Mass Tort Defense

State Supreme Court Reverses Itself on Economic Loss Doctrine

Not long ago we blogged about the economic loss rule, noting that the doctrine had some variants among the states.  Recently, the South Carolina Supreme Court pulled back on an exception to the economic loss rule, concluding that its 2008 opinion expanding the ability to recover in tort for purely economic damages had been wrongly decided. Sapp v. Ford Motor Co., 2009 WL 4893648 (S.C., 12/21/09). Very refreshing to see a court recognize an issue quickly, and act promptly to correct the error.

Economic loss generally refers to damages that occur through the loss of the value or use of the goods sold or the cost of repair, when there has been no claim of personal injury or damage to property other than the product. The economic loss doctrine has held that such damages, a product injuring itself in essence, is a claim about a breach of the commercial relationship, and thus must be brought in contract/warranty, and not a tort claim sounding in negligence or strict liability. Most states have adopted some form of the economic loss rule, although with some variation in detail. Some carve out exceptions, and in South Carolina there has long been an exception for economic damage to a residence. The reasoning was that a home is often an individual's largest investment and different in kind from other manufactured goods. The courts also looked at the unequal bargaining power between builders and home purchasers.

But in Colleton Preparatory Academy Inc. v. Hoover Universal Inc., 379 S.C. 181, 666 S.E.2d 247 (S.C. 2008), the court seemed to expand the exception even farther, into commercial property.  In Colleton Prep, which concerned allegedly defective materials used in constructing a school building, the state court held that a tort suit could go forward even where only the product itself is damaged, if there is also a clear, serious and unreasonable risk of injury or death, as was the case in a school. The defense bar termed this a very surprising opinion, because it extended the seemingly narrow exception so far that it threatened to swallow the rule, appearing to create tort liability for mere potential harm or risk.

In Sapp, actually two cases consolidated for appeal, plaintiffs sued over allegedly defective cruise-control systems on Ford Motor Co. F-150 trucks, which allegedly caused fires. The lower courts dismissed the claims, saying that under the economic loss doctrine, tort recovery was not available because the damage was only to the allegedly defective products themselves. At oral argument on plaintiffs' appeal, they argued the new expanded exception, suggesting the truck fire created that clear and serious risk of injury. 

The supreme court seemed to recognize the problems it had created. The court recognized that
the exception for residences was a very narrow one.  And the court clarified it  no intention of the exception extending beyond residential real estate construction and into commercial real estate construction. "Such a progression was in error and we now correct that expansion. Much less did we intend the exception to the economic loss rule to be applied well beyond the scope of real estate construction in an ordinary products liability claim.” Accordingly, the court overruled Colleton Prep to the extent it could be read to expand the narrow exception to the economic loss rule beyond the residential builder context.

In South Carolina, as in many states, the purpose of the economic loss rule is to define the line between recovery in tort and recovery in contract. 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 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; but when personal injury or other property damage occurs, a tort remedy may be appropriate.  The traditional economic loss rule provides a more stable framework and results in a more just and predictable outcome in product liability cases.

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Sean P. Wajert of Shook, Hardy & Bacon LLP