Did the Florida Supreme Court Greatly Expand Tort Law at a Cost to Florida's Contract Law?
By Craig S. Hudson , Esq. and Jason L. Scarberry, Esq.*
On March 7, 2013, the Supreme Court of Florida rendered its opinion in Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc., 110 So.3d 399 (Fla. 2013). In its opinion, the Court specifically limited the application of the Economic Loss Rule (ELR) to product liability cases. The plaintiffs' bar is celebrating this as the opportunity for an entirely new theory of recovery, and the defense bar is trying to relieve the anxiety of their clients and insurance carriers. While plaintiffs may be able to survive motions to dismiss, this decision will not expose defendants to any additional liability.
The Economic Loss Rule
Contrary to popular belief, the ELR is not a long-standing common law principle of American jurisprudence but, rather, "a doctrine that arose in the torts context to serve a specific purpose—to curb potentially unbounded liability following the adoption of strict liability principles." In 1976, the Florida Supreme Court adopted the strict liability doctrine for recovery in product liability cases that held the manufacturer and seller of a product is liable for injuries to persons or property, regardless of the conduct of the manufacturer or seller. See, West v. Caterpillar Tractor Co., 336 So.2d 80 (Fla. 1976); see also, Restatement 2d of Torts §402A (1965). Strict liability was not intended to replace contractual damages for "disappointed economic expectations," and the ELR was designed to limit a seller's liability. This limitation of strict liability to actions in tort for damages to a person or property from a defective product was "designed to prevent parties to a contract from circumventing the allocation of losses set forth in the contract by bringing an action for economic loss in tort." Indemnity Insurance Company of North America v. American Aviation, Inc., 891 So.2d 532, 536 (Fla. 2004).
The rationale of these early cases was that contract principles are more appropriate than tort principles for resolving economic loss without an accompanying physical injury or property damage. Moransais v. Heathman, 744 So.2d 973, 980 (Fla. 1999)(citing Florida Power & Light v. Westinghouse Elec. Corp., 510 So.2d 899, 902 (Fla. 1987)). The Florida Supreme Court adopted the ELR in the product liability context in 1986. See, Florida Power & Light Co. v. Westinghouse Elec. Corp., 510 So.2d 899 (Fla. 1987).
This original iteration of the ELR—to address strict liability in product cases—is not what caused confusion in the courts and the legal community. Confusion resulted from the expansion of the ELR to preclude the recovery of purely economic losses in cases where parties had contracted for services. As noted by Justice Pariente in her concurring opinion in Tiara, this expansion of the ELR to cases involving contractual privity was unnecessary because traditional contract law already limited the recovery of economic losses in breach of contract actions to "the negotiated remedies for non-performance pursuant to the contract."
Contractual Privity Economic Loss Rule
The first reference in Florida courts to the "contractual privity economic loss rule" was in Indemnity Insurance Company of North America v. American Aviation, Inc., 891 So.2d 532 (Fla. 2004), in which the Florida Supreme Court stated that the application of this "principle" was best exemplified in its decision in AFM Corp. v. Southern Bell Telephone and Telegraph Co., 515 So.2d 180 (Fla. 1987). In that case, the Court concluded that "without some conduct resulting in personal injury, or property damage, there can be no independent tort flowing from a contractual breach which would justify a tort claim solely for economic losses." In truth, while referring to "economic losses," AFM never mentions or references the ELR, but, in American Aviation, its foregoing statement became known as the "Contractual Privity Economic Loss Rule," which has been applied by Florida courts to dismiss counts of negligence where there is a contract between the parties.
In Moransais, supra, the Supreme Court began expressing concern that Florida courts "ha[d] appeared to expand the application of the [Economic Loss Rule] beyond its principled origins and ha[d] contributed to applications of the rule well beyond [its] original intent." In response, the Supreme Court sought to limit the expansion of the ELR in non-product liability cases:
[T]he [ELR] was primarily intended to limit actions in the product liability context, and its application should generally be limited to those contexts or situations where the policy considerations are substantially identical to those underlying the product liability type analysis.
Moransais, 744 So.2d at 983 (footnote omitted).
The Supreme Court ultimately carved out an exception to the ELR for professional negligence, despite the fact that claims for professional negligence generally seek only economic damages. This exception to the ELR was added to the previous exceptions to the ELR to actions for negligence claims for fraudulent inducement (HTP, Ltd. v. Lineas Areas Costarricenses, S.A., 685 So.2d 1238 (Fla. 1996)), negligent misrepresentation (PK Ventures, Inc. v. Raymond James & Associates, Inc., 690 So.2d 1296 (Fla. 1997)) and statutory causes of action. These "exceptions" to the ELR are more appropriately labeled as "expansion[s] of negligence law to protect interests not traditionally protected by negligence law." The Sandarac Association, Inc. v. W.R. Frizzell Architects, Inc., 609 So.2d 1349, 1353 (Fla. 2d DCA 1992). This is because, historically, economic losses have not been recoverable in negligence causes of action. Casa Clara Cond. Assoc., Inc. v. Charley Tappini & Sons, Inc., 620 So.2d 1244, 1246-1247 (Fla. 1993).
