Tuesday, December 22, 2009

New Products Liability Decision: Economic Loss Rule

In yesterday's advance sheets, the South Carolina Supreme Court issued its decision in Sapp v. Ford Motor Co. The opinion can be found at page 86 at this link. This case is significant because it clarifies the economic loss rule in the products liability context and overrules a prior decision of the South Carolina Supreme Court.

FACTUAL BACKGROUND: Plaintiff-Appellant ("Sapp") purchased a 2000 Ford F-150 truck for $5,000 in 2004. The truck had 190,000 miles on it and was purchased "as is." In 2005, the cruise control on the truck stopped working, and the vehicle caught fire when Sapp parked it. The fire did not injure Sapp or damage any property other than the vehicle itself. The cost to repair the vehicle was $7,000.

PROCEDURE: Sapp filed suite against Ford alleging causes of action for negligence, strict liability, breach of warranty, and fraud/misrepresentation. He alleged that Ford knew of a design defect in the cruise control switch that would short circuit and cause a fire in the engine compartment. The circuit court granted summary judgment as to all causes of action and found that the economic loss rule precluded the tort claims. Sapp appealed.

ISSUES: Sapp argued on appeal that the circuit court erred in granting summary judgment.

DISPOSITION: The South Carolina Supreme Court agreed with the circuit court and affirmed dismissal. It also overruled its prior decision in Colleton Preparatory Academy, Inc. v. Hoover Universal, Inc., 379 S.C. 181, 666 S.E.2d 247 (2008).

RULES AND OPINION: The key language that summarizes the court's holding is as follows:

The purpose of the economic loss rule is to define the line between recovery in tort and recovery in contract. Contract law seeks to protect the expectancy interests of the parties. Tort law, on the other hand, seeks to protect safety interests and is rooted in the concept of protecting society as a whole from physical harm to person or property. In the context of products liability law, when a defective product only damages itself, the only concrete and measurable damages are the diminution in the value of the product, cost of repair, and consequential damages resulting from the product's failure. Stated differently, the consumer has only suffered an economic loss. The consumer has purchased an inferior product, his expectations have not been met, and he has lost the benefit of the bargain. In this instance, however, the risk of product failure has already been allocated pursuant to the terms of the agreement between the parties. On the other hand, the parties have not bargained for the situation in which a defective product creates an unreasonable risk of harm and causes personal injury or property damage. Accordingly, where a product damages only itself, tort law provides no remedy and the action lies in contract; but when personal injury or other property damage occurs, a tort remedy may be appropriate.

The court reviewed its prior decisions in Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 341, 384 S.E.2d 730, 734 (1989) and Colleton Preparatory Academy, Inc. v. Hoover Universal Inc., 379 S.C. 181, 666 S.E.2d 247 (2008). The court reiterated that its holding in Kennedy only applies in the residential home context. (In Kennedy, the court held that a homebuyer could recover in tort against a developer or builder where the builder violates an applicable building code, deviates from industry standards, or constructs a home that he knows or should have known will pose a serious risk of physical home). The court explained that the reason for the exception in Kennedy was related to the the mechanics and context of home purchasing, which make it different from the purchase of other manufactured goods.

Significantly, the court overruled its decision in Colleton Prep to the extent that it expanded the Kennedy's exception beyond the residential builder context. The court also stated that -- like the dissent in Colleton Prep -- it was cautious in permitting negligence actions where there is neither personal injury nor property damage.

Imposing liability merely for the creation of risk when there are no actual damages drastically changes the fundamental elements of a tort action, makes any amount of damages entirely speculative, and holds the manufacturer as an insurer against all possible risk of harm.

The court agreed with federal court decisions that the economic loss rule precludes a negligence action against a manufacturer where duties are created solely by contract and where the product only injured itself or where the damages were contemplated by the parties' contract.

Justice Beatty concurred in the decision but discussed the inconsistent treatment of the doctrine and suggested that the use of varying analytical frameworks does not provide the bench and bar with guidance in its application. He suggested that the Court should should pronounce a list of areas to which public policy prohibits the application of the economic loss doctrine and forego any legal analysis.

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