The economic loss doctrine prohibits a party, which is seeking only damages for economic loss, from recovering those damages pursuant to a tort cause of action. Under the doctrine, economic losses are the damages suffered by a party, other than damages for personal injury or property damage to “other” property. Here is an example of the application of the economic loss doctrine:
- Plaintiff bought 1,000 widgets from Defendant
- The widgets all malfunctioned and were virtually useless because Defendant defectively manufactured them
- Plaintiff’s losses include the cost of the widgets and profits it lost from the anticipated resell of the widgets
- Under the economic loss doctrine, the Plaintiff can recover under breach of contract and breach of warranty causes of action, but cannot recover under tort causes of action for misrepresentation or products liability
If, in the above example, one of the widgets, because of a defect, had caused personal injury to a warehouse worker of Plaintiff or had burned down Plaintiff’s warehouse, Plaintiff could recover, under tort theories, for the damages caused by that widget because they were for personal injuries or to “other property” (property other than the widgets).
The purpose of the doctrine is to preserve the boundaries between tort and contract law, or, as it has been put: To keep contract law from drowning in a sea of tort law. Another principle underpinning the doctrine was stated as follows by a Tennessee court: “Courts should be particularly skeptical of business plaintiffs who – having negotiated an elaborate contract or having signed a form when they wish they had not – claim to have a right in tort.”
The economic loss doctrine, as it exists in Tennessee, took a new twist based on a recent decision of the Court of Appeals of Tennessee in the case of Milan Supply Chain Solutions, Inc. v. Navistar, Inc. In that case, the trial court held that Tennessee’s economic loss doctrine did not apply to fraud claims. The court of appeals, at least on the facts before it, disagreed and reversed. The case is a very significant case dealing with a very significant defense that is sure to become even more litigated in commercial disputes in Tennessee courts in the coming years.
Here are the key facts of the case:
- Plaintiff (“Buyer”) bought over two hundred trucks from a manufacturer (“Seller”)
- The documents related to the purchases provided that Seller made no warranties other than those set forth in the warranty documents, and provided that Seller disclaimed any warranties of merchantability and fitness for a particular purpose
- Buyer filed suit alleging that the trucks had defects
- Buyer’s pleadings set forth causes of action for (1) breach of contract; (2) breach of express and implied warranties; (3) fraud (also known in Tennessee as “misrepresentation”); and (4) violation of the Tennessee Consumer Protection Act
- The trial court held that the economic loss doctrine did not apply to fraud claims and allowed the jury to decide the fraud (misrepresentation) claims
- The jury found that Seller had made misrepresentations as to the standard and quality of the trucks, and awarded Buyer $10,000,000 in compensatory damages and $20,000,000 in punitive damages
- Thus, the Buyer’s recovery was under tort theories
The Court of Appeals observed that three approaches regarding fraud and the economic loss doctrine had developed in other states. Some states have held that there is no exception to the economic loss rule for fraud. Others have held that there is an exception for all claims alleging fraud in the inducement. Other states have created a narrow exception that applies only where the fraudulent statements do not relate to the quality or character of the goods.
The Milan Supply Chain court held that the economic loss doctrine applies where the alleged fraud, as in the case before it, related to the quality of the goods sold. As the court put it, because the only economic loss at issue in the case concerned the quality of the trucks, and, thus, the fraudulent statements were directly connected to the loss, the fraud exception to the economic loss doctrine did not apply.
Every leading Tennessee case, and, I am pretty sure, every Tennessee case, where the economic loss doctrine has been at issue, involved products and goods that failed, were defective, or were otherwise unsuitable. Moreover, I read the leading law review article on the economic loss doctrine, which is cited in the Milan Supply Chain case. None of the hundreds of cases it discussed involved anything other than goods and products. Nevertheless, I see no reason that the doctrine cannot apply to cases not involving products and goods, such as cases involving services and investments.
The purpose of the doctrine is to prevent a party from doing an end run around contractual language to which the party agreed. That being so, Tennessee business litigation lawyers should press for its application in cases not involving products and goods. Imagine a case where an investor signs contractual language whereby she represents that no representations about the investment have been made to her other than those contained in the written document, but then files a lawsuit alleging that the defendant made intentional oral misrepresentations to her about the investment before she signed that document. If those alleged misrepresentations are not in the parties’ written contract, considering that the parties contractually agreed that the investor would not rely on any statements not contained in the written document, why should the economic loss doctrine not apply given its intended purpose? I view the economic loss doctrine as being in its infancy in Tennessee, and expect that that question and others related to the doctrine will eventually be answered by Tennessee courts.