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If you have been involved in a product liability or construction defect case, you may have come across the term “economic loss doctrine” or “economic loss rule” and wondered how this legal rule might apply to you and your case. Unfortunately, the economic loss doctrine is a commonly misunderstood legal rule riddled with exceptions. If you have experienced an economic loss and are seeking recovery, contact the experienced attorneys at the CEO Lawyer Personal Injury Law Firm to determine if you have a viable case.
Contact Ali Awad, ‘the CEO Lawyer,’ and his team of experienced personal injury attorneys at the CEO Lawyer Personal Injury Law Firm by calling (833) 254-2923 or contacting us online to receive your free and confidential case evaluation. Attorney Ali Awad, ‘the CEO Lawyer,’ established the CEO Lawyer Personal Injury Law Firm and quickly turned it into one of the fastest-growing law firms in the country. If we take your case, you won’t pay anything until we win.
While the economic loss doctrine bars financial recovery from purely economic loss as a general rule in tort cases, there are many exceptions to this rule. Read more about which scenarios the economic loss doctrine applies to and circumstances in which it may not below.
What is Economic Loss?
In legal terms, economic losses refer to monetary loss and damage suffered by an individual, as opposed to physical damages (injuries) to property or a person. For instance, if you have purchased a new vehicle and the car breaks down, and no one is injured, the diminished value of the non-operating vehicle may be considered a purely economic loss. Legally, economic losses are referred to as intangible losses which do not arise from tangible physical harm to persons or property. Therefore, if you have been physically injured or have sustained damage to your personal property while you have incurred monetary damages, this is not considered an economic loss.
What is the Economic Loss Doctrine?
The economic loss rule or economic doctrine is a legal rule established to prevent recovery for purely economic loss in both tort law and contract law without demonstrating separate injury or property damage. This common law rule limits parties that have engaged in a contract to look to their contractual remedies if no separate physical injury or property damage exists. Historically, this rule has been limited to product liability and construction defect cases. Courts uphold this rule when parties should seek recovery in contract negotiation and breach of contract suits rather than through tort recovery.
The economic loss doctrine is a powerful common law rule designed to limit and eliminate damages in a tort lawsuit when there is no privity of contract between parties. This rule clearly provides that a party who has suffered only economic loss due to another negligence has not been injured in a manner that is legally compensable, as tort law is not designed to compensate parties whose economic losses have come as a result of a breach of duties by agreement. Therefore, when it comes to economic losses, these losses are not recoverable as tort damages but only as contract damages. This is because when two parties engage in a contract, they should reasonably anticipate any potential injuries that may occur from a breach of that contract.
Therefore, tort damages on top of contract damages are not allowed. Contract law is a field of law that recognizes the freedom of parties to govern their own affairs when engaged in a commercial transaction. The economic loss doctrine provides protection to companies that would otherwise be exposed to devastating liability claims if tort damages for economic loss were allowed for product defects. The economic loss doctrine is a judicially created principle that bars a party from recovering damages under tort theory who has only suffered economic loss. Whereas a party who enters a contractual agreement should be bound by the terms of that contract or contract law as opposed to tort law.
It is essential to recognize that the economic loss doctrine does not bar injured individuals who have sustained physical injuries or property damage from recovering economic losses but only bars economic recovery in such claims when the only injury results from the product defect itself.
When Does the Economic Loss Rule Apply?
The economic loss doctrine applies, and claims for purely economic loss may be barred when:
- Neither property damage nor physical injury occurred, only economic loss
- A claim stems from simple negligence.
- There is no written contract between the parties.
- There is no sufficient nexus between the parties to substitute for the lack of a written contract.
- There is no third-party beneficiary under the subject contract to substitute for lack of privity
When Can There Be Exceptions to the Economic Loss Doctrine?
The economic loss doctrine may be inapplicable in the following circumstances, allowing recovery of pure economic loss:
- The claim involves negligent misrepresentation (the contract was entered based on false, fraudulent, or misleading representations)
- The claim relates to the inducement
- The claim involves an intentional tort.
- In claims other than product liability or construction defect
- There is a written contract between the parties.
- There is a sufficient nexus between the parties to substitute for the lack of a written contract.
- The defendant exhibited a sufficient degree of power and control over the project.
- There was a third-party beneficiary under the subject contract.
- The policies of tort law favor allowing for the claim to proceed
- A few state supreme courts in the United States have departed from the majority rule and authorized recovery for pure economic loss through tort causes of action (usually negligence). The first was California in 1979, followed later by New Jersey and Alaska.
What Are Sufficient Nexuses (Substitutes for Privity)?
The economic loss doctrine is applicable, barring parties who have experienced purely economic loss from financial recovery, except in cases in which there is a limited exception or written contractual agreement, except in cases in which there is a sufficient nexus or substitute for privity. ‘Nexus’ is a legal term that refers to a sufficient connection, and ‘Privity’ is a legal term that refers to the direct connection parties have to a contract. In certain cases where a party has experienced an economic loss without a contractual relationship, they may be eligible to seek financial compensation without being barred by the economic loss doctrine. If there is a sufficient nexus between parties in the absence of a contract, the economic loss doctrine may be held inapplicable. Courts have found that ‘excessive control may serve as a substitute for privity’ and that whether or not a sufficient nexus exists depends on the defendant’s degree of control. For example:
- A sufficient nexus exists when a subcontractor gives orders and exercises substantial authority. The economic loss doctrine may be avoided, despite there being no contractual relationship between parties.
- When a subcontractor has the power to stop a project. If a subcontractor has the ability to control a contractor or has the power to stop or give orders regarding a project, the economic loss doctrine may be avoided, despite there being no contractual relationship between the parties, and the subcontractor may be held liable.
In the absence of a contractual relationship between parties, the degree of power and control a party has over the overall project, the more a court may find sufficient nexus between parties to substitute the privity of a contractual relationship. However, the mere knowledge of a project, the ability to make minor changes to a plan, or attendance at meetings regarding the project doesn’t create a nexus sufficient to establish privity.
Third-Party Beneficiary
If there was a third-party beneficiary to a contract, the privity of the contract may be established. When a third party benefits from a contract from the intentions of a promisee, then that third party shall be considered as an intended beneficiary who has enforceable rights under the contract. However, if a third party simply incidentally benefits from the performance of a particular contractual promise, then the incidental beneficiary will have no enforceable rights on the contract. Therefore, if a third party is an intended beneficiary by a promisee to a contractual agreement, they may seek compensation for economic loss via sufficient nexus in place of a contractual agreement.
Limited Exceptions
Most tort claims are subject to the economic loss doctrine, except for torts generally referred to as negligent misrepresentation and intentional torts. If a party entered the contract under false, fraudulent, or misleading representations upon inducement, the economic loss doctrine may not be applicable, and the party who sustained an economic loss may seek recovery.
Experienced Georgia Personal Injury Attorney
Economic loss lawsuits are often complex cases that are best left in the hands of an experienced attorney with extensive knowledge of Georgia law. Call Ali Awad, ‘the CEO Lawyer,’ and his experienced team of personal injury accident attorneys today to receive a free, no-obligation consultation. We can assist you with exploring your legal options and avenues to ensure that you receive the compensation you deserve. Contact the CEO Lawyer Personal Injury Law Firm by calling (833) 254-2923 or contacting us online. If we take your case, you won’t pay anything until we win.