ECONOMIC LOSS RULE IN FLORIDA

Posted about 2 years ago. Applies to Florida, 2 helpful votes

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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 a. Negligence 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).. b. Conversion 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. e. Fraud 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).

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Key Cases - Economic Loss Rule 1. Indem. Ins. Co. v. Am. Aviation, Inc., 891 So. 2d 532 (Fla. 2004). Important case regarding application of the ELR to service agreements. The insurer and the buyer sought to recover damages to the buyer's aircraft, allegedly caused by the seller's negligent maintenance and inspection of the aircraft's landing gear, which occurred when the right main landing gear failed to extend during a landing. The seller moved to dismiss the complaints, arguing that Florida's economic loss rule barred the tort claims and that no breach of warranty action could be maintained because of a lack of privity between the insurer and the buyer and the seller. The Supreme Court of Florida reviewed the certified questions and found that the economic loss doctrine or economic loss rule barred a negligence action to recover solely economic damages only in circumstances where the parties were either in contractual privity or the defendant was a manufacturer or distributor of a product, and no established exception to the application of the rule applied. Because the seller was neither a manufacturer nor distributor of a product, and the parties were not in privity of contract, the negligence actions were not barred by the economic loss rule. 2. Comptech Int'l, Inc. v. Milam Commerce Park, Ltd., 753 So. 2d 1219 (Fla. 1999). The economic loss rule does not apply to statutory causes of action, especially when the statute provides that the remedy exists notwithstanding any other remedies available. Petitioner lessee sued respondent lessor for damages, under Fla. Stat. Ann. § 553.84 (1995), to petitioner's computers caused by the alleged negligent renovation of a warehouse in which they were stored. In a separate, but similar, action, petitioner homeowner sued respondent subcontractor for damages, under the same building code statute, resulting from the alleged negligent installation of electrical wiring in petitioner's home. The primary issue was whether the judicially created economic loss rule precluded the petitioners' causes of action under the applicable statute. The court held that the economic loss rule could not be used to defeat either of petitioners' causes of action under the statute because the legislature had made it clear that the statutory remedy was available notwithstanding the fact that there may be other remedies. In the first case, the court found that the computers were "other property," thereby not precluding damages under the economic loss rule. 3. Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999). After he discovered defects in the home he purchased, petitioner home buyer sued respondent engineers, who had conducted the engineering inspection of the home, for professional negligence in not detecting and disclosing the defects, even though petitioner's contract was specifically with their employer, a professional engineering corporation. The trial court dismissed and the appellate court affirmed, ruling that the claim was barred by the economic loss rule and that no cause of action was created by Fla. Stat. § 471.023. Petitioner then sought further review. In quashing the decision, the court ruled that Florida law recognized a common law cause of action against individual professional engineers for their negligent services, even though they were employees and not a party to the contract. Moreover, Fla. Stat. §§ 471.023 and 621.07 recognized the responsibility of individual professionals for their negligent acts. The economic loss rule did not bar the action even though petitioner alleged only economic damages because it was primarily intended to apply to product liability cases and not to bar well-established common law causes of action. 4. PK Ventures v. Raymond James & Assocs., 690 So. 2d 1296 (Fla. 1997). The intermediate appellate court certified for review the question of whether petitioner buyers were prevented by the economic loss rule from recovering damages for negligent misrepresentation against respondent broker. The court answered the question in the negative, quashed the trial court decision, and remanded. The issue was controlled by precedent in which the court ruled that the economic loss rule did not prevent a buyer of residential property from recovering damages for fraud in the inducement against a real estate agent. The court agreed with the intermediate appellate court's finding that the sale of commercial property, as opposed to residential property, was an insignificant difference. 5. Straub Capital Corp. v. Chopin, 724 So. 2d 577 (Fla. 4th DCA 1998). Appellee tenants sued appellant landlord alleging fraud in the inducement and negligent misrepresentation. The trial court found appellant liable for negligent misrepresentation. Specifically, the trial court found that appellant negligently promised more than it could perform to the detriment of appellees and awarded appellees attorney's fees and lost profits in the amount of $ 158,619. On appeal, the court concluded that appellees' action for negligent misrepresentation was barred by the economic loss rule because the subject misrepresentations were directly related to the breaching party's performance under the subject lease agreement. This was not a case where fraudulent inducement was established by the evidence. To the contrary, the trial court expressly denied appellees' fraudulent inducement claim on the basis no evidence supported a finding that appellant intended at the outset to fail to complete the leased premises on time. Accordingly, both the awards of attorney's fees and lost profits were reversed and remanded. 6. HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238 (Fla. 1996). Respondent brought suit against petitioner, alleging that petitioner fraudulently induced respondent into entering a settlement agreement. In a counterclaim, petitioner asserted that respondent breached the agreement and sought dismissal of the fraudulent inducement claim as barred by Florida's economic loss rule. The trial court entered a judgment for respondent. The intermediate appellate ruled that the independent tort of fraud in the inducement was not barred by the economic loss rule. Petitioners sought review, arguing that the economic loss rule barred an award of tort damages because respondent did not plead or prove a personal injury or property damage and because the parties were involved in a contractual relationship that pre-existed the alleged fraud in the inducement. The court rejected the argument and approved the decision, concluding that respondent's fraud in the inducement claim was not barred by the economic loss rule. The court explained that the economic loss rule did not eliminate causes of action based upon torts independent of the contractual breach even though there existed a breach of contract action. 7. Airport Rent-A-Car v. Prevost Car, 660 So. 2d 628 (Fla. 1995). The federal district court dismissed appellant owner's complaints regarding tort and contract law theories against appellee manufacturer. Appellant alleged that appellee was liable for economic loss. Appellant challenged the dismissals and the federal court of appeals, after review of the record, certified three questions of unsettled Florida law for this court's determination. The court held that the economic loss rule applied to negligence claims for the manufacture of a defective product where the only damages claimed were to the product itself and where the plaintiff claimed to have no alternative theory of recovery. The court also held that a cause of action otherwise precluded by the economic loss rule may not be maintained if the damage to the product is caused by a sudden calamitous event. The court held that a cause of action may not exist outside the bar of the economic loss rule where the plaintiff alleged a duty to warn which arose from facts which came to the knowledge of the manufacturer after the manufacturing process and after the contract. The court remanded the matter back to the federal court of appeals for its disposition. 8. Casa Clara Condominium Ass'n, v. Charley Toppino & Sons, Inc., 620 So. 2d 1244 (Fla. 1993). The trial court held that petitioner homeowners could not recover for purely economic losses from respondent concrete supplier under a negligence theory. Petitioners owned homes built with, and allegedly damaged by, respondent's concrete. Some of petitioners' claims against respondent were based on a theory of negligence. The appellate court held that because no person was injured and no other property was damaged, petitioners had no cause of action against respondent in tort. On appeal the supreme court approved the appellate court's ruling, holding that contract principles were more appropriate than tort principles for recovering economic loss without accompanying physical injury or property damage. The supreme court noted that for recovery in tort there had to be a showing of harm above and beyond disappointed expectations, and a buyer's desire to enjoy the benefit of his bargain was not an interest that tort law traditionally protected. Finally, the supreme court held that respondent's concrete did not damage other property, as required for a claim in tort, because petitioners purchased homes as a finished product, not as individual components. 9. Florida Power & Light Co. v. Westinghouse Electric Corp., 510 So. 2d 899 (Fla. 1987). Appellant power company entered into an agreement with appellee corporation whereby appellee agreed to manufacture two nuclear steam systems. After appellant discovered system leaks, it initiated a negligence action for economic losses. The trial court granted appellee's motion for summary judgment because appellant could not bring a tort action for economic loss without any claim of personal injury or property damage to other property. The appellate court affirmed the decision but certified the question of whether a buyer, such as appellant, could recover economic losses in tort without a claim for personal injury or property damage to property other than the allegedly defective goods. The state supreme court answered the certified question in the negative. The state supreme court determined that appellee had a duty to insure that its steam systems would not harm persons or property. The state supreme court further determined that appellee did not have a duty to insure that such systems met appellant's economic expectations. The state supreme court concluded that contract principles were more appropriate for resolving economic loss issues. 