Planning Ahead: Some Tips for the Complaint Drafter Dealing with the Economic Loss Rule
The hearing on summary judgment, the day of calendar call, or, worse, the day of the charge conference is not the day to find out that the economic loss rule has eviscerated the plaintiff’s case. Similarly, the defendant’s counsel ought not to suppose that victory is automatic on this issue, because the current state of the law is by no means clear, and there is no assurance that, if the defense is inadequately argued, a reversal on appeal necessarily will follow. Thus, both parties should develop an early understanding of the economic loss rule. This article is intended to provide some guidance to the practitioner-drafter in anticipating that defense, and, in that context, to present the current status of this court-made rule in order to assist counsel for plaintiff and defendant in making the most effective presentation for their respective clients. In developing the following strategies, the author had in mind practitioners representing entities, regardless of formality of organization (corporation, partnership, sole proprietorship), operating in a commercial setting.
Many cases that are lost because of the economic loss rule might have been saved by careful drafting of the complaint. What usually happens is that, with the client’s contract in hand and the client’s cry of “I was robbed!” ringing in counsel’s ears, the complaint comes steaming from the printer, replete with a combination of contract and tort language. More than 10 years after the economic loss rule was adopted by the Supreme Court of Florida,1 that still happens. The practitioner is urged to step back, to review the facts, and to assess the relative positions of the potential plaintiff and the potential defendant. Here are some questions which counsel should consider before writing a complaint.
What Does the Contract Say?
While it is true, as was said in Casa Clara Condominium Assn. v. Charley Toppino & Sons, Inc., 620 So. 2d 1244, 1245 (Fla. 1993),
that “Plaintiffs find a tort remedy attractive because it often permits the recovery of greater damages than an action on a contract and may avoid the conditions of a contract,” the contract also may contain language which makes early settlement or resolution by summary judgment likely to be a shorter and more certain route to victory for the client.2 Another advantage of suing on the contract is that many, if not most, contracts contain useful provisions for an award of attorneys’ fees which may not be available using other theories. In short, the surest way to avoid economic loss rule problems is to proceed on contract theories alone. The difficulty arises where the parties to the contract either did not or (as discussed below) could not negotiate terms sufficient to protect against the behavior that actually caused the injury.
What Else Does the Contract Say?
Put another way, can we sue in tort after we negotiated our own way out of a contract action? It is a truism that many clients hire an attorney too late. That is, they negotiate their contract without benefit of counsel, or accept the form proffered by the other party, and, contractually speaking, hold their noses and jump off the roof, hoping for a soft landing. As a practical matter, after the injury has been suffered, counsel may be hard-pressed to find remedies for the commercial nondrafter. A significant example of that problem, resolved against the plaintiff on the ground that the economic loss rule barred recovery, arose in Comptech International, Inc. v. Milam Commerce Park Ltd., 711 So. 2d 1255 (Fla. 3d DCA 1998) (on rehearing). Comptech had an existing lease with Milam, and the parties entered into a second lease under which Milam agreed to build out a portion of the space for Comptech’s computer hardware business. During the build-out, Comptech complained that the construction was not being done in a timely or workmanlike manner, and that its office space and computers were being damaged in the process.3 The subsequent lawsuit alleged negligence by Milam in selecting the contractor to do the work, negligence against the contractor (a “dissolved corporation”), damages from violation of the South Florida Building Code, punitive damages, and return of rent illegally collected.4
Comptech’s lawyers did not allege any breach of contract claims, and the court obligingly tells the reader why: “The lease contained an indemnity provision whereby Comptech agreed to indemnify Milam from all claims for damages arising under the use and occupancy of the premises, including any improvements.”5 Thus, presumably because counsel saw that a realistic contract claim could not be asserted, the plaintiff was forced to allege only tort claims. Throughout the opinion on rehearing the court comes back to that contract provision, barely concealing its contempt for Comptech, a commercial entity supposedly negotiating at arm’s length, which completely contracted away all of its remedies: “In fact, the parties did negotiate the allocation of risks and remedies as evidenced by the indemnification provision of the contract.”6 Thus, the contract itself provided a major obstacle to a viable breach of contract action, and it may be that the all-encompassing indemnification clause poisoned the court’s attitude toward the entire case.7 If counsel has an opportunity to participate in the contract negotiations, this type of error is unlikely to be made.
Economic Loss Rule Defense Foreseen and Prevented?
