Continued Revision of the Economic Loss Rule: Statutory Causes of Action Not Barred (Comptech International, Inc. v. Milam Commerce Park, Ltd.)
Undoubtedly, no modern doctrine has been the subject of more debate, discussion, and commentary than the economic loss rule. The Florida Bar Journal alone has published numerous articles on this subject.1 The ELR has often been applied in ways that delighted defendants and bewildered plaintiffs. Recently, however, the Florida Supreme Court expressly sought to provide order and reason to a doctrine that many perceive to be out of control.
The first such pronouncement came earlier this year in Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999).2 In Moransais, the Florida Supreme Court expressed concerns over the expansion of the ELR beyond the product liability context. The Florida Supreme Court held that the ELR does not bar tort claims against professionals. The court continued its tailoring of the ELR in Comptech Int’l., Inc. v. Milam Commerce Park, Ltd. , 1999 WL 983857 (Fla. 1999). The Comptech decision further curtails the application of the ELR by prohibiting its application to statutory causes of action. Comptech also further defines the general principles of the ELR and the “other property” exception. This article discusses the Comptech case and its implications.
The Facts of Comptech
Comptech leased warehouse space from Milam.3 The parties entered into a renewal lease that included an obligation for Milam to renovate and expand the leased space. Milam failed to obtain proper permits and its construction contractor performed the work in a manner that violated the building code.4 As a result of the foregoing, computers that Comptech stored in the space were damaged. Comptech sued Milam for, inter alia, “negligent selection of a contractor,” “negligent construction,” and “violation of section 553.84.”5 Comptech, 1999 WL 983857 at *3. The Third District Court of Appeal held that by virtue of the lease agreement, Comptech’s claims were barred by the economic loss rule and its remedy, if any, was in contract.
Comptech was accepted by the Florida Supreme Court under conflict jurisdiction with Stallings v. Kenney Elec., Inc. , 710 So. 2d 195 (Fla. 5th DCA 1998). In Stallings, homeowners brought suit, also under F.S. §553.84, against an electrical subcontractor contending the contractor’s wiring work, which violated applicable codes, caused a fire. The Fifth District Court of Appeal held that such claims were not barred by the ELR.
The Rule Prior to Moransais and Comptech
In order to understand the recent changes to the ELR a review of its previous application is essential. Prior to Moransais and Comptech the ELR had taken three basic forms. They were well described by Judge Altenbernd in Woodson v. Martin, 663 So. 2d 1327 (Fla. 2d DCA 1995), quashed, 685 So. 2d 1240 (Fla. 1996):
First, there is the products liability economic loss rule: If the defendant’s product physically damages only itself, causing additional economic loss, no recovery is permitted in “tort.”
Second, there is the contract economic loss rule: If the parties have entered into a contract, the obligations of the contract cannot be relied upon to establish a cause of action in tort for the recovery of purely economic damages. This rule is best exemplified by AFM Corp. v. Southern Bell Telephone & Telegraph Co. , 515 So. 2d 180 (Fla. 1987). If the plaintiff sues in negligence under these circumstances, the standard of care alleged must be based upon some broader societal interest and not merely on the obligations between the parties established in their contract. There must be a separate, “independent tort.” Id. at 181.
Finally, there is the negligence economic loss rule: Common law negligence will not be expanded to protect economic interests in the absence of personal injury or property damage unless the judiciary is convinced that a strong public policy requires an expansion of the common law to protect specific economic interests.
Id. at 1331 (Altenbernd, J., dissenting).
The product liability ELR is the origin of the doctrine.6 It is justified by reasoning that where a product fails and damages only itself, commercial parties are free to bargain for warranty protection.
