The Economic Loss Rule in Kansas and Its Impact on Construction Cases
| Publication year | 2005 |
| Pages | 30-39 |
74 J. Kan. Bar Assn. 6, 30-39 (2005). The Economic Loss Rule in Kansas and its Impact on Construction Cases
74 J. Kan. Bar Assn. 6, 30-39 (2005)
I. Introduction.
The distinction between contract and tort law is still sometimes blurred, although the application and evolution of the economic loss rule is helping to clarify it. The economic loss rule prevents a plaintiff who has only suffered economic losses from recovering from a defendant based on a tort theory of strict liability or negligence.1 Instead, the plaintiff is left to rely on contract law for recovery of the losses, usually in the form of breach of contract or breach of express or implied warranty.2 The economic loss rule, therefore, helps to clarify the boundary between the overlapping theories of tort law and contract law by barring the recovery of purely economic loss in tort.3
Economic loss is a "result of the failure of the product to perform to the level expected by the buyer, which is the core concern of traditional contract law."4 Economic loss is defined as the "loss of the bargain, repair and replacement cost, loss of profits, and/or goodwill, including diminution in value."5 A cause of action based upon tort does not exist when the plaintiff has not suffered any personal injuries.6
The economic loss rule is based on the premise that "contract law and the law of warranty, in particular, is better suited than tort law for dealing with purely economic losses in the commercial arena."7 Where the contracting party is permitted to proceed in tort while claiming damages, which do not include personal injury or damage to "other property," that party "is in effect rewriting the agreement to obtain a benefit that was not part of the bargain."8
The economic loss rule can be justified for three reasons: (1) it maintains a "fundamental distinction between tort and contract law;" (2) it protects commercial party's freedom to "allocate economic risk by contract;" and (3) it encourages "the parties best situated to assess the risk of economic loss" and to "assume, allocate, or insure against the risk."9
The primary motivation behind the economic loss rule is the fear that allowing a party to proceed in tort would result in "crushing useful activity by a liability."10
Almost every breach of contract involves actions or inactions that can be conceived of as a negligent or intentional act. If left unchecked, the incessant tide of tort law would erode and eventually swallow contract law. ... [I]f tort law and contract law are to fulfill their distinctive purposes, they might be distinguished where it is possible to do so. The economic loss doctrine serves the basis for such a distinction. ...
Allowing a party to a broken contract to proceed in tort where only economic losses are alleged would eviscerate the most cherished virtue of contract law, the power of parties to allocate the risks of their own transactions.11
Although the economic loss rule has historically applied to product liability cases, the rule has been applied in commercial transaction disputes, construction disputes, and even professional negligence.12 The rule has been applied not only to bar a plaintiff from making tort claims, such as general negligence, but also to bar claims of negligent misrepresentation and intentional misrepresentation.13
This article will address the history of the economic loss rule, its application in a few key Kansas cases, its use in construction litigation, and its most recent evolution in Kansas as an application to residential construction cases.
II. The History and Development of the Economic Loss Rule.
A. Seely v. White Motor Co.
The economic loss rule is a judicially created doctrine, which was first articulated by the California Supreme Court in Seely v. White Motor Co.14 in 1965. The plaintiff, Seely, bought a White Motor Co. (White) truck from Southern Truck Sales for use in his heavy duty hauling business. White warranted the truck to be free from defects in material and workmanship under normal use and service.15 Unfortunately, the truck "bounced violently."16 For 11 months, Southern Truck Sales made several unsuccessful attempts to correct the bouncing problem. One day, when slowing down for a turn, the brakes did not work and the truck "bounced" and then overturned.17 Seely, who was driving the truck, was not injured, but the truck sustained $5,466.09 in damage.18
Seely brought suit for breach of warranty against White and sought damages for the repair of the truck, the money he had paid on the purchase price, and the profits lost in his business because he was unable to make "normal use" of the truck.19 The trial court entered judgment in favor of Seely for breach of warranty in the amount of $20,899.84, which was made up of $11,659.44 for payment on the purchase price and $9,240.40 for lost profits.20 The Court, however, denied Seely's claim for $5,466.09 for repair of the truck, characterizing Seely's claim as a product or tort claim.21 Both Seely and White appealed.
