Why You Should Care About the Elimination of the Economic Loss Rule
The economic loss rule may sound like an archaic and old fashioned legal term that many people shouldn’t have to worry about. But, in fact, it’s recently undergone some changes, and if you are a business owner, the changes could very well affect you.
What is the Economic Loss Rule?
The economic loss rule (ELR) is a longstanding rule that says that you cannot receive tort damages or sue under a tort theory (such as negligence) due to breach of contract when there’s a contract in place. If you have a contract, you are limited to collecting damages you incur because of the breach, but nothing more.
So for example, if you contract with a roofer who damages your roof, you can sue the roofer for breach of contract in attempt to collect damages from the breach. However, you could not also sue him for negligence or malpractice.
The logic is that because parties have contracted their rights, remedies, and damages, no party should be able to get more than their contractual damages by suing for negligence. The creators of the law wanted a way for business owners to have some certainty about what potential damages were, as well as possible remedies, if something went wrong.
Furthermore, contractual damages are intended to put a party where they were if the contract had been completed. But damages as a result of negligence are intended to make a party whole. Those are two very different standards; as such, someone cannot expect to recover damages under the theory of negligence for a breach of contract.
Florida Court Changes the Rule
But the law has recently changed in a case decided by the Florida Supreme Court. In the case, a condominium association sued their insurance broker, with which it had a contract, alleging that the broker misrepresented the amount of insurance coverage the association had. The association sued not only for breach of contract, but for negligent misrepresentation, breach of fiduciary duty, and negligence, all torts that the ELR would bar.
The Florida Supreme Court, reversing years of prior law, decided that the ELR should not bar tort damages, even where there’s a contract. They provided no explanation as to the reversal, other than the fact that imposing the ELR in the first place was a bad idea, and unworkable in practice.
The Effects of the Law Change on Businesses
The end result is that in a breach of contract action, a party suing could receive almost any kind or nature of damages. And businesses may have more responsibility to those with whom they contract than previously assumed.
From a business owner perspective, the change in the law can be seen either way, depending on whether you are the business suing and seeking damages, or being sued. It is important to remember that nothing stops a party from explicitly limiting damages in a contract itself.
Given the now expanded ability of an aggrieved party to pursue and receive extra-contractual damages, businesses may be wise to review their agreements to ensure that there are limitation of damages clauses in them.
Don’t leave your business to chance. Make sure your business contracts and agreements are current and protect you to the greatest extent possible. Contact Tampa business attorney David Toback to discuss your needs and review documents to make sure your business transactions go as planned, without problems.