Chipping away at the economic loss rule.

• Author: Lesser, Steven B.
• Position: Florida

The Supreme Court Decides Moransais v. Heathman

In its decision of Philippe H. Moransais v. Paul S. Heathman, et al., 24 Fla. L. Weekly S308 (Fla. July 1, 1999),(1) the Florida Supreme Court held the Economic Loss Rule (ELR) to be inapplicable to negligence actions against engineers and other professionals. This sudden but welcome detour arrived after more than a decade of case law which stretched, sculpted, and misapplied a product liability doctrine to bar causes of action for negligent professional services. Consequently, the application of the ELR became the focus of countless articles and CLE lectures which acknowledged confusion as to its scope and application.(2) The practical result of all the debate and controversy led to the ultimate distillation of the ELR to a simpler premise: The plaintiff always loses.

The Supreme Court's anticipated retreat from prior ELR rulings became evident during oral argument in Moransais, where several Justices expressed their views on a topic that has confused the judiciary as well as practitioners of construction and commercial litigation.(3) As Justice Charles Wells pointed out: "It looks to me that the whole notion of the economic loss rule has gotten way out of kilter.... Why isn't it just applicable to products? Where is it that we've expanded the economic loss rule to professional liability?"(4) Justice Barbara Pariente expressed she has "really got problems" with the idea that negligence cannot apply in commercial situations where only economic damages exist.(5) Most notably, Justice Harry Lee Anstead asked, "How did the economic loss rule get tangled up in this in terms of determining the legal liability" of a professional?(6)

Justice Anstead answered his own question in a well crafted majority opinion that reviewed the history of the ELR and proceeded to realign it closer to its origin in product liability cases. In this context, the opinion may be credited with bringing the runaway train carrying the ELR to a sudden halt. However, the opinion leaves the construction practitioner with certain unresolved issues. These issues likely will generate continued debate over the scope and application of the ELR in future litigation. This article will explore the Moransais decision, the unresolved issues, and the future of the ELR as it relates to construction claims.

The Facts of Moransais

Philippe H. Moransais entered into a contract with an engineering corporation, Bromwell & Carrier, Inc. (BCD, to conduct an inspection of a single-family home that he contemplated purchasing. BCI sent two of its engineers to perform the inspection, Lennon Jordan and Larry Sauls, who were not parties to the contract between Moransais and BCI. Jordan and Sauls performed a structural inspection of the home and wrote a report, which BCI issued. The report concluded that the "residence appears to be in sound structural condition." Based upon the report, Moransais purchased the home only later to discover the existence of significant structural deficiencies. Faced with the cost of rectifying the structural deficiencies, Moransais initiated a lawsuit against BCI for breach of contract and against Jordan and Sauls for professional malpractice based on F.S. Ch. 471, which regulates engineers who practice in a professional corporation.(7) The statute requires engineers to be held "personally liable and accountable for negligent acts, wrongful acts or misconduct committed ... while rendering professional services on behalf of the corporation...."(8) The complaint sought recovery for purely economic damages consisting of the cost to correct the deficiencies; but did not seek damages for personal injury or property damage. The trial court dismissed the action against the individual engineers, with prejudice, based upon the ELR, which bars claims for economic damages asserted by those not in privity with the negligent party. In so ruling, the trial court reluctantly relied upon the Second District opinion of Sandarac Association, Inc. v. W.R. Frizzell Architects, Inc., 609 So. 2d 1349 (Fla. 2d DCA 1992), which barred a condominium association's right to pursue recovery of economic loss damages from an architect who designed a condominium building. However, the trial court recognized a conflict with the Fifth District decision in Southland Construction Co. v. The Richeson Corp., 642 So. 2d 5 (Fla. 5th DCA 1994), which permitted a contractor to assert a negligence claim against individual engineers, employed by a corporation, for economic loss notwithstanding the absence of privity. On appeal, the Second District affirmed the dismissal but recognized a conflict with Southland.(9) This conflict served as the basis for the Supreme Court to answer two certified questions dealing with the application of the ELR to professional services where the damages are purely economic.(10) In a 5-1 decision, the Supreme Court held that the ELR is inapplicable to services rendered by a professional engineer employed by a corporation and that a cause of action for professional malpractice exists to recover purely economic damages.(11)