It is the second form of the ELR that has often been implicated with regard to statutory causes of action. The proponent of the ELR argues that because the parties have a contract, the only remedy that may be found is in the contract. Prior to Comptech the district courts approached the question of how the ELR interacts with statutorily created causes of action with varied reasoning. Some courts attempted to apply the court’s holding in HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238 (Fla. 1996), which concluded fraudulent inducement claims were not barred by the ELR because the fraud constituted an independent tort. Thus, the ELR was applied where the statutory cause of action could be described as a “statutory tort” and the action was based upon the same elements as the breach of contract.7 Other courts simply applied the ELR to bar statutory causes of action if such claims were not “independent of the breach of contract.”8 Other courts refused to apply the ELR to statutory causes of action.9
The third form of the ELR is perhaps the most amorphous. In the past it was often applied to bar tort claims against professionals.10
Statutory Causes of Action Not Barred by the Rule
The Florida Supreme Court’s opinion in Comptech first addresses the issue of how the ELR interacts with statutory causes of action. The court, without difficulty, concludes that “the economic loss rule does not bar statutory causes of action.”11 The court reasons “that the Legislature has the authority to enact laws creating causes of action. If the courts limit or abrogate such legislative enactments through judicial policies, separation of powers issues are created, and that tension must be resolved in favor of the Legislature’s right to act in this area.”12 The Comptech court cites with approval four cases following this reasoning.13
The court’s holding is consistent with the well established body of law concerning the role of the judiciary in applying legislative enactments. Courts have long limited their role to the interpretation of statutes and application of the legislature’s intent.14 Accordingly, courts have refused to substitute their view for that of the legislature so as to adhere to the intent of the legislature.15
Effect of a Contract on Statutory Claims
After Comptech, it is an open question whether the existence of a contract between the parties has any significance. The answer is probably yes, but only in limited circumstances. The existence of a contract potentially bears on two issues relating primarily to statutory civil theft claims. First, it could be relevant to whether the elements of the statutory cause of action are satisfied; and second, it could be relevant to whether the legislature intended for the statutory cause of action to exist where the parties have a contract.
An example of the significance of the first issue is presented by Rosen v. Marlin, 486 So. 2d 623 (Fla. 3d DCA 1986). In Rosen, the effect of a contract between the parties on a civil theft claim was considered before the ELR was commonly applied in Florida. In essence, the Rosen court concluded that the requirements of the civil theft statute were not satisfied where a genuine dispute existed regarding the amount owed under a contract. The existence of the contract defined the dispute and the parties’ relationship. Thus, the requirement of the knowing use of the property of another was not satisfied where the matter concerns disputed funds (under a contract) rather than specifically identifiable funds.16
It is understandable how this interpretation of the statute later became described as the application of the ELR.17 This application is no longer permissible because Comptech prohibits the application of the ELR to statutory causes of action. Nevertheless, that does not mean that every breach of contract claim is now a statutory civil theft. Courts will continue to perform their traditional role of interpreting legislative intent and ensuring the requirements of statutory causes of action are satisfied. Thus, in the wake of Comptech, courts will simply analyze whether the requirements of a given statutory action are met under the circumstances presented.
Accordingly, the second issue probably will not be implicated absent an expression by the legislature that a contract between the parties has significance. The court in Comptech quoted with approval Facchina v. Mutual Benefits Corp. , 735 So. 2d 499 (Fla. 4th DCA 1999), in which the Fourth District reasoned that the legislature’s use of the terms “any person” and “any loss of injury,” evidenced the intent not to apply any judicial limitations on the statutory cause of action.18 Thus, absent a legislative expression that a statutory action does not apply to contracting parties, the statutory action should be available if its elements are satisfied.
“Other Property” Exception Redefined by Comptech
The Florida Supreme Court went much further than resolving the inapplicability of the ELR to statutory causes of action in Comptech. As in Moransais, the court reiterated that the ELR has been applied “well beyond [the Court’s] original intent.”19 The court sought to restore some order to the ELR by examining the origins of the ELR and the application of the “other property” exception to non-product liability cases.
The court explained that the ELR originates from the products liability context.20 The policy justification for the ELR is that where a product malfunctions and damages only itself the purchaser is not in need of the special protections provided by tort law.21 The purchaser is free to bargain for warranty protection or lack thereof. On the other hand, where the product causes personal injury or damages “other property” the policy supports tort liability. This forms the basis for the “other property” exception.
The Comptech court expressed reservations about the application of the ELR outside the product liability context:
Had the courts adhered to these requirements (a product, the product damaging itself, and economic losses), the confusion that has abounded in this area of the law would have been minimized. [Although] the economic loss rule has some genuine, albeit limited, value in tort and contract law [it] cannot be used as a barrier to legitimate causes of action whether they be statutory or common law.22
The Comptech court then addressed Comptech’s argument, rejected by the district court, that the damaged computers were other property. Consistent with the court’s reasoning that the ELR had been expanded beyond its logical bounds, it reasoned that the “other property” exception “is not truly applicable to a situation. . . where the subject of the contract is a service.”23 The court held that to the extent that “the warehouse is the object of the contract, the computers in the warehouse are indeed ‘other property.’”24 It appears that the rule for service contracts is that other property constitutes property that is not the “object” of the contract. The effect of this apparent expansion of the other property exception is discussed in more detail below.
