The term “Economic Loss Rule” is a misnomer because the “Economic Loss Rule” is actually a set of rules and exceptions to those rules.[1] These rules are widely recognized as difficult to correctly apply.[2] On this website, we provide several articles regarding the Economic Loss Rule. The discussion in those articles is easier to consume with a clear understanding of the two general purposes of the Economic Loss Rule:
1. Set “Contractual Jurisdiction:” to protect the boundary line between contract and tort; and
2. Bar Unlimited Liability: to protect wrongdoers from unlimited liability. [3]
Note that “economic loss” has been defined as “loss that is not itself a consequence of personal injury or property damage.”[4] “Lost profit” is an example of “economic loss.”
Set Contractual Jurisdiction
When parties enter a contract, they have the opportunity to allocate risks between them. If a court later allows the parties to impose tort remedies, the court would, in effect, disrupt the risk allocations made by the parties and therefore disrupt the role of contract law. That is not to say that the existence of a contract between the parties will preempt all tort claims. That is, courts allow tort claims if there is injury to personal or property (that is not the subject of the contract) despite the existence of a contract between the parties. Courts have determined that tort law is better suited than contract law to enforce a duty to protect the public from negligent physical harm to person or property (that is not the subject of the contract). So as a general rule, a contract displaces/precludes a tort unless there is a need to protect:
1. Persons from injury to their body;
2. Property (other than property that is the subject of a contract between the parties) from physical injury (as opposed to merely financial injury);
3. Persons from being fraudulently induced into a contract; and
4. Persons from a fiduciary’s violation of a fiduciary duty.[5]
So courts use the economic loss rule to draw the boundary between contract law and tort law.
Bar Unlimited Liability
Courts have barred tort liability for purely economic loss even in the absence of a contract.[6] As such, the Economic Loss Rule bars the recovery of economic damages unless there has been a personal injury or injury to property. However, courts have recognized numerous exceptions to this general rule holding. For example, courts have limited the applicability of the Economic Loss Rule in the context of negligent misrepresentation, fraud, and business disparagement.
In Conclusion: You should consult with an attorney regarding your specific situation. We have experience and methodologies for undermining the applicability of the economic loss rule.
Written by:
Mark A. Fassold
Watts Guerra, LLP
4 Dominion Drive, Bldg 3, Suite 100
San Antonio, TX 78257
Office (210) 447-0500
[1] See Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 415 (Tex. 2011); see also Vincent R. Johnson, The Boundary-Line Function of the Economic Loss Rule, 66 Wash. & Lee L. Rev. 523, 534-35 (2009) (“[T]here is not one economic loss rule broadly applicable throughout the field of torts, but rather several more limited rules that govern recovery of economic losses in selected areas of the law.”).
[2] See R. Joseph Barton, Note, Drowning in a Seat of Contract: Application of the Economic Loss Rule to Fraud and Negligent Misrepresentation Claims, 41 Wm. & Mary L. Rev. 1789 (2000) (“The economic loss rule is stated with ease but applied with great difficulty . . . . Lawyers and judges alike have found it difficult to determine when the rule applies and when an exception is appropriate.”
[3] See Jim Wren, Applying the Economic Loss Rule in Texas, 64 Baylor L. Rev. 204, 214 (2012).
[4] William Powers, Jr. & Margaret Niver, Negligence, Breach of Contract, and the “Economic Loss” Rule, 23 Tex. Tech L. Rev. 477, 478 (1992).
[5] Id. at 215-16.
[6] Id. at 218.
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