The Contractually Based Economic Loss Rule in Tort Law: Endangered Consumers and the Error Of East River Steamship
41 Pages Posted: 13 Sep 2016 Last revised: 15 May 2017
Date Written: September 1, 2016
The rule of strict products liability has been widely adopted in the U.S., subjecting manufacturers and other product distributors to strict tort liability for physical harms proximately caused by defective products. The scope of strict products liability has also been widely limited to bar tort recovery for cases in which the defect only damaged the product itself, causing pure economic losses such as repair costs and lost profits. In these cases, a growing majority of courts have followed the approach charted by the U.S. Supreme Court in East River Steamship Corp. v. Transamerica Delavel Inc., which barred tort recovery for stand-alone economic harms to ensure that contract law does not “drown in a sea of tort.” Relying on this reasoning, other courts have applied the rule to dismiss tort claims for pure economic losses caused by the negligent performance of a service contract.
As specified by East River Steamship, the economic loss rule is fully defined by two formal properties. If the form of the parties’ relationship permits the allocation of loss by contracting, and if the form of the alleged injury is for pure economic loss, then the rule bars tort recovery. Across the full range of tort cases, however, these two formal properties do not always determine whether tort law permits recovery for pure economic loss, creating a body of case law that appears to be in considerable disarray.
The economic loss rule is routinely justified with a contracting rationale, yet that rationale has never been substantively developed. Doing so shows that the availability of tort recovery for pure economic losses depends on whether the ordinary consumer has the requisite information to protect the relevant set of interests by contracting. In considering the allocation of liability for economic losses that only implicate economic interests in lost profits and the like, the ordinary consumer is sufficiently well informed to protect these interests by contracting. But as established by the substantive rationale for strict products liability, the ordinary consumer is unable to make informed contractual decisions about product risks threatening physical harm. The same contracting problem extends to certain types of pure economic loss, including the financial costs of medical monitoring and asbestos abatement. Consequently, the substantive contracting rationale justifies an intermediate economic loss rule that permits endangered consumers to recover tort damages for these types of pure economic loss while otherwise denying tort recovery for disappointed product users. The same conclusion applies to service contracts. This contractually based intermediate economic loss rule explains the full body of case law while being substantively consistent with the widely adopted rule of strict products liability, unlike the East River Steamship formulation.
Suggested Citation: Suggested Citation