The Impact of Moransais

Economic loss has been defined as "damages for inadequate value, costs of repair and replacement of defective product or consequent loss of profits--without any claim of personal injury or damage to other property."(12) As applied to construction disputes, the ELR prohibits tort recovery when a product damages itself, causing economic loss, but not causing personal injury or damage to any property other than to itself. For example, damages to correct a defective roof where no physical injury and/or property damage has occurred other than to the roof itself constitutes "economic loss." As case law emerged to extend the ELR to bar negligence actions in a construction setting, owners suddenly became deprived of a traditional cause of action to recover economic loss arising from improperly designed buildings.(13)

In Moransais, the Supreme Court recognized that a cause of action for negligence exists against professionals who proximately cause economic loss.(14) In reaching its decision, the court reflected upon the legislative history permitting attorneys to practice in professional corporations.(15) Against this backdrop, the court concluded that engineers and other professionals could not hide behind the walls of a professional service corporation to escape liability for their negligent conduct. As the majority pointed out, the existence of a contract is irrelevant:

The fact that neither man signed the contract between Moransais and the engineering firm is of no moment where, as here, both Jordan and Sauls were responsible for performing professional services to a client of their company whom they knew or should have known would be injured if they were negligent in the performance of those services.(16)

On this score the court recited with approval those decisions which support recovery of economic loss damages by recipients who rely upon professionals who supply expert information for the purpose of guiding others in business transactions.(17) The cornerstone of liability is predicated upon [sections] 552 of the Restatement (Second) of Torts which established that economic losses may be recovered from accountants,(18) title companies,(19) attorneys,(20) architects,(21) engineers,(22) and others.(23) Throughout the majority opinion, the court appeared to deliberately sidestep overruling Sandarac, 609 So. 2d 1349 (Fla. 2d DCA 1992), review denied, 626 So. 2d 207 (Fla.1993), A.R. Moyer, Inc. v. Graham, 285 So. 2d 397 (Fla. 1973), or any prior appellate decision that applied the ELR to negligent services. In reaction to the Moransais opinion, owners, general contractors, professionals, and others may resort to litigation in order to clarify the breadth of this opinion.

As we struggle to understand the boundaries of Moransais, the strongly worded dissent by Justice Overton becomes instructive in analyzing the scope of the majority opinion.(24) According to Justice Overton, economic damages arising from negligent services and defective products, including the spalling concrete of Casa Clara Condominium Association, Inc. v. Charley Toppino & Sons, et al., 620 So. 2d 1244 (Fla. 1993),(25) now fall beyond the reach of the ELR. Moreover, Moransais suggests that professional service corporations become exposed to breach of contract, as well as negligence causes of action.(26) Consequently, limitation of contractual liability clauses for professional services essentially become inapplicable if a negligence cause of action can be pursued against the corporation and its individual professionals.(27) As Justice Overton lamented in his dissenting opinion: "It appears to me that the majority has substantially obliterated the distinction between contract and tort causes of action, and in addition, has effectively overruled our rather recent decision in Casa Clara without saying so."(28)

A reasoned interpretation of the majority opinion suggests that the ELR applies only to cases involving defective products. In this context, decisions such as Casa Clara survive Moransais, but Sandarac and Moyer have been implicitly overruled.(29) Sandarac barred a condominium association from pursuing a claim against a negligent architect, hired by the developer, for economic loss damages to repair condominium building deficiencies.(30) Moyer stands for the proposition that the architect must have "supervisory duties" including the power to stop work before a nonprivity contractor may pursue the owner's architect to recover economic damages.(31) In reaching its conclusion, the court condensed the complexity of the ELR to a simple rule, namely, negligent conduct committed by professionals that results in economic damage to foreseeable parties will be actionable.(32) Although recognizing Moyer as a reminder of "the distinct limitations of the economic loss rule,"(33) the court...