One of Florida's messiest doctrines

The economic loss rule - aside from sounding boring, it makes every lawyer's eyes roll at the thought of having to engage in an argument or motion practice involving it. So, what is it? It is a rule of law that says, effectively, if you have a contract then disputes and problems arising from it or its subject matter should be resolved by theories of recovery based in contract principles - namely, a cause of action for breach of contract. You cannot sue in tort. In other words, there is no such thing as negligence associated with the performance of a contract, just as there is no fraud. Those of you who do not practice law have probably hit upon the obvious by now and thought, "It doesn't matter if someone breaches their agreement because they have to or if they do so intentionally?" That's right. Generally, one breach is no better or worse than another.

But, because this is the law and, well, there's a lot of lawyers out there, there is an exception to this rule. You get to sue in tort (negligence, fraud, breach of fiduciary duty, etc.) if the actions or events that gave rise to the tort are separate and distinct from the breach of contract. Confusing enough? Need an example? Ok, you and I are negotiating for the purchase and sale of your company. You like the price I offered, but another bidder is offering you more money for the company. I tell you that, if you accept my offer, I will make you president of the company after we close the deal and you can get paid a salary. Based on this representation, you accept my offer instead of going with the higher bidder and we sign a contract for the sale of the business. After the sale goes through, I do not make you president of the company. You now have a cause of action for fraud that is not barred by the economic loss rule. Why? Because the fraud had nothing to do with the terms of the contract and was an inducement offered separate and distinct from the contract.

Sounds messy? It is and this is the subject of much litigation in Florida every year. But it does ensure that when you sign a contract, the damages that can be caused by its breach are limited only to those recoverable under contractual theories. We would lose a lot of commercial certainty and reliability if people could be sued for things like fraud arising out of a contract and could be exposed for damages they never dreamed of. If nothing else, the law likes predictability, even if arrived at by a confusing theory.

Have a great day everyone - and don't forget that you can see all the updates on http://kaijacobs.blogspot.com (do not include the www in the address because it's an internal Google site).