Economic-loss rule applies to bar tort claims for injury to property that is the subject of a contract between the parties.

Walsh v. Cluba, 2015 VT 2 [Filed February 13, 2015]


SKOGLUND, J. This case concerns a dispute over damage to a leased commercial space. The jury awarded plaintiff, landlord David Walsh, just under $11,000 in damages attributable to defendant, tenant Frank Cluba, but the court dismissed landlord's contract and tort claims against defendant Good Stuff, Inc., a business formed by Cluba and his partner that had possession of the subject property. We affirm.

The trial court granted Good Stuff summary judgment on contract claims, ruling that Good Stuff had not signed the lease and that Walsh had failed to point to any post-lease writing or action that could have bound Good Stuff to the lease. The court stated that the successor liability doctrine was inapplicable to this case, and that Walsh had abandoned his ratification theory by neither raising it nor offering facts to support it in his response to defendants' summary judgment motion. Accordingly, the court concluded that "[a]ll contractual claims against Good Stuff must be dismissed.”

At trial the court granted Good Stuff's Rule 50 motion, ruling that the economic-loss rule precluded the tort claim because the dispute was completely covered by Walsh's and Cluba's contractual relations and because the parties' duties were defined by the contract, which required the tenant to leave the premises in the condition in which he took them.

Walsh first argues that the trial court erred by dismissing his contractual claims against Good Stuff. We decline to consider the argument. The court declined to consider the ratification argument on the basis that it had neither been briefed nor supported by evidentiary material in Walsh's response to defendants' motion for summary judgment, in which defendants asserted that Walsh knew he was contracting solely with Cluba, made no attempt to bind Good Stuff to the lease agreement. Walsh made the tactical decision to abandon his contractual claims and instead rely on a negligence claim of liability and pointedly did not challenge the trial court's ruling below in his motion to clarify.

Walsh next argues that the court erred in barring his negligence claim against Good Stuff because he was claiming property damage as the result of Good Stuff's actions. Walsh alleged that "[i]n the process of vacating the premises, the Defendants negligently damaged them quite extensively which inhibited the Plaintiff from reletting the premises for some time, while repairs were made." Walsh sought a judgment that "the Defendants are liable for the cost of repairing the damages to the Lease Premises negligently inflicted by them, the loss of rentals during the period of repair, and other consequential damages resulting therefrom."

The economic-loss rule "maintain[s] a distinction between contract and tort law" by "prohibit[ing] recovery in tort for purely economic losses.” Negligence actions are generally limited to unanticipated physical injury, while contract law allows parties to protect themselves through bargaining.

Injury to the product or property that is the subject of a contract is generally considered a disappointed economic expectation for which relief lies in contract rather than tort law. Thus, the economic-loss rule generally applies to bar tort claims when the alleged damage is to property that is the subject of a contract between the parties. The determining factor in deciding whether to apply the economic-loss rule is not whether privity exists but rather whether there is "a duty separate and apart from a contractual duty.”

Walsh sought damages to his commercial property that was the subject of the lease agreement between him and his tenant, Cluba. Good Stuff occupied the property as the result of Cluba being its president and director and having signed the lease with Walsh. Thus, although Walsh and Good Stuff were legal strangers, any duty Good Stuff had concerning the subject property was established by virtue of the lease agreement. Here, the alleged tort duty was plainly interwoven with the subject contract—indeed, the contract was the source of the duty. Under these circumstances, the trial court did not err in dismissing Walsh's negligence claim based on the economic-loss rule.

Given the unique circumstances of this case, the trial court did not err in dismissing Walsh's negligence claim against Good Stuff under the economic-loss rule.


ROBINSON, J., concurring and dissenting. The majority expands the so-called economic-loss rule by applying it to claims resting on physical damage to property and by implying a presumptive prospective waiver of tort claims whenever parties assume corresponding contractual duties. In so doing, it misapprehends the rationale for and scope of the rule, further muddying an already confused area of law.

This Court has long recognized that the "economic losses" to which the economic-loss rule applies are intangible economic losses, and do not include losses accompanying physical harm to persons or property. Restatement (Third) of Torts: Liab. for Econ. Harm § 2 ("`[E]conomic loss' is pecuniary damage not arising from injury to the plaintiff's person or from physical harm to the plaintiff's property.”). This simply isn't an "economic-loss" case, in which a plaintiff is seeking a tort remedy for a purely economic loss. He does not seek damages for "economic loss without physical injury," or "absent some accompanying physical harm."

The majority shifts from a rule that recognizes that a contractual duty does not give birth to a tort duty to avoid purely economic losses to a rule that presumes that a contractual duty negates any pre-existing, independent tort duty concerning the same subject matter. This approach turns the analysis on its head and bypasses the proper threshold question—"Is there a duty here independent of the contract?" Wholly apart from any lease agreement, defendants here had a well-established duty not to unreasonably damage Walsh's premises.