10. AFM Corp. v. Southern Bell Tel. & Tel. Co., 515 So. 2d 180 (Fla. 1987). Appellee entered into an agreement with appellant to advertise in appellant's yellow pages. Appellee encountered numerous problems with its advertisements and asserted a claim against appellant for economic losses. Appellant chose to proceed solely on a tort theory and specifically announced that it was not basing its tort theory on any agreement between the parties. The appeals court certified a question regarding whether Florida permitted a purchaser of services to recover economic losses in tort without a claim for personal injury or property damage. The court answered the certified question in the negative explaining that without some conduct resulting in personal injury or property damage, there could be no independent tort flowing from a contractual breach that would justify a tort claim solely for economic losses. The court remanded the matter to the appeals court for disposition, 11. Turbomeca, S.A. v. French Aircraft Agency, Inc., 2005 Fla. App. LEXIS 17204 (Fla. 3d DCA November 2, 2005). Six days after a mechanic inspected the owner's helicopter and removed and improperly reinstalled the helicopter's airframe fuel filter upside down, the helicopter crashed. The pilot and two passengers sustained personal injuries. The helicopter itself, however, was a total loss. After the jury returned a defense verdict absolving the owner of all liability, its third-party contribution claim against the engine manufacturer was mediated. The arbitration panel concluded that the manufacturer was 25 percent at fault. The trial court confirmed the arbitration award and awarded the owner the costs incurred during the arbitration proceeding. The appellate court held that although the pilot and the two passengers were injured, the owner had no claim against the manufacturer for any physical injuries to itself. Pursuant to Fla. Stat. § 682.11 (2002), the trial court was not authorized to award arbitration costs. 12. Swope v. Dimarco, 866 So.2 270 (Fla. DCA 2004). The buyer claimed that while the sellers and the real estate agent affirmatively represented that there were no matters or defects that affected the property's value, they knew or should have known that latent material defects were present, including flooding of the home and structural defects. The complaint alleged damages based upon fraudulent inducement to buy the property. The motion to dismiss alleged that the suit was barred by the economic loss rule, because the buyer failed to allege property damage independent of the breach of contract. The trial court granted the motion and dismissed the buyer's complaint with prejudice. The appellate court ruled that the economic loss rule did not eliminate causes of action based on torts independent of a contractual breach even though there existed a breach of contract action. Fraudulent inducement claims may have coexisted with breach of contract claims, safe from the economic loss rule. The type of fraudulent inducement claim alleged by the buyer was not barred by the economic loss rule. 13. Sarkis v. Pafford Oil Co., 697 So. 2d 524 (Fla. 1st DCA 1997). The court concluded that the trial court correctly dismissed the claim that defendants interfered with the business relationship between the plaintiffs and their customers because the complaint did not identify the customers subject to the alleged interference. Because the interference alleged was not specific, the claim failed. Other claims were properly barred by the economic loss rule, precluding tort claims to recover economic loss. The risk of fraud could have been addressed in the contract. However, the court found error in dismissing the claims under the Florida Unfair and Deceptive Trade Practices and the Motor Fuel Marketing Practices Acts, where the economic loss rule was not a bar to recovery. Losses under the acts were independent of the contract and remedies available for willful violation of the statutes were different from those for breach of contract. 14. Hotels of Key Largo v. RHI Hotels, 694 So. 2d 74 (Fla. 3d DCA 1997). Appellants sought review of the dismissal of their complaint seeking rescission of licensing agreements based upon alleged fraudulent misrepresentations. The court held that misrepresentations related to the breaching party's performance of a contract did not give rise to an independent cause of action in tort, because such misrepresentations were interwoven and indistinct from the heart of the contractual agreement. Appellants' complaint failed to state an action, and specifically, appellants' fraudulent inducement claim was barred by the economic loss doctrine. 15. First Florida Bank, N.A. v. Max Mitchell & Co., 558 So. 2d 9 (Fla. 1990). Respondent certified public accountant delivered to petitioner bank financial statements prepared by his firm for a client. Based on the statements, petitioner gave the client a loan. The client never repaid the loan. Petitioner discovered that the client's assets were overstated and its liabilities were understated. Petitioner sued. The district court affirmed summary judgment to respondent on negligence counts. The district court posed a certified question seeking to determine if respondent could be liable, despite a lack of privity, as an exception to the economic loss rule, for presenting financial statements to petitioner without exercising reasonable care, knowing that the statement would be relied upon to induce petitioner to loan or invest in the client. The court answered affirmatively and adopted Restatement (Second) of Torts § 552, as an ELR exception because of the heavy reliance upon audited financial statements in the contemporary financial world. The court believed permitting recovery only from those in privity or near privity was unduly restrictive but the court limited recovery to those persons whom an accountant "knew" would rely on his opinion. The court quashed the decision of the district court and remanded.

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