Future of the Economic Loss Rule
Plainly, any application of the ELR outside of product liability cases is suspect. Moransais virtually eliminated application of the ELR in its third form relating to professional liability. Comptech has eliminated application of the ELR to statutory causes of action. In addition, Comptech limits application of the ELR to service contracts through an expansive view of the other property exception. The open questions are what is the effect of this view of the other property exception and are further revisions of the ELR in the future.
This analysis begins with an examination of the court’s current formulation of the “other property” exception to service contracts. As discussed above, damage to items other than the “object” of the service contract are “other property.” This rule probably is more easily described than applied. For example, consider the situation where a consumer contracts for the replacement of an automobile radiator. Damage to personal property within the car is certainly other property under Comptech ; however, what if the car is scratched while at the shop? The application of the other property exception depends on whether the object of the contract is defined as the radiator or the entire automobile. Comptech instructs that the object of the contract is the radiator, and, thus, the ELR does not bar this claim.25
This does not mean that tort recovery will be automatically available for the scratched car. Some boundary between tort and contract law is necessary. Otherwise, virtually every suit would be for negligent performance of contract and all certainty would be eliminated in the commercial context.
The common law defined the boundary between tort and contract long before the ELR was embraced in Florida. This body of law arises from the situation where the plaintiff seeks to assert tort damages or tort theories arising from a breach of contract. Courts addressed this issue in terms of tort duty. Simply stated, courts required some duty in tort that was more than a duty to perform under the contract.26 This duty might be not to cause personal injury through the want of reasonable care. In Comptech, it appears that the tort claims were not barred because §553.84 creates a statutory duty.
When the Florida Supreme Court first applied the ELR to service contracts in AFM Corp. v. Southern Bell Tel. & Tel. Co., 515 So. 2d 180 (Fla. 1987), it mixed the foregoing analysis with the ELR. In AFM, the plaintiff contracted for a commercial telephone listing and call forwarding services. The defendant listed the wrong number and its call forwarding service did not function properly. To recover its lost business profits, the plaintiff chose to proceed on a negligence theory alone. The court reasoned the defendant owed the plaintiff no duty and that the plaintiff’s claim was barred by the ELR because it sought purely economic damages.
The court is now obviously dissatisfied with this confusing doctrine, but not with the existence of a necessary boundary between tort and contract remedies. The court expresses this view of AFM in Moransais : “While we continue to believe that the outcome of [ AFM ] is sound we may have been unnecessarily over-expansive in our reliance on the economic loss rule as opposed to fundamental contractual principles.”27 The court repeated the foregoing in Comptech.28
Reading the court’s dissatisfaction with application of the ELR beyond the product liability context leads one to question why it did not simply limit the ELR to product cases rather than engage in an extensive analysis of the other property exception. Justice Wells’ concurrence in Comptech suggests that the court should have so held. He states: “I would expressly state that [the ELR’s] application is limited to product claims and would recede from AFM Corp. v. Southern Bell Telephone & Telegraph Co., 515 So. 2d 180 (Fla. 1987).”29
There are two interrelated concerns with receding from AFM. First, as discussed above, some boundary between tort and contract is necessary. Second, traditional notions of standing mandate that legal doctrine be developed in the context of a factual controversy that presents the issue.30 Comptech did not present a concrete factual opportunity to adequately define the boundaries between tort law and contract law in the nonproduct setting. Without an opportunity to discuss the “fundamental” principles referred to in Moransais and Comptech, the court probably would have created confusion rather than clear law.