The policy behind the economic loss rule is to encourage parties to a contract to negotiate and ensure against economic losses. Contracts that have not been negotiated from scratch (a common situation in many businesses) may well lack the protections that the courts assume are present. One commentator recently wrote:
Recovery in contract [in construction cases] presents a much cleaner and less problematic route [than tort claims] although privity [between owner and subcontractors or suppliers], as always, poses a substantial impediment to claims against lower-tier participants in the construction process.8
But a contract action will not be effective unless measures have been taken in advance to ensure that those privity problems have been met, generally by having the owner contract directly with the “lower-tier participants.” The contracting process will become much more expensive on the front end in order to preserve a potential right to recover that may not be required in the majority of cases. This is a cost that is difficult to justify in a business setting, and as a result of this and other limitations on counsel’s involvement in pre-contract bargaining, the practitioner may be limited in the realistic ability to obtain contract remedies. It is at this point that navigating the minefields of the economic loss rule becomes unavoidable.
What Kind of Tort Is Involved?
Recently, in HTP v. Lineas Aereas Costarricanses, S.A., 685 So. 2d 1238 (Fla. 1996), the Florida Supreme Court determined that there are circumstances where a tort claim can survive in a contract setting. HTP appears to say that it is possible, and even easy, to defeat the economic loss rule if the plaintiff is able to allege one or more “independent torts.” In a paragraph of the HTP opinion that is widely quoted, the court said,
The economic loss rule has not eliminated causes of action based upon torts independent of the contractual breach even though there exists a breach of contract action. Where a contract exists, a tort action will lie for either intentional or negligent acts considered to be independent from acts that breached the contract.9
Those words can open the door to successful tort litigation in a contract setting, provided only that the elements of a separate tort can be established. And indeed, in subsequent cases where there is a tort issue relative to the actual negotiations for the contract, the courts have found no economic loss rule bar. For example, in Alex Hofrichter, P.A. v. Zuckerman & Venditti, P.A., 710 So. 2d 127 (Fla. 3d DCA 1998), the court held that conversion, civil theft, and constructive fraud claims were not barred by the economic loss rule. In Hofrichter, the court decided that allegations that one lawyer had wrongfully obtained or held certain fees amounted to accusations of “intentional misconduct” which were not barred by the economic loss rule.
The actual holding of HTP is narrower than the foregoing quotation would indicate because the court concluded only that recovery on a tort theory for “fraud in the inducement” is not barred by the economic loss rule; the rule continued to apply to other torts. Although the court’s opinion in HTP did what all good opinions purport to do—it decided only the case before the court—litigators wish that the court had taken the opportunity presented there to announce some global guidelines to aid future litigants, rather than the limited opinion the court issued.
Nevertheless, this still-evolving area offers great opportunities for a practitioner to exercise legal creativity for the benefit of a damaged client. This is because there are cases where the courts have refused to sanction an economic loss rule defense, even though the pre-contractual nature of the alleged misrepresentations or other tortious behavior is less apparent than in HTP.10 The dichotomy is demonstrated in Bankers Risk Management Services, Inc. v. Av-Med Managed Care, 697 So. 2d 158 (Fla. 2d DCA 1997), where the court upheld a tortious interference claim while barring a fraudulent misrepresentation count on economic loss rule grounds. Bankers, an administrator of employee health benefit plans, entered into a marketing agreement with Av-Med. When the arrangement foundered, and Bankers sued, the court barred the fraud claim, but upheld the allegations of tortious interference, quoting the HTP passage above and added,
Tortious interference is such an independent tort.. . . Bankers alleges tortious interference by Av-Med both before and after the termination of the marketing agreement. Thus, it states an independent claim, which is not barred by the economic loss rule.11
In barring recovery for the fraud claim the court found,
[Bankers] asserts fraud in the performance of the marketing agreement [and] essentially accuses Av-Med of fraudulently representing that it was properly performing its duties under the Marketing Agreement. It is so intertwined with the performance of the contract that the assertions do not rise to the level of an independent tort.12
This language appears to adhere to HTP ’s distinction between fraud in the performance of a contract (barred by the economic loss rule) and fraud in the negotiation of a contract (which is not so barred, after HTP ), but it also appears to contradict the court’s contrary result in Bankers as to tortious interference. Logic indicates that either the tortious interference that occurred before the termination of the marketing agreement, or that which took place after the termination, must have been “intertwined with the performance” of that marketing agreement.13 Indeed, Bankers could hardly be blamed for shaking its head in bewilderment at the outcome.
Where Do We Go from Here?
