In law school, it seemed simple enough: business relationships were generally governed by contract and warranty, and tort was reserved for conduct that hurt people or damaged property. But in practice, the line is constantly shifting: the plaintiffs’ bar – often aided by state legislatures – tries to turn routine business disputes into torts, while the defense bar responds that the parties’ relationship should be governed by the terms of their negotiated contract.
The Supreme Court chose an apt metaphor for this battle in a 1986 maritime case, worrying that if this trend were allowed to develop too far, “contract law would drown in a sea of tort.”
Defense lawyers have a potent weapon at their command in defending their clients’ negotiated allocations of risk: the economic loss rule. Economic losses are frustrated commercial expectations: “it wasn’t worth what I paid,” or “it broke,” or “I didn’t make as much money as I expected.” The economic loss rule, simply stated, holds that where a plaintiff has suffered nothing but economic losses, tort claims are barred, and he or she must sue, if at all, on the contract.
Last week, the Tenth Circuit reaffirmed this important doctrine in Mountain Bird, Inc. v. Goodrich Corporation [pdf]. There, plaintiff purchased an aircraft which included an optional de-icing system which the manufacturer said was “certified for flight in icing conditions.” The plaintiff added an additional after-market de-icing system, also manufactured by the same defendant. Five years after it was purchased, the aircraft crashed, allegedly due to ice accumulating on the wings. The owner of the aircraft sued in tort, seeking to recover the value of the plane.
On appeal, plaintiffs argued that their claim came under an exception to the economic loss rule for expert services. Plaintiff offered an affidavit saying that it wouldn’t have bought the plane if the defendant hadn’t issued a form saying it was certified for flight in icing conditions.
The Court disagreed, pointing out that the defendant hadn’t claimed to be a certification expert:
[W]e would not infer that a car manufacturer held itself out as a vehicle safety certification expert by advertising that its cars complied with federal safety regulation. To do so would permit the special relationship exception to swallow the rule by allowing tort claims against every manufacturer of a regulated product.
The plaintiffs pointed to a controversial line of California cases imposing tort duties based on a series of policy-based factors, including the extent to which the transaction was intended to affect plaintiff, the closeness of the connection between the defendant’s conduct and the plaintiff’s injury, and the moral blameworthiness of defendant’s conduct. The Court declined to apply these cases where the parties’ relationship was already governed by a contract.
In the forty-five years since the economic loss rule was first stated by the California Supreme Court, the doctrine has spread to nearly every state in the country. However, the contours of the doctrine vary somewhat from state to state.
In 2004, the American Law Institute announced that as part of its ongoing work on the third generation of Restatements, it would undertake the “Restatement (Third) of Torts: Economic Torts and Related Wrongs.” Unfortunately, that project has been on hold since 2007, when the Reporter resigned. Given that the conflict between contract and tort continues every day in commercial litigation across the country, it is time for work on the ALI’s proposed Restatement to resume. In the meantime, when looking for a tool to weed out tort claims from a business dispute, defense counsel should keep the economic loss rule firmly in mind.