I. Why is there an Economic Loss Rule?
The Economic Loss Rule (“ELR”) is a judicially formed doctrine setting forth the instances where separate tort actions are prohibited when the only damages are economic losses. Indemnity Ins. Co. N. Am. v. America Aviation, Inc., 891 So.2d 532, 536 (Fla. 2004). The current doctrine in Florida is traced in part to two cases decided in 1987 by the Florida Supreme Court. Florida Power & Light v. Westinghouse Elec. Corp., 510 So.2d 899 (Fla. 1987), and AFM Corp. v. Southern Bell Tel. & Tel., 515 So.2d 180 (Fla. 1987). Absent personal injury or property damage, any parties in litigation are limited generally to whatever remedies, if any, may be found in the contract from which the dispute arose. Casa Clara Condominium Ass’n v. Charley Toppino and Sons, Inc., 620 So.2d 1244 (Fla. 1993). Once parties have entered into a contract, contractual relationships allocate the rights between parties preventing tort law from supplementing or altering agreed to provisions. See Strickland-Collins Constr. v. Barnett Bank of Naples, 543 So.2d 476 (Fla. 2d DCA 1989).
The underlying rationale for the ELR is that parties have already allocated rights through contracts and “rule is the underlying boundary between contract law… and tort law.” Casa Clara, 602 So.2d at 1246. Economic losses are disappointed economic expectations which are protected by contract rather than by tort law. For recovery in tort, there must be a showing of harm above and beyond disappointed expectations. Consequently, when the alleged duty breached is derived from a contractual relationship it cannot form the basis for a separate and distinct tort. Medalie v. FSC Securities Corp., 87 F.Supp. 2d 1295, 1299 (S.D. Fla. 2000). Immediately apparent bodily injury or severe property damage provide the clearest evidence to circumvent the possibility of the ELR being employed as a defense. Otherwise, only circumstances of such extraordinary nature that judicial interference is clearly necessitated to protect a plaintiff’s economic expectations will, in theory, overcome the ELR.
II. Instances Most Likely to Encounter the ELR
The establishment of the ELR came, in part, when the Florida Supreme Court rejected the idea that negligent provision of services extended to a tort beyond recovery delineated by contract. AFM Corp v. Southern Bell Tel. & Tel., 515 So.2d 180 (Fla. 1987). Similarly, invoking the ELR, a negligence claim on the sale of a product was stricken when no personal injury or property damage was suffered. Florida Power & Light v. Westinghouse Elec. Corp., 510 So.2d 889 (Fla. 1987).
Within the tort of negligence, a sizeable portion of claims will relate to the negligent manufacture of a product or performance of a service that led to some further harm. Florida Power and Light was the first representative of this factual situation when FP&L filed in suit against Westinghouse, claiming that the generators Westinghouse built were not to FP&L’s satisfaction. Almost identically, the firm Galaxis received a dismissal with prejudice for its counterclaim against Lockheed Martin for the negligent manufacture of “space scanners” based on the reasoning that any recovery would be governed by contract. Lockheed Martin Corp. v. Galaxis USA, Ltd., 222 F.Supp.2d 1315 (M.D. Fla. 2002).
Moreover, negligent handling of merely part of a product might be barred by the ELR even though the part damaged the greater whole. Allegedly negligent manufacture of steamship turbines that later damaged the vessel did not survive the ELR. East River Steamship Corp. Transamerica Delaval, 476 U.S. 858 (1986). (This case provided the rationale for the Florida Supreme Court’s decision in Florida Power & Light). Even the negligent repair of aircraft landing gear leading to a crash was not found to be negligence because the landing gear is part the airplane. Indemnity Ins. Co. of No. Am. v. American Aviation Inc., 344 So.2d 1136 (11th Cir. 2003). The most expansive reading of the ELR in negligence claims, from which courts have since begun to retreat, came in the decision of Casa Clara. Casa Clara Condominium Ass’n. v. Charley Toppino and Sons, Inc., 620 So.2d 1244 (Fla.. 1993), the plaintiffs purchased homes that suffered damage from bad concrete. Despite the fact that the purchasers had no privity with the concrete manufacturer, the ELR was applied and defeated the plaintiff’s case.