These contradictory results may reflect a grappling (at least in the district courts) with some principles that are set out with admirable clarity in an article that Frank Nussbaum published just before HTP was decided, titled The Economic Loss Rule and Intentional Torts: A Shield or A Sword?, 8 St. Thomas L. Rev. 473 (Spring 1996). In the course of his analysis Professor Nussbaum expressed a hope that the Supreme Court would make a significant distinction between products liability cases and intentional torts in ruling on the then-pending Woodson v. Martin, 685 So. 2d 140 (Fla. 1996) (decided with HTP, upholding claim based on allegation of fraud in the inducement), HTP and others, correctly noting,
[T]here is an urgent need to clarify the extent to which the economic loss rule doctrine will be applied [in intentional tort cases] — specifically, whether the economic loss rule prevents recovery of purely economic damages arising out of a contractual relationship and which would not have occurred but for an intentional act.14
While Professor Nussbaum’s invitation was not accepted directly by the Supreme Court, the cases that have been decided since HTP and Woodson v. Martin fall into two broad groups: those that bar recovery under the economic loss rule (like Comptech and Hotels of Key Largo, Inc. v. RHI Hotels, Inc., 694 So. 2d 74 (Fla. 3d DCA 1997), reh. denied, rev. denied, 700 So. 2d 685) and those that have allowed recovery in the face of an economic loss rule defense in one of two subcategories: a finding of an independent tort, or a finding that the defendants’ violation of a statute allowed recovery, regardless of the economic loss rule.
ELR-Proof Independent Torts: The List Grows
The “independent tort” group has expanded beyond “fraud in the inducement” to include civil theft, conversion, and constructive fraud. In Hofrichter, 710 So. 2d at 127, for example, the court held that summary judgment was erroneously granted to the defendant, because the allegations of intentional misconduct—that defendant Zuckerman “embezzled or converted partnership property to his own use,”—stated a cause of action that should not be doomed by application of the economic loss rule. Thus, where it is possible to state a claim in terms of a criminal or quasi-criminal cause of action such as theft, embezzlement, or conspiracy to defraud, the practitioner should do so.
As this area continues to evolve, the courts are identifying more torts that are not barred by the economic loss rule. In Facchina v. Mutual Benefits Corp., 23 Fla. L. Weekly D2185 (Fla. 4th DCA September 23, 1998), defamation and invasion of privacy were added to the category of independent torts which can survive a motion to dismiss on economic loss rule grounds. The Facchina court emphasized that, on an appeal from a motion to dismiss, no effort would be made to foresee whether the plaintiff could prove the elements of each tort or the damages suffered, and the drafter should heed the court’s words of caution. The point here is that allegations of intentional torts will increasingly be a basis for confidence that economic loss rule will not be a complete bar to recovery at the motion to dismiss stage.
Can Statutory Violation Form Separate Basis for Recovery?
Perhaps the most intriguing group of post- HTP cases are those that have found that a cause of action arising from violation of a statute will survive an economic loss rule defense, although the leading economic loss rule case itself rejected the concept. In Casa Clara, the court dismissed the whole idea without analysis, saying merely, “The district court also held that Toppino, a supplier, had no duty to comply with the building code.”15 The Third District Court of Appeal in Comptech came to the same conclusion as the court in Casa Clara :
[T]he economic loss rule does not permit a cause of action for economic damages brought under the South Florida Building Code where the claims are clearly contractual in nature and the cause of action is inseparably connected to the breaching party’s performance under the agreement. (citations omitted)16
This refusal to apply the plain meaning of a statutory provision is puzzling, since the actual statute (F.S. §553.84)17 contains no limiting language, nor any hint that the legislature intended to include the bar of the economic loss rule in this enactment.
