by Judge Lisa T. Munyon, Judge Alice L. Blackwell, and Paul Sarlo
The economic loss rule, a doctrine that is at the “intersection between contract and tort law [and that] has confounded courts and counsel for decades,”1 is traceable to English case law that predates Abraham Lincoln’s presidency. In Hadley v. Baxendale, 9 Ex. 34 (1845) — a case upon which American courts have derived their rules regarding damages for breach of contract — the Court of Exchequer Chamber limited contractual damages to amounts that parties had negotiated when they formed the contract.2 After numerous challenges to Hadley in cases involving claims for defective products, courts recognized that the general public needed protection from faulty products that contract law could not provide through warranties,3 which may guarantee the reimbursement of a party’s economic losses but offer no remedy for personal injury or property damage. These challenges to Hadley caused the boundaries between tort law and contract law to fade. To recreate those boundaries, courts designed the economic loss rule as a barrier between tort and contract claims.4 The rule stands for the principle that “because parties may allocate risks and remedies through contract negotiations, tort remedies should not be available simply because an unhappy contracting party deems negotiated contractual remedies to be insufficient.”5
Since its inception, Florida’s economic loss rule had developed into something of a protean doctrine, having taken on varied applications. In 1987, the Florida Supreme Court in Fla. Power & Light Co. v. Westinghouse Elec. Corp., 510 So. 2d 899 (Fla. 1987), enshrined the economic loss rule into common law by adopting the U.S. Supreme Court’s holding in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 866 (1986), in which the Court reasoned: “When a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong.” From there, the Florida Fifth District Court of Appeal held that the economic loss rule barred claims for tortious breach of fiduciary duty when parties have a contract that defines their relationship.6 Just the day before the Fifth District’s decision, the Florida Supreme Court chafed at the expansion of the economic loss rule beyond its product liability origins when it stressed that it had “never intended [the economic loss rule] to bar well-established common law causes of action.”7 The Third District then aligned itself with the Supreme Court.8 The Supreme Court unanimously reined in the economic loss rule in Indemnity Insurance Company of North America v. American Aviation, Inc., 891 So. 2d 532, 542-43 (2004), confining its application to just two scenarios: 1) when parties have negotiated remedies in a contract, and 2) when a defective product damages itself but does not harm a person or damage other property.
American Aviation was the status quo for nearly a decade. Now the Supreme Court, at least in part, has disavowed it outside of the products liability context. In Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc., 110 So. 3d 399 (Fla. 2013), the Supreme Court retracted the economic loss rule, restoring the doctrine to its original conception: as a bar to recovery of economic losses in products liability cases. That is, the Court left unchanged the second scenario under American Aviation but withdrew the first scenario, eliminating the application of the economic loss rule as a bar to tort claims seeking economic damages that arise from a contractual relationship. Both Chief Justice Polston and Justice Canady, in their respective dissenting opinions, decried the majority’s decision: “With today’s decision, we face the prospect of every breach of contract claim being accompanied by a tort claim.”9 Their uneasiness is tied to the U.S. Supreme Court’s apprehensions in East River Steamship — the very case from which the Florida Supreme Court espoused the economic loss rule more than 25 years earlier: “It is clear…that [without a boundary between tort law and contract law], contract law would drown in a sea of tort,” the U.S. Supreme Court wrote, in unanimity.10 Now, Florida’s trial courts will encounter considerable challenges in navigating through that tumultuous sea.
The majority opinion in Tiara Condominium — mostly a historical overview of the economic loss rule — contains neither reassurances nor explanations regarding why these waters will not rise. The majority limits the rationale for its opinion to one line: “Our experience with the economic loss rule over time, which led to the exceptions to the rule, now demonstrates that expansion of the rule beyond its origin was unwise and unworkable in practice.”11 While Justice Pariente, in her concurring opinion, backs the majority with a much more detailed analysis, attorneys and judges should remember that her concurrence is not precedent but merely persuasive insight. Justice Pariente proposes that courts, in the absence of the economic loss rule, should now turn to fundamental, longstanding principles of contract law to ascertain the boundaries between tort law and contract law.12 She also tries to assuage fears that the majority opinion will usher in a new wave of viable tort claims by citing the fact that, to bring a valid tort claim, plaintiffs must still “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.”13 This statement evokes aspects of the Court’s majority opinion in American Aviation — aspects that former Justice Cantero aptly summarized in his concurrence: “[P]laintiffs whose cases fall outside of the economic loss rule must still satisfy ‘the traditional negligence principles of duty, breach, and proximate cause….’ The ‘duty’ prong remains a strong filter in these cases — virtually as strong as the rule itself.”14
Justice Pariente, however, may be overly optimistic in her belief that fundamental principles of contract law provide courts with a natural dividing line between tort and contract claims. Distinctions between these claims are often murky. For one, damages in tort can be indistinguishable from contractual damages. In contract law, damages are intended to return the parties to their contractual expectations. Contrast that premise to current tort law: “Ordinarily, the measure of damages in tort is designed to make the plaintiff ‘whole’ — that is, to put him in the same position he would have been in had his loss not occurred.”15 Also, when a contract creates the setting for a tort claim, economic relationships tend to be complex, “intertwined so intimately…that…[they] may have far-reaching consequences.”16 Without the benefit of the economic loss rule in these instances, courts have struggled to separate tort claims from breach of contract claims.17 In short, when courts face cases of pure economic loss, they “confront the potential for liability of enormous scope, with no easily marked intermediate points” between where liability begins and ends,18 and for that matter, where the overlap between tort law and contract law begins and ends.
