1022, 38 Fla.L.W. S151A (March 7, 2013). The case was before the court on a certified question from the U.S. Court of Appeals for the Eleventh Circuit. The question was: "Does the Economic Loss Rule bar an insured's suit against an insurance broker where the parties are in contractual privity with one another and the damages sought are solely for economic losses?" The court answered the question in the negative and held categorically that the economic loss rule is limited to product liability cases only.
The court first reviewed the history of the economic loss rule, noting that it was created by the courts to address circumstances under which a tort claim is prohibited if the only damages suffered are economic losses. The court explained that the rule has been applied to bar claims (1) where the parties are in contractual privity and one party seeks to recover damages in tort for matters arising out of the contract, or (2) where the defendant is a manufacturer or distributor of a defective product which damages itself but does not cause personal injury or damage to any other property. Specifically, with regard to the first scenario, the economic loss rule dictated that if parties were in contractual privity, one party cannot sue the other party under tort theories for damages that arise out of the contract. The idea behind the rule was 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.
Expressing concern, however, about the undue expansion of the rule to contract matters, the court examined the historical application of the economic loss rule in Florida. In the end, and without much discussion or analysis other than historical context, the court concluded that the economic loss rule applies only in the products liability context:
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. We thus recede from our prior rulings to the extent they have applied the economic loss rule to cases other than products liability.
Id. (emphasis added).
In a dissenting opinion, Justice Canady voiced fear that “Florida’s contract law is seriously undermined by this decision … [and] with today’s decision, we face the prospect of every breach of contract claim being accompanied by a tort claim.” Id. dissenting op. at 28, 35 (Canady, J.). However, in a concurring opinion, Justice Pariente attempted to alleviate unease by explaining that the Tiara decision “is neither a monumental upsetting of Florida law nor an expansion of tort law at the expense of contract principles.” Id. Concurring Op. at 20 (Pariente, J.).
The majority’s conclusion that the economic loss rule is limited to the products liability context does not undermine Florida’s contract law or provide for an expansion in viable tort claims. Basic 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. For 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.
Id. concurring op. at 21 (Pariente, J.)
Ultimately, the court’s ruling will undoubtedly result in much debate over its reach and application. On its face, however, the Tiara opinion dictates that parties in contractual privity can sue each other under tort theories, e.g., negligence, to potentially recoup damages in excess of the recoverable breach of contract damages and/or to get around contractual provisions and remedies. Indeed, relying on the court’s holding in Tiara, plaintiffs will attempt to elevate the value of potential claims by pursuing claims that would have been precluded under pre-Tiara precedent.
For instance, plaintiffs will now argue that Tiara permits them to seek consequential damages in tort, despite the fact that consequential damages are expressly excluded under the contract. As the dissent pointed out, the following examples illustrate the type of cases that are now overruled by Tiara and “will make available a wide arsenal of tort claims” previously barred by the economic loss rule: Cessna Aircraft Co. v. Avior Techs., Inc., 990 So. 2d 532, 538 (Fla. 3d DCA 2008) (barring negligence claim against aircraft repair company for failed contracted-for repairs to aircraft); Taylor v. Maness, 941 So. 2d 559, 564 (Fla. 3d DCA 2006) (barring cause of action alleging fraudulent failure to perform under the contract and sell real property to plaintiffs); Straub Capital Corp. v. L. Frank Chopin, P.A., 724 So. 2d 577, 579 (Fla. 4th DCA 1998) (barring action alleging negligent misrepresentation by a landlord after he failed to timely build and provide space to tenants under the terms of their contract); Smith v. Bd. of Regents ex rel. Florida A&M Univ., 701 So. 2d 348, 349 (Fla. 1st DCA 1997) (barring cause of action brought by university professor alleging negligence by the Board of Regents and his bank in potentially breaching their duties under employment and deposit contracts); Hotels of Key Largo v. RHI Hotels, 694 So. 2d 74, 77 (Fla. 3d DCA 1997) (barring action alleging fraudulent failure to adequately provide increased reservations and hotel management services under the contract).
Consequently, we anticipate a significant increase in the number of tort claims that will accompany breach of contract claims. However, it should be noted that this reasoning applies only in cases where the contracts do not have language limiting damages for claims sounding in both contract and tort. As such, our firm will be recommending avenues to mitigate the potential risk of claims that were previously barred by the economic loss rule. In particular, through revising current contracts, as well as negotiating future contracts, we can achieve the contractual protections afforded to our clients prior to Tiara.
Although there is no way to predict how Florida courts will apply and construe Tiara, we note that a number of cases from other jurisdictions are similarly moving to limit the economic loss rule. For example, in a case filed by this firm, Pub. Bldg. Auth. of City of Huntsville v. St. Paul Fire & Marine Ins. Co., 80 So. 3d 171 (Ala. 2010), the Alabama Supreme Court in 2010 rejected the economic loss rule as a bar to recovery against subcontractors in a commercial construction context. As such, we intend to argue that Justice Pariente’s concurrence is the accurate interpretation and, therefore, the parties’ contractual language will still bar claims that may have previously been barred under the economic loss rule.
This alert provides a general overview of recent legal developments. It is not intended and should not be relied on as legal advice.