On the other hand, §553.84 itself that was used to defeat an economic loss rule defense in Stallings v. Kennedy Electric, Inc., 710 So. 2d 195 (Fla. 5th DCA 1998). In that suit by homeowners against an electrical subcontractor, the court held that the economic loss rule did not preclude the homeowner’s statutory claim for violation of the building code, the court finding that the statute’s opening words, “Notwithstanding any other civil remedies available,” meant that “barring [homeowners’] statutory claim under §553.84 based on the economic loss rule would essentially abolish the statutory cause of action.”18 Despite the contrary holding in Comptech on this point, the Stallings court (which acknowledged its conflict with the panel opinion in Comptech, although in advance of the rehearing opinion which reached the same conclusion), quoted another Third District case19 with approval and emphasis: “ Courts cannot willy nilly strike down legislative enactments. ”20
The Second District, shortly before the Stallings opinion was issued, took a similar stance in Delgado v. J.W. Courtesy Pontiac GMC-Truck, Inc., 693 So. 2d 602, 606 (Fla. 2d DCA 1997), finding that Florida’s Deceptive and Unfair Trade Practices Act (FDUTPA), F.S. §501.201 et seq. , amounted to a legislatively mandated “new cause of action for the benefit and protection of the consuming public.” “As a new cause of action, the FDUTPA constitutes a substantive law, which creates, defines, and regulates rights which are to be administered by the courts.”21
The plaintiffs in Delgado had bought what the dealer told them was a new car. On learning that the car previously had been seriously damaged in an accident, they sued the dealer under FDUTPA, and for common law fraud.22
On appeal from a grant of the dealer’s motion for judgment on the pleadings, based on the trial court’s application of the economic loss rule, the Second District reversed and remanded, finding that the economic loss rule did not eliminate a FDUTPA claim, even though this consumer transaction was based on a written contract. In reaching that conclusion, the court relied on principles of separation of powers, holding that the “judicial policy pronouncement in the form of the economic loss rule has no application within the realm of a statutory cause of action brought under the FDUTPA.”23 This trend was followed in Facchina v. Mutual Benefits Corp., 23 Fla. L. Weekly D2185 (Fla. 4th DCA September 23, 1998) , where the Fourth District Court of Appeal joined the Fifth, the Third, and the Second in holding that a judge-made rule such as the economic loss rule would give way to an expression by the legislature of its “intent not to apply judicial limits on common law remedies” to a statutory cause of action.24 The rationale in Facchina was that argued by Professor Nussbaum: “It would be unrealistic to hold future defamation claimants to a duty to provide for remedies by contract with potential defamers.”25
The discussions in Stallings, Delgado, and Facchina seem to augur well for recovery in some future actions, establishing that the issue of recovery in the face of an economic loss rule defense is still open to discussion, litigation, and possible victory.
Despite the continued existence of the economic loss rule, recent cases indicate that the intermediate appellate courts are uneasy with this concept: If a party fails to negotiate a contract that foresees all possible sources of injury, no noncontract remedy will be available. When faced with this situation, there may be room to draft and litigate on one or more intentional tort theories, and an examination of the statutes may also be useful in fostering the client’s cause.
1 See AFM Corp. v. Southern Bell Tel. & Tel. Co., 515 So. 2d 180 (Fla. 1987).
2 The focus in this article is on controversies affecting litigants who actually had a “contract,” regardless of its terms. Thus, the significant problems of litigants without privity generally will not be explored.
3 Comptech, 711 So. 2d at 1257.
6 Id. at 1261 n.6.
7 Apparently the court also was put off by Comptech’s over-the-top damages claim: more than $2 million for property damage to its electrical systems, warehouse space, and computers, plus a demand for $5 million in punitive damages. Id. at 4.
8 Hugh McConnell, Diminished Capacity—Owners’ Ability to Sue for Construction Defects in Florida, 7 1
Fla. B.J. 64 (June 97). M r. McConnell was one of the attorneys for the disappointed homeowners in Casa Clara Condominium Assn. v. Charley Toppino & Sons, Inc., 620 So. 2d 1244 (Fla. 1993), the leading case upholding the economic loss rule.
9 HTP, 685 So. 2d at 1239.
10 See Nerbonne, N.V. v. Lake Bryan Properties, 689 So. 2d 322 (Fla. 5th D.C.A. 1997) (the court refused to apply the economic loss rule and upheld fraud claim where it determined that defendant had an “extra contractual, preexisting duty not to collude” in a scheme to defraud plaintiffs).
11 Bankers, 697 So. 2d at 161 (emphasis added).
13 Id. at 161.
14 Nussbaum at 505.
15 Casa Clara, 620 So. 2d at 1245.
16 Comptech, 711 So. 2d at 1257. The court’s reference to §553.85 appears to be a typographical error; the context makes clear that it is §553.84 that was meant.
17 The full text of §553.84 is: “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.”
18 Stallings, 710 So. 2d 195.
19 Rubio v. State Farm Fire & Casualty Co., 662 So. 2d 956 (Fla. 3d D.C.A. 1995), rev. denied, 669 So. 2d 252 (Fla. 1996).
20 Rubio, 662 So. 2d at 957 n.2 (emphasis added in Stallings, 710 So. 2d at 196).
21 Delgado, 693 So. 2d 602.
22 The Second District sustained the fraud claim as well, relying on HTP and its progeny. Delgado, 693 So. 2d at 604–605.
23 Id. at 609.
24 Facchina, 23 Fla. L. Weekly D2185 .
Nancy C. Wear practices with Patrick C. Barthet, P.A., a business law and litigation firm with offices in Miami and the Florida Keys. She concentrates in commercial litigation and appeals, and is a University of Miami graduate (A.B. 1971, J.D. 1974).
This column is submitted on behalf of the Trial Lawyers Section, Richard A. Gilbert, chair, and D. Keith Wickenden, editor.