While the duty prong has traditionally been a filter between these two areas of the law, the scope of a duty may be widening in Florida, rendering the filter more porous than before and leaving plaintiffs with greater flexibility to allege tort claims. In Curd v. Mosaic Fertilizer, LLC, 39 So. 3d 1216, 1222 (Fla. 2010), licensed fishermen sought recovery in negligence from a fertilizer plant whose chemicals spilled into Tampa Bay and killed marine life, even though they were not the owners of any real or personal property damaged by the pollution. Despite noting the “widely recognized principle” that courts do not permit recovery for pure economic losses when a plaintiff suffers no personal harm or property damage,19 the Florida Supreme Court held that the fishermen could recover lost income under their negligence theory because, as licensed professionals, they possessed an economic expectancy in Tampa’s waters, namely the marine life.20 Justice Polston dissented in part, expressing skepticism about whether the fishermen’s licenses set them apart from the community: “[I]f every state-licensed Floridian has a ‘special’ or ‘unique’ interest, then it seems there is endless ‘foreseeable’ liability’”21 and the parameters of duty are equally limitless. In light of the Court’s apparent expansion of the duty prong in Curd, Justice Pariente’s observation in Tiara Condominium — that plaintiffs still have to plead the required elements of a tort — may not stop the rising “sea of tort” as she anticipates. Given the ruling in Curd, Justice Cantero’s statement that the duty prong is “virtually as strong [a filter] as the [economic loss] rule itself”22 is similarly optimistic.
In this same vein, the fact that plaintiffs, to bring a viable tort claim, must demonstrate that the tort claim is “independent of any breach of contract claim”23 does not necessarily prevent them from pleading both causes of action together. Justice Pariente argues that courts, using basic principles of contract law, have discretion to dismiss tort claims that are commingled with breach of contract claims.24 But whether a tort claim is independent of a breach of contract claim may often present questions of fact,25 which courts may not appropriately consider on a motion to dismiss.26 Instead, this issue could survive beyond the pleading stage and then become the subject of an expensive, time-consuming discovery process. The reality is, as Justice Pariente acknowledges, that the “contractual privity form of the economic loss rule provided a simple way to dismiss tort claims interconnected with breach of contract claims . . . .”27 For this reason, in part, Florida’s economic loss rule has not only been workable but also helpful in legal practice. With its demise, the general public and Florida businesses will struggle to determine if they can continue to allocate the risks and rewards of a transaction by contract. The legal community will struggle to determine the line that remains, if any, between contract and tort. Courts and practitioners will undoubtedly labor to define where a “product” ends and “other property” begins28 and to determine whether common law contract principles provide protection from tort claims equivalent to the contractual privity form of the economic loss rule.
Not unexpectedly, talented lawyers will now take advantage of the inchoate shift away from the economic loss rule, using intelligent pleading to make tort claims appear to be companions with, rather than interlopers among, breach of contract claims, and vice versa. The scene may be something like the one Benjamin Austin, a young politician in 18th century Boston, bemoaned in a rare pamphlet that lies in the archives at the Harvard University Law Library: “Judge and Jury must [sit] for hours to hear two artful, cunning [lawyers] dispute.”29 Whether this scene was intended by the majority in Tiara Condominium, one thing is certain, tort and contract claims are strange bedfellows no more.
1 Eddward P. Ballinger, Jr. & Samuel A. Thumma, The History, Evolution and Implications of Arizona’s Economic Loss Rule, 34 Ariz. St. L. J. 491, 491 (2002).
2 Id. at 492 (citing Hadley v. Baxendale, 9 Ex. 341 (1845)).
3 Id. (citing Seely v. White Motor Co., 63 Cal. 2d 9, 15 (Cal. 1965)).
5 Thomas Wade Young, Ruminations on the Relationship Between the Economic Loss Rule and Claims for Breach of Fiduciary Duty, 86 Fla. B. J. 9 (Mar. 2012).
