Business Torts: The Economic Loss Rule, Independent Tort Doctrine, and Spotting the Independent Facts
Rocco J. Carbone, III
Douglas Law.
Orange Park, FL
rocco@dhclawyers.com
http://www.dhclawyers.com
Charles T. Douglas
Douglas Law.
Palatka, FL
charlie@dhclawyers.com
http://www.dhclawyers.com
In commercial litigation, determining whether a plaintiff has an actionable business tort sometimes can be difficult. “Business torts” is a broad category of claims that deal with causes of action against businesses and the agents of these businesses. [1] The conduct at issue can determine whether contract or tort remedies are appropriate. Generally, recognizable business torts are claims for fraud, misrepresentation, breach of fiduciary duty, and various state deceptive and unfair trade practice act claims.
When a dispute among the parties stems from a contract, the practitioner must have a familiarity with the Economic Loss Rule (“ELR”) and the Independent Tort Doctrine (“ITD”) when determining what claims to allege and anticipating defenses to those claims. Over the years, some courts have held the ELR and the ITD are one and the same.[2] However, other courts have found them as two distinct theories. [3] Generally, these are considered two distinct theories for limiting the available damages to a plaintiff. [4]
The ELR initially developed in the context of product liability cases [5] but has evolved to cover several other areas as well. [6] Generally, the ELR precludes tort remedies where there is only economic loss without personal injury or damage to any other property. [7]The initial purpose of the rule was intended to be a dividing line between contract and tort remedies. [8] In this context, the ELR was “the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care and thereby encourages citizens to avoid causing physical harm to others.” [9]
In the business torts context, the ELR has been, and continues to be, a basis for dismissal of tort claims where the allegations against the defendant primarily arise from a breach of contract. [10] However, some jurisdictions have begun to narrow the scope of the ELR and limit it to its originally intended purpose, which was to preclude tort claims only in the product liability context. [11] Still, this has only shifted the focus from the ELR to the similar, but fundamentally different, ITD. [12]
If a contract is at the center of a dispute, the ITD will not allow a tort claim to stand unless the breaching party has committed a tort distinguishable from the duty that arises from the breach of contract claim. [13] To be actionable, the alleged tort must be substantiated by facts which requires proof separate and distinct from the breach of contract, or the alleged tort should be dismissed. [14] In other words, the same facts that make up the breach of contract claim should not necessarily be the same facts that make up a party’s tort claim. The duty that was breached due to the non-performance of a contract is simply that-a party not doing what they promised in a contract. If the defendant had an obligation under a contract and failed to fulfill that obligation, the Plaintiff seeking compensation should be entitled to the appropriate damages based upon what was bargained for in the contract. [15] As such, even outside the context of product liability cases, the ITD stands as a limitation for what types of claims may be actionable when there is a contract at issue between the parties. [16]
Other claims which a plaintiff’s attorney should simultaneously consider when evaluating a claim for a breach of contract include, but are not limited to, claims for fraud, misrepresentation, breach of fiduciary duty, [17] tortious interference with a business relationship, [18] or conversion. [19] Several other claims may also be actionable. For a plaintiff’s attorney whose potential client has a breach of contract claim, questions during the initial client intake should not be limited solely to the dates, times, and basis of the agreement that made up the contract. The attorney must also inquire of the potential client why they entered the contract. Was there a misrepresentation of material facts? Was the other party a fiduciary?
If there are additional facts that can substantiate tort claims independent of the breach of contract claim, the plaintiff’s attorney must plead each of these facts in the initial complaint as a basis to support the tort claim independent of a breach of contract claim. This is particularly important when considering the additional pleading requirement when dealing with a potential fraud claim. [20] The particular facts pled can be the difference between recovering significant additional damages above contractual remedies (including even punitive damages), or limiting damages to those confined by the initial contract. [21]
Failing to consider or plead the required additional facts allows the other party to highlight the insufficient basis to substantiate a tort claim and limit the remedies to those based on a breach of contract. As one court noted, “In evaluating the applicability of the economic loss rule, the Court must look at the substance of the claim, rather than the label placed on it by counsel.” [22] Knowing what facts can substantiate an independent tort from a breach of contract can make all the difference for a client’s, and the practitioner’s, eventual recovery.
** Rocco J. Carbone, III, of Douglas Law. focuses his practice on commercial, civil, and criminal litigation. He can be reached at rocco@dhclawyers.com.
*Charles T. Douglas, Jr., of Douglas Law. focuses his practice on civil litigation. He can be reached at charlie@dhclawyers.com.
[1] See Jay M. Feinman, Teaching Economic Torts, 95 Ky. L.J. 893, 907 (2006/2007) (“[B]usiness torts include not only doctrines aimed primarily at defining and regulating appropriate means of market competition, but also issues arising out of contractual relationships other than ordinary breach of contract.”).
[2] Donatelli v. D.R. Strong Consulting Eng’rs, Inc., 179 Wn.2d 84 (Wash. 2013) (“[Previously], a majority of this court concluded that the term “economic loss rule” was a misnomer and renamed the rule the “independent duty doctrine” to more accurately describe how this court determines whether one contracting party can seek tort remedies against another party to the contract. The independent duty doctrine continues to “‘maintain the boundary between torts and contract’ in the place of the economic loss rule.”); see also, De Serling v. Bank of Am., N.A., 2009 U.S. Dist. LEXIS 103923, *6 (S.D. Fla. 2009) (“BOA has argued that the Plaintiff’s claim for conversion should be dismissed because it is barred by the independent tort doctrine (also known as the economic loss rule).”).
