Vol. 8, No. 3, Pg. 24. Unanswered Questions: The Economic Loss Rule in South Carolina.

• Author: By Benjamin Edward Nicholson V

South Carolina Lawyer

1996.

Vol. 8, No. 3, Pg. 24.

Unanswered Questions: The Economic Loss Rule in South Carolina

24UNANSWERED QUESTIONS: THE ECONOMIC LOSS RULE IN SOUTH CAROLINABy Benjamin Edward Nicholson VYou are sitting in your office, contemplating your latest plum case, a multimillion dollar negligence lawsuit against a construction company and its principals for faulty construction of your clients' newest manufacturing facility.

As you have explained to your client prior to filing the lawsuit in federal court, it did not matter that the defendant company was judgment proof because its owners, who participated in the negligence as the company's agents, had plenty of assets. The predictable Motion to Dismiss has just arrived in the mail from your eminently qualified opposing counsel.

Not to worry, complex construction cases are rarely disposed of in such fashion. You cavalierly thumb through the memorandum submitted to support of the defendants' motion to assess what futile arguments have been made. You reach a heading containing the words "economic loss rule."

Three days later, you are buried in reporters, treatises, law review articles and endless notes scribbled with the hope that you will somehow put it all together. The simple Motion to Dismiss has become your nightmare as you attempt to understand South Carolina's unique application of that curious and confusing doctrine, the economic loss rule. As your weekend slips away, you wonder "how could I have avoided this?"

WHAT IS THE ECONOMIC LOSS RULE?

"Economic loss" is traditionally defined as simply any loss of a party's benefit of the bargain. When a party fails to recover the contractual benefits of its purchase of an item, or its commercial expectations are frustrated by its inability to use a product as anticipated, it is said to have suffered "economic loss." Such loss can also be the lost profits, diminution in value, and cost to repair or replace. Moorman Mfg. Co. v. National Tank Co., 435 N.E.2d. 443, 449 (Ill. 1982).

Traditionally, economic losses were found in contract actions. Tort claims are not really a problem since South Carolina has long adhered to the rule that a mere breach of contract, or even a negligent breach of contract, did not create a cause of action for negligence. See e.g., Meddin v. Southern Ry.-Carolina Div., 62 S.E.2d. 109, 112 (S.C. 1950), and Foxfire Village, Inc. v. Black & Veatch, Inc., 404 S.E.2d. 912, 917 (S.C. App. 1991).

However, with the development of modern tort law and in particular products liability law, economic losses have become recoverable in claims for negligence and strict liability. This brought the policy considerations of tort law and the recovery of punitive damages as factors to be reviewed by courts in what had been simple contract matters. The confusion of the courts as they attempted to in some logical fashion harmonize the conflicting goals of tort and contract law resulted in the growth of what became known as the economic loss rule.

The basic theory behind the economic loss rule is that when two parties have a contract and the opportunity to negotiate how they want to be protected by the contract, the

26policy considerations and incentives for proper conduct of tort law are irrelevant. See East River Steamship Corp. v. TransAmerica Delaval, Inc., 476 U.S. 858, 872-874 (1986). "The economic loss rule is a creation of the modem law of products liability." Carolina Winds v. Joe Harden Builders, Inc., 374 S.E.2d 897, 901 (S.C. App. 1988),

overruled by Kennedy v. Columbia Lumber & Supply Co., 384 S.E.2d 730 (S.C. 1989). "The economic loss rule simply states that there is no tort liability for a product defect of the product itself. In other words, tort liability only lies where the damage done is to other property or is personal injury." Kennedy, 384 S.E.2d at 734. The Supreme Court further explained:

This rule exists to assist in determining whether contract or tort theories are applicable to a given case. Where a purchaser's expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only 'economic' losses. Conversely, where a purchaser buys a product which is defective and physically harms him, his remedy is in either tort or contract. This is so, the analysis provides, because his losses are more than merely "economic."

Kennedy, 384 S.E.2d at 736.

Therefore, the economic loss rule serves as a judicially created gatekeeper to prevent tort claims from interfering with parties' contractual expectations. Unfortunately, the rule has created many difficulties as courts now struggle...