top of page
  • Writer's pictureAIM

Tennessee Supreme Court Refuses to Extend Economic Loss Doctrine Beyond Product Liability Cases

Updated: Oct 25, 2023

In Commercial Painting Company, Inc. v. The Weitz Company, a drywall subcontractor filed an action for breach of contract, fraud, misrepresentation, and rescission against a general contractor and its sureties for failure to pay for work performed on a construction project and sought $10 million in punitive damages. The contract at issue was lengthy, involved millions of dollars of work, and stated that in no event would the general contractor have to pay special or consequential damages. A jury awarded the subcontractor compensatory damages of $1.73 million and punitive damages of $3.9 million. After prejudgment interest and attorney fees, the judgment totaled $8.36 million.

The Court of Appeals held that the economic loss doctrine applied outside the product liability context when the contract was negotiated by sophisticated commercial entities, and partially reversed the verdict consistent with that finding. The Tennessee Supreme Court granted permission to appeal under Rule 11.

The economic loss doctrine is a judicially created rule that operates to preclude contracting parties from pursuing tort recovery for purely economic losses.

In other words, when the only damages arising from a contract are economic damages, the plaintiff cannot maintain an action in tort. The rationale is that a defective product that damages only itself leaves the product’s owner in the same position as if he had simply not received the benefit of his bargain, and the damages should be based in contract, rather than in tort.

In 2009, the Tennessee Supreme Court adopted a narrow exception to the economic loss rule, barring purely economic loss claims in cases where the alleged fraud concerns “pre-contractual misrepresentations and nondisclosures about the quality, reliability, and character of the goods that are the subject of a contract between sophisticated business entities.” Lincoln General Ins. Co. v. Detroit Diesel Corp., 293 S.W.3d 487 (Tenn. 2009). Thus, in Tennessee, the rule has been implicated in product liability cases when a defective product damages itself without causing personal injury or damage to other property.

Uncertainty has existed for years in Tennessee regarding whether sophisticated parties to service contracts – parties who do not enjoy the protections of the UCC – are actually limited to the damages specified in the contracts they sign.

Application of the economic loss doctrine can be complex, with exceptions (such as the fraud exception) potentially swallowing the rule. Noting the untenable and “confusing morass” that courts have created when expanding the doctrine beyond product liability actions, the Tennessee Supreme Court refused to expand it here. Reversing the court of appeals, the Supreme Court declined to extend the economic loss doctrine to non-product liability claims and found that the subcontractor was entitled to recover compensatory and punitive damages based on its tort claim of intentional misrepresentation against the general contractor, despite the limitations of the contract signed by the parties. In so holding, the court noted that even a sophisticated commercial party to a contract should not have to anticipate fraud or dishonesty by the other party at the time it enters the contract. Notably, the opinion did not address whether a limitation of damages provision could be undone by negligence of a contracting party, as opposed to fraud or misrepresentation.

31 views0 comments


bottom of page