It seems reasonable to conclude that when presented with the appropriate case, the Florida Supreme Court may indeed recede from AFM and return to traditional principles of law to define the boundaries between tort and contract for non-product- liability cases. In many cases the result might be the same; however, it would be based on sound reasoning through the analysis of whether a tort duty exists rather than a mechanical application of the ELR.31
An example of how this analysis might occur is presented in Palau Int’l Traders, Inc. v. Narcam Aircraft, Inc., 653 So. 2d 412 (Fla. 3d DCA 1995). In Palau, the buyer of an airplane sued a mechanic, with whom it was not in privity, for negligent repairs and inspection occurring prior to the sale. The majority focused on the nature of the buyer’s damages—economic damages only for an unfit airplane—to conclude that claims were barred by the ELR. Judge Cope concurred with the result only. Id. at 418. He focused on whether the mechanic owed the buyer any duty, rather than on the type of damages sought. Id. The type of analysis undertaken by Judge Cope appears consistent with the traditional doctrine that the Florida Supreme Court might adopt in lieu of applying the ELR to service contracts.
Florida’s Supreme Court has taken tremendous steps to restore the ELR to its logical and traditional application. Comptech has made clear that the ELR does not apply to statutory causes of action. In addition, the other property exception appears to have been greatly expanded with regard to service contracts. It also appears that further revision of the application of the ELR to service contracts—and the boundary between tort and contract—can be expected in the future.
1 See Nancy C. Wear, Planning Ahead: Some Tips for the Complaint Drafter Dealing with the Economic Loss Rule, 73 Fla. B.J.
57 (May 1999); Theresa Montalbano Bennett, Lies and Broken Promises: Fraud and the Economic Loss Rule After Woodson v. Martin, 70
Fla. B.J. 46 (May 1996); Paul J. Schwiep, The Economic Loss Rule Outbreak: The Monster that Ate Commercial Torts, 69
Fla. B.J. 34 (Nov. 1995); Daniel M. Bachi and Brad D. Rockenbach, The Practical Limitations of the Economic Loss Rule, 69
Fla. B.J. 89 (Nov. 1995); Lynn E. Wagner and Richard A. Solomon, Finally a Concrete Decision: The Supreme Court of Florida Ends the Confusion Surrounding the Economic Loss Doctrine, 68
Fla. B.J. 46 (May 1994); Matthew S. Steffey, Florida’s Economic Loss Rule: A Critical Look at the Cases, 64
Fla. B.J. 19 (May 1990).
2 For a thorough discussion of Moransais, see Steven B. Lesser, Chipping Away at the Economic Loss Rule, 73
Fla. B.J. 22 (Oct. 1999).
3 Comptech, 1999 WL 983857 at *3.
4 Comptech Int’l., Inc. v. Milam Commerce Park, Ltd., 711 So. 2d 1255, 1264 (Fla. 3d D.C.A. 1998) (Cope J., dissenting).
5 Fla. Stat. §553.84 (1995) provides: “Notwithstanding any other remedies available, any person or party, in an individual capacity or on behalf of a class of persons or parties, damaged as a result of a violation of this part or the State Minimum Building Codes, has a cause of action in any court of competent jurisdiction against the person or party who committed the violation.”
6 Florida Power & Light Co. v. Westinghouse Elec. Corp., 510 So. 2d 899 (Fla. 1987) (where generator failed and damaged only itself, tort claims barred by the economic loss rule).
7 See, e.g., Sarkis v. Pafford Oil Co., Inc., 697 So. 2d 524, 527 (Fla. 1st D.C.A. 1997) (civil theft and civil racketeering claims barred by ELR).
8 See, e.g., Moore Business Forms, Inc. v. Iberoamerican Electronics, S.R.L., 698 So. 2d 611, 613 (Fla. 3d D.C.A. 1997).
9 See, e.g., Delgado v. J.W. Courtesy Pontiac GMC-Truck, Inc., 693 So. 2d 602 (Fla. 2d D.C.A. 1997) (ELR not applicable to action brought under the Florida Deceptive and Unfair Trade Practices Act).
10 See Moransais v. Heathman, 24 Fla. L. Weekly S308 (Fla. July 1, 1999) (reviewing application of the ELR to tort claims against professionals).
11 Comptech, 1999 WL 983857 at *8.
12 Id. at *5.
13 Facchina v. Mutual Benefits Corp. , 735 So. 2d 499 (Fla. 4th D.C.A. 1999) (ELR does not bar claims for unauthorized publication under
Fla. Stat. §540.08); Delgado v. J.W. Courtesy Pontiac GC-Truck, Inc., 693 So. 2d 602 (Fla. 2d D.C.A. 1997) (claims under Deceptive and Unfair Trade Practices Act not barred by the ELR); Rubio v. State Farm Fire & Cas. Co., 662 So. 2d 956 (Fla. 3d D.C.A. 1995) (insured’s bad faith action under
Fla. Stat. §624.155 not barred by the ELR).