On appeal, White contended that the trial court had erred in awarding Seely damages for lost profits and for money paid toward the purchase price. The California Supreme Court affirmed the trial court's award.22 Seely, on the other hand, argued that the trial court erred by refusing to award him the $5,466.09 for repair to the truck. The California Supreme Court disagreed and held that, in the absence of personal injury or physical injury to property other than to the product, a purchaser's sole remedy rested in breach of warranty, not strict liability or negligence.23
In reaching its decision, the Seely Court recognized the increasing overlap between contract and tort law and analyzed the impact of applying strict liability in tort to the facts of the case.24 The Court noted that one purpose of strict liability is to prevent a manufacturer from defining the scope of his responsibility for harm caused by his products.25 Under a strict liability analysis, manufacturers are generally liable for damages of an "unknown and unlimited scope." Under a contract analysis, however, a manufacturer is liable only on the basis of the contract.26 The Court stated:
The distinction that the law has drawn between tort recovery for physical injuries and warranty recovery for economic loss is not arbitrary and does not rest on the 'luck' of one plaintiff in having an accident causing physical injury. The distinction rests, rather, on an understanding of the nature of the responsibility a manufacturer must undertake in distributing his products. He can appropriately be held liable for physical injuries caused by defects by requiring his goods to match a standard of safety defined in terms of conditions that create unreasonable risks of harm. He cannot be held for the level of performance of his products in the consumer's business unless he agrees that the product was designed to meet the consumer's demands. A consumer should not be charged at the will of the manufacturer with bearing the risk of physical injury when he buys a product on the market. He can, however, be fairly charged with the risk that the product will not match his economic expectations unless the manufacturer agrees that it will. Even in actions for negligence, a manufacturer's liability is limited to damages for physical injuries and there is no recovery for economic loss alone.27
B. East River Steamship Corp. v. Transamerica Delaval Inc.
Following the landmark decision in Seely , the economic loss rule gained widespread acceptance in a majority of jurisdictions.28 The U.S. Supreme Court, however, first applied the economic loss rule in East River Steamship Corp. v. Transamerica Delaval Inc. 29 In East River , Seatrain Shipbuilding Corp. (Seatrain) contracted with several of its wholly-owned subsidiaries to build four oil tankers.30 Seatrain then contracted with Transamerica to design, manufacture, and supervise the installation of high-pressure turbines for the tankers. As each ship was completed, the ships were chartered to various other Seatrain subsidiaries. One of the subsidiaries was East River Steamship Corp.31 After the ships began sailing, the turbines were discovered to have a defective component that damaged the turbine engine.32
East River and Seatrain's other chartering subsidiaries filed suit against Transamerica, alleging strict liability for design defects, the cost of repair, and lost income while the tankers were out of service.33 Initially the plaintiffs alleged claims of breach of contract and warranty in addition to the tort claims. However, due to the statute of limitations on the contract claims, the plaintiffs proceeded solely on the tort claims. Transamerica moved for summary judgment, arguing that it was not liable in tort.34 The district court granted Transamerica's motion and the 3rd U.S. Circuit Court of Appeals affirmed.35
Like the Seely Court before it, the U.S. Supreme Court considered whether injury to a product itself is the kind of harm that should be protected by products liability or left entirely to the law of contracts.36 The East River Court also recognized the growing tension between products liability and contract law. The Court noted that products liability law grew out of the public policy that people need more protection from dangerous products than is afforded by the law of warranty and contracts.37 However, the Court acknowledged that if products liability were extended too far, contract law would "drown out in the sea of tort[s]."38
Ultimately, the East River Court adopted the approach taken in Seely and held that East River could not recover in tort on the grounds that "a manufacturer in a commercial relationship has no duty under...
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