6 Detweiler v. Bank of Central Fla., 736 So. 2d 757, 759 (Fla. 5th DCA 1999).
7 Moransais v. Heathman, 744 So. 2d 973, 983 (Fla. 1999).
8 Invo Fla., Inc. v. Sumerset Venturer, Inc., 751 So. 2d 1263 (Fla. 3d DCA 2000).
9 Tiara, 110 So. 3d at *11 (Canady, J., dissenting).
10 E. River Steamship, 476 U.S. at 866.
11 Tiara Condominium, 110 So. 3d 399 at 7.
12 Id. at *9 (Pariente, J., concurring).
13 Id. (citing Lewis v. Guthartz, 428 So. 2d 222, 224 (Fla. 1982)).
14 American Aviation, 891 So. 2d at 546 (Cantero, J., concurring).
15 Kenneth S. Abraham, The Forms and Functions of Tort Law 282 (3d ed. 2007).
16 Harvey S. Perlman, Interference with Contract and Other Economic Expectancies: A Clash of Tort and Contract Doctrine, 49 U. Chi. L. Rev. 61, 72 (1982).
17 See, e.g., City of Malvern v. Jenkins, ___ S.W.3d ___, 2013 WL 388730 at *8 (Ark. Jan. 31, 2013) (stating that the difference between a tort claim and a contract claim is “not exact”); Chatterjee v. Glynn, No. 931912, 1994 WL 879735 at *3 (Mass. Jan. 28, 1994) (commenting that “it is not clear that there is any meaningful difference between a tort claim for malpractice and a third-party-beneficiary claim for breach of contract”); Paul v. Escambia Cnty. Hosp. Bd., 281 So. 2d 817, 821 (Ala. 1969) (noting that the distinction between a tort claim and a contract claim is a “close question”).
18 Perlman, Interference with Contract and Other Economic Expectancies: A Clash of Tort and Contract Doctrine, 49 U. Chi. L. Rev. at 72.
19 Curd, 39 So. 3d at 1123-24 (quoting Union Oil Co. v. Oppen, 501 F.2d 558, 563 (9th Cir. 1974)).
20 Id. at 1128.
21 Id. at 1233 (Polson, J., dissenting).
22 American Aviation, 891 So. 2d at 546 (Cantero, J., concurring).
23 Tiara Condominium Ass’n, 2013 WL 828003 at *9 (Pariente, J., concurring).
25 See, e.g., Occu-Health, Inc. v. Miss. SpaceServices, No. 1:06CV159-HSO-JMR, 2008 WL 2037443 at *6 (S.D. Miss. May 9, 2008) (holding that “material questions of fact remain as to [p]laintiff’s tortious breach of contract claim, including, but not limited to, whether there was . . . an independent tort committed by [d]efendants”).
26 See, e.g., Fla. Farm Bureau Gen. Ins. Co. v. Ins. Co. of North. Am., 763 So. 2d 429, 434-35 (Fla. 5th DCA 2000) (stating that a trial court should not resolve issues of fact on a motion to dismiss).
27 Tiara Condominium Ass’n, 2013 WL 828003 at *9 (Pariente, J., concurring).
28 Compare E. River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 867 (1986), in which the U.S. Supreme Court found the product to be the turbine (not the turbine’s component parts and not the ship in which the turbine was installed), which was supplied by the manufacturer as an integrated package or a single unit, with Casa Clara Condominium Association, Inc. v. Charley Toppino and Sons, Inc., 620 So. 2d 1244 (Fla. 1993), in which the Florida Supreme Court found the product to be the building, rather than the defective concrete supplied by the manufacturer.
29 Benjamin Austin, Observations on the Pernicious Practice of Law 24 (True & Weston 1819), available at 13 Am. J. Legal Hist. 244, 266 (1969).
Judge Alice Blackwell is a circuit judge currently sitting in the Complex Civil Litigation Division [Business Court] in the Ninth Judicial Circuit. She has served as a circuit judge since 1991. She is also an adjunct professor at the Dwayne O. Andreas School of Law for Barry University where she currently teaches commercial law. Judge Blackwell received her B.A. from Furman University and her J.D. from The University of South Carolina.
Judge Lisa T. Munyon currently serves in the Complex Civil Litigation Division [Business Court] and as administrative judge of the Circuit Civil Division of the Ninth Judicial Circuit. She has been a circuit judge since 2003. She has a B.S. in finance (with high honors) (1982) and J.D. (1985) from the University of Florida.
Paul Sarlo is a fellow at the Georgetown University Law Center’s Institute of International Economic Law, where he is also pursuing his masters of law. He was formerly the staff attorney for the Ninth Judicial Circuit Court of Florida’s Complex Business Litigation Court.
This column is submitted on behalf of the Real Property, Probate and Trust Section, Margaret Ann Rolando, chair, and Kristen Lynch and David Brittain, editors.