14 See Citizens of the State of Fla. v. Public Serv. Comm’n, 435 So. 2d 784 (Fla. 1983) (“[w]here the words of a statute are clear and unambiguous, judicial interpretation is not appropriate to displace the expressed intent.”)
15 See In re Investigation of Circuit Judge of Eleventh Judicial Circuit of Fla., 93 So. 2d 601 (Fla. 1957) (the Judiciary’s function is “to interpret law as given. . . by the Legislature [and it is not] permitted to substitute” its view of what the law should be); Karell v. Miami Airport Hilton/Miami Hilton Corp., 668 So. 2d 227 (Fla. 1st D.C.A. 1996) (court’s task is to interpret and apply statute as written).
16 Fla. Stat. §812.014(1) provides: “(1) Any person commits theft if he or she knowingly obtains or uses, or endeavors to obtain or to use, the property of another with intent to, either temporarily or permanently: (a) Deprive the other person of a right to the property or a benefit from the property. (b) Appropriate the property to his or her own use or to use of any person not entitled to the use of the property.” See also Sanchez v. Enchinas, 627 So. 2d 489 (Fla. 3d D.C.A. 1993) (contractual dispute over funds negates wrongful intent necessary to maintain statutory civil theft claim); Gambolati v. Sarkisian, 622 So. 2d 47 (Fla. 4th D.C.A. 1993) (accord).
17 Sarkis v. Pafford Oil Co., Inc., 697 So. 2d 524, 527 (Fla. 1st D.C.A. 1997) (civil theft claim barred by ELR unless facts allege action “independent” of breach of contract).
18 Comptech, 1999 WL 983857 at *3.
19 Comptech, 1999 WL 983857 at *5.
20 Id. at *8–11.
22 Id. at *11.
23 Id. at *7.
25 Note that the application of the other property exception to products cases is set forth in Casa Clara Condominium Ass’n v. Charley Toppino & Sons, Inc., 620 So. 2d 1244 (Fla. 1993). Casa Clara held that the other property must be defined in terms of the product purchased by the plaintiff rather than the product sold by the defendant. Thus, damage to an entire home purchased by the plaintiff from defective concrete sold by the defendant would not qualify as other property damage.
26 See, e.g., Weimar v. Yacht Club Point Estates, 223 So. 2d 100, 103 (Fla. 1969); Masciarelli v. Maco Supply Corp. , 224 So. 2d 329 (Fla.1969); Griffith v. Shamrock Village, Inc. , 94 So. 2d 854 (Fla.1957).
27 Moransais, 24 Fla. L. Weekly at S311.
28 Comptech, 1999 WL 983857 at *12.
29 Id. at *18.
30 Department of Revenue v. Kuhnlein, 646 So. 2d 717, 720–21 (Fla. 1994) (case must present a controverted issue; courts may not render advisory opinions).
31 For example, the application of the ELR in at least one case, McDonough Equip. Corp. v. Sunset Amoco West, Inc., 669 So. 2d 300 (Fla. 3d D.C.A. 1996) is implicitly overruled by Comptech. In McDonough the defendant was hired to replace underground gasoline piping and tanks with updated equipment. The defendant struck a gasoline pipeline contaminating the surrounding service station property. The court relied on AFM to conclude that the ELR barred the plaintiff’s tort claims. Plainly, under Comptech the tanks and piping are the object of the contract and the surrounding site is other property. Thus, the claims would not be barred by the ELR. Nevertheless, the issue of whether the defendant owed the plaintiff any duty remains.
Raymond W. Valori is a trial attorney with the law firm of Robles & Gonzalez, P.A., Miami. He concentrates his practice in the areas of complex litigation and products liability. Mr. Valori received his bachelor’s degree in architectural engineering from Pennsylvania State University in 1988 and his J.D., magna cum laude, from the University of Miami School of Law in 1994.
This column is submitted on behalf of the Trial Lawyers Section, Michael G. Tanner, chair, and D. Keith Wickenden, editor.