The ELR has been successfully applied to negligence cases beyond those involving manufacture or repair. A plaintiff whose funds were pilfered by the employee of the defendant bank could not recover beyond what the court considered to be a purely economic loss. Warter v. Boston Securities, S.A., 2004 U.S. Dist. Lexis 5682 (S.D. Fla 2004)..
Conversion claims are not barred by the ELR when independent of any contractual breach. Duncan v. Kasim, Inc., 810 So.2d 968 (Fla. 5th DCA 2002). The ELR does not preclude conversion when misappropriation or thievery goes beyond and is independent from contractual terms. Targia v. U.S. Alliance Management Corp., 2003 U.S. Dist. Lexis (S.D. Fla. 2003). Even more openly, affirmative and intentional acts of converting funds to one’s own use by allegedy stealing is not merely a breach of contract but an independent tort. Burke v. Napieracz, 674 So.2d 756, 758 (Fla. 1st DCA 1996).
c. Civil Theft
The mere existence of a contractual relationship between parties does not preclude an action for civil theft under the ELR. Nerbonne, N.V. v. Lake Bryan Int’l Properties, 689 So.2d 322,326 (Fla. 5th DCA 1997). A court may find civil theft when a party transfers specific property for personal use in addition to breaching a contract. Florida Desk, Inc. v. Mitchell Int’l, Inc., 817 So.2d 1059 (Fla. 5th DCA 2002). However, there are districts that consider the alleged theft of money arising from a dispute in a breached contract as the basis for the action still to be contained within the contract. Gambolati v. Sarkisian, 622 So.2d 47 (Fla. 4th DCA 1993).
d. Punitive Damages
A request for punitive damages is founded on the premise that the defendant allegedly committed some act of such malfeasance the court should impose a punishment on the defendant beyond the requirement of making the plaintiff whole once more. This premise goes almost directly against the nature of the ELR to limit damages awarded to economic losses. The courts, both state and federal, have a long and well-settled history of frequently striking down requests for punitive damages.
Until the mid 1990’s, the prevailing opinion amongst Florida courts was to reject various claims for fraud under the ELR. An example followed this line of reasoning; a fraud in the breach of a contract is a claim that the breach was basically willful, and therefore is still nothing more than a breach of contract, no matter how oppressive. Leisure Founders, Inc. v. CUC Int’l, Inc., 833 F.Supp 1562 (S.D. Fla. 1993). Other forms of fraud were treated the same for ELR purposes. J. Batten Corp. v. Oakridge Inv. 85, Ltd., 546 So.2d 68 (Fla. 5th DCA 1989); Richard Swaebe, Inc. v. Sears World Trade, Inc., 639 So.2d 1120 (Fla. 3d DCA 1994). The Fourth District explicitly held that fraud relating to performance cannot form the basis of a separate claim. Wadlington v. Continental Medical Servs., Inc., 728 So.2d 352 (Fla. 4th DCA 1999).
More recently, fraud in the inducement has enjoyed some success in overcoming the ELR since HTP, Ltd. v. Lineas Aereas Costarricences, 685 So.2d 1238 (Fla. 1996). The court moved away from former fraud rulings by holding that fraudulent inducement claims are not barred provided the fraud is not intertwined with the underlying contract. That is not to imply all districts allow inducement to proceed easily. The Third District struck down an inducement claim where allegations were interwoven with the heart of the agreement. Hotels of Key Largo, Inc. v. RHI Hotels, Inc., 694 So.2d 74, 77 (Fla. 3d DCA 1997). Other courts do not follow this approach; having found that because the fraud occurred prior to the contract’s creation, the fraud is a separate tort. Nautica Int’l., Inc. v. Intermarine USA, L.P., 5 F.Supp 1333 (S.D. Fla. 1998).
III. Defense Against the ELR Absent Injury and Property Damage
A potential plaintiff has two immediate options to proactively demonstrate a given claim in not barred by the ELR. The first method is to show the cause of action is separate and distinct from the contract with the defendant. The other option is to prove that while the causes are identical, the damages flowing from each action are separate from the breach. The Second District allowed for the possibility of separate damages in John Brown Automation, Inc. v. Nobles. John Brown Automation, Inc v. Nobles, 537 So.2d 614, 617 (Fla. 2d DCA 1988).
I. Why is there an Economic Loss Rule?