The economic loss rule, also known as the economic loss doctrine (ELD), is one of the most confusing legal doctrines to comprehend. It originated in tort law, but part of the confusion has arisen from the fact that the doctrine, which is a defense, can come into play in contract cases that also involve tort or tort-like issues or requests for damages. This article examines the ELD generally and in the specific contexts of construction and product liability litigation.
Originally, the ELD was a judicially created rule that states manufacturers are not liable under tort law/theories, for damages that are purely economic in nature. The ELD does not apply to product liability claims involving physical damage or injury, because such claims are considered legitimate tort claims.
Every jurisdiction handles its application of the ELD a little differently. In Florida, for example, until 2013, the doctrine could be applied in almost any case. However, the Florida Supreme Court limited the defense available under the ELD to product liability cases only, in Tiara Condo. Ass’n, Inc, v. Marsh & McLennan Companies, Inc. 110 So. 3d 399 (Fla. 2013). California, on the other hand, limits the ELD, but not to the same extent as in Florida. In California, other exceptions are recognized to the economic loss rule.
First, California’s Senate Bill 800 (SB 800) provides a scheme for construction defect litigation that involves “individual dwelling units.” Under SB 800 a series of protocols exist for initiation of a lawsuit, and “construction defect” is redefined. SB 800 requires various types of notice by homeowners and builders, extensive pre-litigation procedures, and often, mediation. If a construction defect case reaches the trial stage under SB 800, the inquiries are highly-fact intensive. Moreover, under the California Civil Code, § 945.5, there are numerous defenses available to builders, ranging from unforeseen acts of nature to ordinary wear and tear. Each of these defenses is fact-specific and also seems to call for expert testimony. For example, determining what is unforeseen or ordinary wear and tear are two factors that necessitate establishing the meaning of those terms a construction expert witness or real estate expert witness. Experts in these fields are clearly of great import in cases that are brought under SB 800.
Second, California does not apply the economic loss rule to cases where the parties have privity of contract. Generally, privity of contract is found where each party was the agent to a specific contract, rather than a third party. However, the California Court of Appeal also held that a duty may exist between defendants and parties who are not in contractual privity in certain cases. In 2001 construction case, the California Court of Appeal held that whether or not a duty exists between a defendant who is not in contractual privity with a party involves balancing the following factors: (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing future harm. 125 Cal. App. 4th 152 (2004). Each of these factors can be scrutinized and established by expert witnesses in the construction field.
The economic loss rule or ELD varies by jurisdiction, but the majority of exceptions that the courts seem to carve out occur in the context of construction and product liability litigation. In those particular cases, because the doctrine is often inapplicable (or at the very least, subject to quite a bit of scrutiny), experts in these fields are indispensable to attorneys who practice in these fields.
By: Kat S. Hatziavramidis, Attorney-at-Law