SC Lawyer, March 2009, #2. The Economic Loss Rule Survives Colleton Prep.

• Author: By Susan M. Glenn and Paula M. Burlison

South Carolina Lawyer

2009.

SC Lawyer, March 2009, #2.

The Economic Loss Rule Survives Colleton Prep

South Carolina LawyerMarch 2009The Economic Loss Rule Survives Colleton PrepBy Susan M. Glenn and Paula M. BurlisonThe economic loss rule is a confusing doctrine, the subject of numerous articles attempting to sort through the possible rationales for the rule and the various ways in which it can be applied. See, e.g., Anita Bernstein, Keep It Simple: An Explanation of the Rule of No Recovery for Pure Economic Loss, 48 Ariz. L. Rev. 773 (2006); R. Joseph Barton, Note, Drowning in a Sea of Contract: Application of the Economic Loss Rule to Fraud and Misrepresentation Claims, 41 Wm. & Mary L. Rev. 1789 (2000). Simply stated, the economic loss rule is a method developed by courts over the years for delineating recovery in tort and contract. In South Carolina, the economic loss rule appears to be more honored in the breach than the observance, and courts continue to develop exceptions to the rule, as illustrated by the S.C. Supreme Court's recent decision in Colleton Preparatory Acad. v. Hoover Universal, Inc., 379 S.C. 181, 187, 666 S.E.2d 247, 250 (2008).

In Colleton Prep, the Supreme Court of South Carolina considered the application of the economic loss rule in the "commercial construction arena" to answer questions certified to it by the U.S. District Court for the District of South Carolina. Id. at 190, 666 S.E.2d at 252. The Court held that for a plaintiff to recover in tort when only the product itself has been injured, there must be a breach of duty accompanied by a clear, serious and unreasonable risk of bodily injury or death. Id. at 194, 666 S.E.2d at 254. Three justices agreed with this holding. Two justices dissented.

In its decision, the Court outlined the facts alleged in the complaint, which were taken as admitted because the defendant failed to timely answer. According to the complaint, Plaintiff Colleton Preparatory Academy's roof, constructed in 1972, contained a roof truss system that had been treated with "Fire-X," a fire retardant Defendant Hoover's predecessor manufactured. Id. at 184, 666 S.E.2d at 249. In 2002, Plaintiff discovered that the fire retardant treated (FRT) wood was deteriorating, causing structural problems that "would eventually lead to truss failure and partial or full roof collapse." Id. at 184-85, 666 S.E.2d at 249. "The majority of the roof trusses and sheathing had failed or were about to fail, the roof framing and sheathing were substantially impaired, and the truss system had to be replaced for safety reasons." Id. at 185, 666 S.E.2d at 249. Plaintiff sought damages "caused by the deterioration of the wood under theories of negligence, reckless/gross negligence, and violation of the UTPA." Id.

Because the plaintiff sued in negligence rather than contract and because the case concerned a commercial entity which had commissioned a new building rather than a residential homebuyer, the case raised what the district court viewed to be a novel question of South Carolina law, which it posed as follows: "Can the user of a defective product recover in tort when only the product itself has been injured and when the product either violated generally accepted industry standards or posed a serious risk of bodily harm?" Id. at 186, 666 S.E.2d at 250. The S.C. Supreme Court understood this question to concern the economic loss rule and reframed it as follows:

[W]hether the legal duties to conform to industry standards and to avoid creating a serious risk of bodily harm found in Kennedy v. Columbia Lumber & Manufacturing Company, 299 S.C. 335, 384 S.E.2d 730 (1989) are limited to the residential housing arena or whether they have wider application.

Id. at 187, 666 S.E.2d at 250 (footnote omitted).

To provide a framework for understanding the ruling in Colleton Prep and assessing its potential impact, this article will review the development of the economic loss rule and its application in S.C. Supreme Court jurisprudence. The article will conclude by arguing that Colleton Prep did not "work[] a wholesale revision of the law of products liability," as the dissenting opinion states. Id. at 199, 666 S.E.2d at 257 (Pleicones, J., dissenting). Instead, based on the actual question answered, as reframed by the Court, the decision simply extended the existing Kennedy analytical framework beyond the residential housing context.

The economic loss rule

The economic loss rule grew out of the development of products liability jurisprudence and the erosion of the privity requirement in warranty law. First year law students no doubt still study the case of Henningsen v. Bloomfield Motors, Inc., in which the New Jersey Supreme Court held that an automobile manufacturer and a dealer were liable to the automobile purchaser's wife, on a theory of implied warranty, even in the absence of privity of contract. 161 A.2d 69, 84 (N.J. 1960). Other jurisdictions followed the New Jersey Supreme Court's lead and extended the implied warranty theory to other products. W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 97 (5th ed. 1984). Courts struggled while applying contract rules to implied warranty cases involving personal injury, operating on the assumption that contract rules must apply to these "warranty" actions, although often no contract was involved. Id.

In response to the difficulties of attempting to apply contract rules to products liability cases in the absence of a contract, courts moved away from the implied warranty theory of recovery and adopted a theory of "strict liability" in tort. Based on the policy reasons used to justify "strict liability," courts considered tort theory, based on the dangerousness of conduct, more adaptable and more appropriate. Id. at § 98. However, as products liability law based in tort concepts developed, courts began to express a...