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Authority from Other Jurisdictions...

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Authority from Other Jurisdictions Suggests That a Negligent Misrepresentation Claim is Subject to the Economic Loss Rule

Courts in other jurisdictions also hold that where tortious misrepresentations concern the quality and characteristics of the property being transferred by contract, the economic loss rule applies because the tortious representations are indistinguishable from the bargained for warranty provisions of the contract. 

A foundational case on the interaction of tortious misrepresentation claims and the economic loss rule is Huron Tool and Engineering Co. v. Precison Consulting Services, Inc., 532 N.W.2d 541 (Mich. Ct. App. 1995).  In that case, the Plaintiff brought breach of contract, breach of warranty, fraud, and misrepresentation claims against the Defendant from whom it had purchased allegedly defective software.  Id. at 543.  At issue was whether the economic loss rule barred a fraudulent inducement claim independent of contractual claims.  Id.  In holding that fraudulent inducement claims are not precluded by the economic loss rule the Huron Court recognized that fraud in the inducement is a recognized tort arising independent of contract: “Fraud in the inducement, however, addresses a situation where the claim is that one party was tricked into contracting.   It is based on pre‑contractual conduct which is, under the law, a recognized tort.”  Id. at 544.  However, in upholding the dismissal of the Plaintiffs’ inducement claim the Huron Court recognized that the economic loss rule still bars tortious inducement claims where the misrepresentations concern the quality and character of the goods sold:

[W]here the only misrepresentation by the dishonest party concerns the quality or character of the goods sold, the other party is still free to negotiate warranty and other terms to account for possible defects in the goods.

. . . .

The fraudulent representations alleged by plaintiff concern the quality and characteristics of the software system sold by defendants.   These representations are indistinguishable from the terms of the contract and warranty that plaintiff alleges were breached.

Id. at 545-46.  Such a limitation on tortious inducement claims preserves the essence of the economic loss rule and eliminates the “danger that tort remedies could simply engulf the contractual remedies and thereby undermine the reliability of commercial transactions.” Id. at 544

Where the alleged misrepresentations concerned the quality and character of the contract property, those alleged misrepresentations concern the heart of the parties’ negotiated contract and the economic loss rule limits the parties’ remedies to those they negotiated through the contract.  “Such fraud is not extraneous to the contractual dispute among the parties, but is instead but another thread in the fabric of [the] plaintiffs’ contract claim.”[1]

Other Courts have similarly concluded that where a plaintiff’s misrepresentation claims concern the quality and character of the contracted for property, the economic loss rule confines the parties to contractual remedies.  In the cases of Martin v. A.O. Smith Corp., 931 F. Supp. 543 (W.D. Mich. 1996) and Valleyside Dairy Farms, Inc. v. A.O. Smith Corp., 944 F. Supp. 612 (W.D. Mich. 1995), the Plaintiffs purchased feed storage systems from the Defendant manufacturer of the storage systems.  The Plaintiffs subsequently brought fraud and other claims against the manufacturer for misrepresenting the ability of the storage systems to “preserve feed quality and improve herd health” by limiting the exposure of feed to oxygen.[2]  The feed storage “systems allegedly failed to perform as represented and allowed plaintiffs’  feed to become exposed to oxygen, causing feed spoilage and nutritional deficits in plaintiffs’ herd.”[3] In both cases, the Court found that the economic loss doctrine barred the tortious misrepresentation claims because the misrepresentations concerned the quality and character of the contracted for property.

As explained by the Valleyside Court:

Plaintiffs’ fraud claims are inextricably connected to the “quality or character” of the silos about which plaintiffs could have negotiated a warranty and other terms to account for possible defects in the goods or nonperformance.   Clearly, the defendants representations were not extraneous to the quality and characteristics of the silos.   Further, plaintiffs’ allegations are essentially indistinguishable from a contract claim that they could have brought against their seller, had they negotiated a warranty of quality and performance.   Accordingly, the economic loss doctrine applies and bars plaintiffs’ fraud claims.[4]

The limitation on misrepresentation claims running to the heart of the parties’ contract also has been extensively explored by Florida courts.  In Hotels of Key Largo, Inc. v. RHI Hotels, Inc., the Plaintiff alleged that it was fraudulently induced into entering a franchise agreement through the Defendant’s misrepresentations regarding the services and benefits accompanying the franchise.[5] The Court determined that the economic loss rule barred such claim, explaining:[6]

Applying common sense to the Supreme Court’s analysis, we decline to adopt the defendants’ position that one can always avoid operation of the economic loss doctrine by merely pleading fraud in the inducement.   A critical distinction must be made where the alleged fraudulent misrepresentations are inseparably embodied in the parties’ subsequent agreement.  This would seem especially so where the parties have specifically agreed in an integration clause that their written contract “supersedes all prior agreements or understandings.”

. . . .

[W]here the only alleged misrepresentation concerns the heart of the parties’ agreement, simply applying the label of “fraudulent inducement” to a cause of action will not suffice to subvert the sound policy rationales underlying the economic loss doctrine.

Id. at 77

            Key Largo seemed consistent with the rulings from other jurisdiction applying the economic loss rule.  In Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Cos. Inc., 110 So. 3d 399 (Fla. 2013), the Florida Supreme Court brought a halt to what it considered the unprincipled expansion of the economic loss rule, stating:

Having reviewed the origin and original purpose of the economic loss rule, and what has been described as the unprincipled extension of the rule, we now take this final step and hold that the economic loss rule applies only in the products liability context. We thus recede from our prior rulings to the extent that they have applied the economic loss rule to cases other than products liability.[7]

There were numerous concurring and dissenting opinions.  At least the Florida Supreme Court, however, has “receded” from its prior opinions allowing the application of the economic loss rule in any case other than in the product liability context.

 



[1]Huron Tool and Engineering Co., 532 N.W.2d at 373 (quoting Public Service Enterprise Group, Inc. v. Philadelphia Elec. Co., 722 F. Supp. 184, 201 (D.N.J., Aug. 24, 1989)).

[6] Florida’s former interpretation of the economic loss rule is no different than Utah’s in that Florida recognizes and enforces the “independent duty” analysis: “[T]he economic loss rule has not eliminated causes of action based upon torts independent of the contractual breach even though there exists a breach of contract action.”  Hotels of Key Largo, 694 So. 2d at 76 (quoting HTP, Ltd. v. Lineas Aereas Costarricenses, 685 So. 2d 1238, 1239 (Fla. 1996)).

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