[3] See Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Companies, Inc., 110 So. 3d 399, 408 (Fla. 2013) (Pariente, J. concurring) (distinguishing the economic loss rule from the independent tort doctrine stating,
“[I]n order to bring a valid tort claim, a party still must demonstrate that all of the required elements for the cause of action are satisfied, including that the tort is independent of any breach of contract claim.”).
[5] Santor v. A. & M. Karaghensian, 207 A.2d 305 (N.J. 1965); Seely v. White Motor Co., 403 P.2d 145 (Cal. 1965); see also, East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986) (“A manufacturer in a commercial relationship has no duty under either negligence or strict products-liability theory to prevent a product from injuring itself.”).
[6] See, e.g., Duffin v. Idaho Crop Improvement Ass’n, 895 P.2d 1195 (Idaho 1995) (economic loss prevents tort claims outside product claims, except when there is a special relationship involved, i.e., professional or quasi-professional relationship.);Koster v. P & P Enter., Inc., 539 N.W.2d 274 (Neb. 1995) (economic loss rule exception for intentional interference with a business relationship).
[7] See Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Companies, Inc., 110 So. 3d 399, 401 (Fla. 2013) (“We have defined economic loss as ‘damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits-without any claim of personal injury or damage to other property.’ We have further explained that economic loss includes ‘the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.’ In other words, economic losses are ‘disappointed economic expectations,’ which are protected by contract law, rather than tort law.”).
[8] R. Joseph Barton, Drowning in a Sea of Contract: Application of the Economic Loss Rule to Fraud and Negligent Misrepresentation Claims, 41 WM. AND MARY L. REV. 1789 (2000).
[9] Casa Clara Condominium Ass’n, Inc. v. Charley Toppino and Sons, Inc., 620 So. 2d 1244, 1246 (Fla. 1993) (quoting Sidney R. Barrett, Jr., Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis, 40 S.C.L. Rev. 891, 894 (1989)).
[10] See, e.g., Victory Park Mobile Home Park v. Booher, 2014 Tex. App. LEXIS 2209 (Tex. App. Dallas Feb. 26, 2014) (directed verdict was proper because economic loss rule barred a partnership’s claim for damages for breach of fiduciary duty arising from a partner’s alleged failure to remit rent payments; absent any allegation or evidence regarding duties outside that agreement the economic loss rule bars recovery in tort).
[11] See Tiara Condominium Ass’n, Inc., 110 So. 3d at 401.
[12] Id.; see also, Lamm vs. State Street Bank and Trust, 2014 U.S. App. LEXIS 6868 (11thCir. 2014).
[13] Daedalus Capital LLC v. Vinecombe, 2014 U.S. Dist. LEXIS 127993 *18-19 (M.D. Fla. 2014) (common law fraud and Civil RICO case sufficiently pled distinct from breach of contract claim).
[14] Joyeria Paris, SRL v. Gus & Eric Custom Servs., 2013 U.S. Dist LEXIS 176674 * 10-11 (S.D. Fla. 2013) (cause of action for fraud dismissed as not independent of the breach of contract claim).
[15] “[F]undamental difference between tort and contract actions lies in the nature of interests protected. Tort actions protect the interest in freedom from various kinds of harm. Contract actions protect the interest in having promises performed.” Porter v. City of Manchester, 849 A.2d 103, 114 (N.H. 2004) (quoting Brockmeyer v. Dun & Bradstreet, 335 N.W. 2d 834, 841 n. 14 (Wisc 1983)).
[16] Tiara Condo Ass’n, 110 So. 3d at 408 (Pariente, J., concurring).
[17] Bay Ctr. Apts. Owner, LLC v. Emery Bay PKI, LLC, 2009 Del. Ch. LEXIS 54 (Del. Ch. 2009) (plaintiff sufficiently pled breach of fiduciary duty independent of breach of contract).
[18] Hill v. Heritage Resources, 964 S.W.2d 89 (Tex. App. El Paso 1997) (tortious interference with a business relationship independent of breach of contract claim).
[19] Condo. Servs. v. First Owners’ Ass’n of Forty Six Hundred Condo., Inc., 281 Va. 561 (Va. 2011) (conversion claim was proper because the management company committed a separate, independent tort, which was alleged to have occurred after the association properly terminated the contract at issue).
[20] See Fed. R. Civ. Pro. 9(b) (“[I]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.”); see also, Talisman Capital Alternative Invs. Fund, Ltd. vs. In re Mouttet, 2013 Bankr. LEXIS 1525, *53 n. 44 (S.D. Fla 2013) (holding that “Because the Complaint fails to meet the requirements of Rule 9 with respect to the allegations of fraud the Court does not need to address the other bases raised for dismissal.”).
[21] See Lewis v. Guthartz, 428 So. 2d 222, 223 (Fla. 1983) (“It is now a well-settled rule in Florida that punitive damages are not recoverable in a breach of contract action, absent an accompanying independent tort.”).
[22] Razi v. Razavi, 2012 U.S. Dist. LEXIS 187072, *26 (M.D. Fla. 2012) (citing Hotels of Key Largo, Inc. v. Hill Hotels, Inc., 694 So.2d 74, 77 (Fla. 3d DCA 1997)).