It is the contractual privity aspect of the ELR that resulted in what the Supreme Court referred to as an "[u]nprincipled expansion" of the ELR; and, it was not necessary. The Court noted this in Moransais, "[w]hile we believe 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." 744 So.2d at 981.
Did Tiara Greatly Expand the Use of Tort Law at a Cost to Florida's Contract Law?
In his dissent in Tiara, Chief Justice Polston expressed concern that "the majority greatly expands the use of tort law at a cost to Florida's contract law." As evidence of this, he cites eight cases he believes would be decided differently post-Tiara. A careful examination of the cases demonstrates that the contractual privity aspect of the ELR was unnecessary because an application of contract law would yield the same outcomes. Seven of the cases cited by the dissent rely on the same principle of law, generally stated, "When parties have entered into a contract, a tort action will only exist if the intentional or negligent acts are independent from the acts that breached the contract." See, Geico Casualty Co. v. Arce, 33 Fed. Appx. 396, 397 (11th Cir. 2009); Mount Sinai Medical Center of Greater Miami, Inc. v. Heidrick & Struggles, Inc., 188 Fed. Appx. 966, 969 (11th Cir. 2006); Royal Surplus Lines Insurance Company v. Coachman Industries, Inc., 184 Fed. Appx. 894, 902 (Fla. 2006); Cessna Aircraft Company v. Avior Technologies, Inc., 990 So.2d 532, 537 (Fla. 3d DCA 2008);Taylor v. Maness, 941 So.2d 559, 564 (Fla. 3d DCA 2006); Smith v. State of Florida, 701 So.2d 348, 349 (Fla. 4th 1997). This principle of law, recently known as the "contractual privity economic loss rule," is still applicable, and "in order to bring a valid tort claim, a party must still demonstrate that all of the required elements for the cause of action are satisfied, including that the tort is independent of any breach of contract claim." In fact, this was the state of the law prior to the Supreme Court's adoption of Economic Loss Rule in Florida Power & Light in 1987. See, Lewis v. Guthartz, 428 So.2d 222, 224 (Fla. 1982)(holding that there must be a tort "distinguishable from or independent of [the] breach of contract" in order for a party to bring a valid claim in tort based on a breach in a contractual relationship); see also, Griffith v. Shamrock Village, 94 So.2d 854 (Fla. 1957)(punitive damages are not recoverable in a breach of contract action unless that breach is attended by some action which amounts to an independent tort).
In her concurring opinion, Justice Pariente clarified the holding of the Court as it relates to Florida contract law.
While the contractual privity form of the economic loss rule has provided a simple way to dismiss tort claims interconnected with breach of contract claims, it is neither a necessary nor a principled mechanism for doing do. Rather, these claims should be considered and dismissed as appropriate based on basic contractual principles – a proposition we reaffirmed in American Aviation, where we stated that 'when parties have negotiated remedies for nonperformance pursuant to a contract, one party may not seek to obtain a better bargain than it made by turning a breach of contract into tort for economic loss.' The majority's decision does not change this statement of law but merely explains that it is common law principles of contract, rather than the economic loss rule that produce this result.
Tiara, supra, 1100 So.3d at 409 (quoting Insurance Indemnity Company of North America v. American Aviation, supra, 891 So.2d 532 at 542).
It is the contracting parties' responsibility to bargain for adequate remedies when forming a contract, and the parties should not be permitted to avoid that bargain by bringing an action in tort for economic losses. As previously stated, the "exceptions" to the ELR were really the Court's expansion of negligence law to allow for the recovery of purely economic losses in cases where, historically, those losses were not recoverable. Along with the holding in Lewis v. Guthartz, these "exceptions" represent the only class of torts that will be viable in situations where the parties have contractual privity.
Defendants and their insurers should not despair, however. "While the contractual privity form of the economic loss rule has provided a simple way to dismiss tort claims interconnected with breach of contract claims, it is neither necessary nor a principled mechanism for doing so." The legal principles stated by the Court in AFM and American Aviation may still be relied on by defendants to attempt to limit a plaintiff's claims. Utilizing the legal concepts and case law highlighted in this article, defendants should still aggressively argue that, except in cases involving a tort independent of the breach of contract, the plaintiff's damages should be governed by contract principles.
*Craig is the managing shareholder of our Fort Lauderdale, Florida, office. He can be reached at 954.847.4955 or CSHudson@mdwcg.com. Jason, an associate in the same office, can be reached at 954.847.4956 or JLScarberry@mdwcg.com.
Defense Digest, Vol. 19, No. 3, September 2013
Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Copyright © 2013 Marshall Dennehey Warner Coleman & Goggin, all rights reserved. This article may not be reprinted without the express written permission of our firm.