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Construction Law - Economic Loss Rule

The Economic Loss Rule (ELR)

Robert Bryan Barnes
February 12, 2013

The economic loss rule (ELR) is an important and ever-developing doctrine which raises many questions in its application. During 2013 this blog will regularly examine aspects of the ELR including some or all of the following:  

  1. Background
  2. Purpose
  3. Rule
  4. Economic loss defined
  5. Exceptions to the ELR:
    1. Bodily injury
    2. Other property
    3. No other recovery
    4. Asbestos
    5. Public entity (PA)  
  6. SC development (including when is residential not residential?)
  7.  Application to various issues:
    1. Who does the ELR protect? Product manufacturers, professionals? Others?
    2. What damages are recoverable where an exception applies, e.g. if damage happened to "other property" is the recoverable damage limited to the "other property?"
    3. Can the ELR be modified by agreement?
    4. Can the ELR be made enforceable across all consumers?
    5. How does it compare to certain aspects of insurance coverage?

Background

The economic loss rule (ELR) provides an interesting example of how the law develops. As the field of products liability, which draws together rules from contract and tort, began to develop a need arose to define the boundaries of those disciplines. See Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 341, 384 S.E.2d 730, 734 (1989) ("the economic loss rule is a creation of the modern law of products liability."). The most well-known early case, Seely v. White Motor Co., 403 P.2d 145 (Cal. 1965), came from California in the 1960's. In the 1980's the ELR received enormous attention when the United States Supreme Court decided two case which set out the rule and explored one of the two main exceptions. East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986) set out the rule, and Saratoga Fishing Co. v. J.M. Martinac & Co.,520 U.S. 875, 117 S.Ct. 1783 (1997) set out the "other property" exception. Over the next thirty years the ELR was adopted by most state courts including North and South Carolina.

Purpose

Some have described the ELR as one of the most confusing doctrines in tort law. The rule defines the boundary between the overlapping theories of tort law and contract law by barring the recovery of economic loss in tort, particularly in strict liability and negligence cases. The rationale behind the rule is that contract law and the Uniform Commercial Code (UCC) are expressly designed to deal with disappointed economic expectations and, therefore, the recovery of economic losses. The courts want to give dignity to agreements people make. Tort law, which would not have limitations of remedy or disclaimers of damages, is likely to have a different measure of damages than the parties' agreement.

In the context of products liability law, when a defective product only damages itself, the only concrete and measurable damages are the diminution in the value of the product, cost of repair, and consequential damages resulting from the product's failure. Stated differently, the consumer has only suffered an economic loss. When the only damage is to the product itself, what has happened is the consumer's expectations have not been met, and he has lost the benefit of the bargain. Accordingly, where a product damages only itself, tort law provides no remedy and the action lies in contract. The traditional economic loss rule provides a more stable framework and results in a more just and predictable outcome in product liability cases than would be the case if tort law were allowed to swallow the contract side.

Rule

The economic loss doctrine generally provides that purely economic losses are not recoverable in negligence and strict liability tort actions in the absence of personal injury or damage to property other than the product itself. In the words of the South Carolina Supreme Court, under the rule, 'there is no tort liability for a product defect if the damage suffered by the plaintiff is only to the product itself.' Kennedy, 299 S.C. 335, 341 (1989). In other words, tort liability only lies where there is damage done to other property or personal injury. Id. A simple statement of the rule begs the question "what does the term economic loss mean?" The answer to that question will be presented in the next post on the ELR.

SOURCE: www.lexology.com

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