Recent Court Decision Reinforces Economic Loss Rule
A recent court decision in Florida appears to have further reinforced the use of the economic loss rule in construction matters, providing manufacturers with a greater defense to claims associated with defective products utilized in construction. The court found that because the defective part was an integral part of the building as constructed, the court barred the condominium association’s claims because the defective product did not cause damage to ‘other’ property—that is, property damage beyond the building itself. It is important to note that while the general economic loss rule is not unique to Florida, it is these types of nuances, exceptions and extensions of the rule that may vary from state to state.
The opinion was in 2711 Hollywood Beach Condominium Association, Inc. v. TRG Holiday, LTD, etc., et al., recently decided by the Third District Court of Appeal in Florida. The court granted Nibco, Inc.’s motion for summary judgment against the plaintiff condominium association for its claims of negligence and strict liability against Nibco, as Nibco was the manufacturer of fittings used in the fire suppression system installed during construction of the building. According to the Association’s claims, Nibco’s fittings failed, allowing for leaks in the building, forcing the Association to file suit against multiple parties involved in the construction, as well as manufacturers such as Nibco, for damages associated with future repairs and replacement of the fire suppression system.
The issue in the case surrounded the economic loss rule, which has been adopted by a majority of the courts throughout the country. In its most basic form, the economic loss rule bars recovery in tort for strictly economic losses arising out of contract. There are some states where the economic loss rule is applied with much less rigidity. Only a handful of states such as Arkansas, Connecticut, Louisiana and Virginia fall into this category, as most states utilize some form of the economic loss rule. More specifically, in Florida, the economic loss rule shields a defendant from liability for a defective product from tort-based claims, unless there is injury to person or damage caused to property other than to the defective product itself. The rule has its roots in pure contract and product liability cases, but has more recently been expanded into Florida’s construction law since the hallmark case of Casa Clara Condominium Ass’n v. Charley Toppino and Sons, 620 So. 2d 1244 (Fla. 1993). There, the Florida Supreme Court stated that the purpose of the rule is to focus on the product purchased by the plaintiff, not the product provided by the defendant – in that case, a house.
In the subject case, the Third District Court of Appeal reasoned that “[t]he Association bargained for, purchased and received a building.” Although Nibco’s fittings were only a component to the building, they were integrated in such a manner that made them an “integral part of the finished product” – the condominium building. Therefore, when the Nibco’ components failed and caused damage to other parts of the building, the court reasoned that was not damage to ‘other’ property. As stated by the court, “[i]njury to the building itself is not injury to “other” property because the product purchased by the Association was the building.” As a result, the court barred the claims against Nibco, and the associated damages with replacing the fire suppression system and repair damages to the building. The court declined to forego applying the economic loss rule on the basis of public policy reasons.
The importance of this decision is not simply the reinforcement of the economic loss rule in construction cases, but the context in which it is applied. In different circumstances, the dynamic of a person bargaining for a particular product is quite different. For example, while an owner contracting for an office building with a contractor may have a significant amount of input on installed products, the purchaser of a condominium almost never has any input, or ability to negotiate, the choice of products utilized in construction—especially in the common elements of the condominium building. This is especially true when a large, commercial contractor is utilized for construction, and there are numerous subcontractors and vendors involved.
In this regard, what remains to be seen is whether parties aside from simple manufacturers attempt to make use of this defense. Meaning, are developers, contractors and design professionals entitled to the benefits of the economic loss rule as well? Based on other cases decided by Florida courts, and the explicit language utilized in the subject case, it is unlikely. For the time being, it appears the economic loss rule and its benefits in the construction context applies solely to products liability claims against manufacturers in Florida. However, due to the nuances surrounding the economic loss rule across the country, it will be interesting to see what affect this ruling may have beyond Florida. This is an issue that all parties involved in the construction process, including property owners, should monitor for years to come.