Applying Economic Loss Doctrine to Article 2 Transactions: A Doctrine at a Loss

Article excerpt

INTRODUCTION

Modem application of the judicially-created economic loss doctrine redirects some purchasers of defective goods away from actions in tort for negligence or strict liability against a product manufacturer. The Uniform Commercial Code's (the "Code") premise of liberal supplementation necessitates harmonization of the Code's Article 2 remedy provisions with the common law economic loss doctrine when it comes to remedies for breach for sales of goods in these kinds of cases. (1) In most sale of goods cases, though, we view Article 2's remedies as the optimal system for compensation. The Article 2 framework allows for both limitations of remedies by the parties under section 2-719, (2) and for default remedies for a simple breach of warranty, which under section 2-714 (3) would entitle the purchaser to the difference in value between the faulty goods and the value of the goods as promised without the defects. (4)

Modern application of the economic loss doctrine has proven esoteric at times, as fittingly illustrated by the case of In re Chinese Manufactured Drywall Products Liability Litigation (the "Chinese Drywall Litigation"), (5) involving installation of defective Chinese drywall in certain homes built after Hurricanes Katrina and Rita. (6) The purchasers of the drywall fell into two categories, creating the potential for different treatment of similar claims involving the same defective drywall; the categories, depending on the type of purchase, were by: (1) those who purchased the Chinese drywall directly from the manufacturer and then installed it in their homes; and (2) those who purchased a home, which had been built (or rebuilt) with Chinese drywall. (7) Plaintiffs' claims included the defective drywall itself, along with damages to the home components and appliances as a result, and, in some cases, also the plaintiffs' health. (8)

The distributor defendants moved for dismissal of the plaintiffs' claims based on the economic loss doctrine under the laws of Florida, Mississippi, Alabama, and Louisiana. (9) Focusing on the specific product purchased by the buyer, rather than the products put into the marketplace by the seller, the defendants attempted to distinguish application of the economic loss doctrine on that basis. (10) As such, the defendants conceded that the doctrine did not act to bar the first category buyers' tort claims related to the home because the product purchased was the drywall, and not the home. (11) The court agreed that as to these first category claimants, the tort allegations related to other property and personal injury were allowable and not barred by the doctrine. (12)

The court, focusing on the economic loss doctrine as developed in Florida, also denied the defendants' motion to dismiss the claims brought by buyers in the second category--who purchased the homes that already contained the drywall. (13) The court did not determine whether the "product" purchased by each individual was the home, or the drywall, but nevertheless concluded that the economic loss rule does not preclude tort claims where a component functions appropriately, but there is a "showing of harm above and beyond disappointed economic expectations." (14) The court observed that the economic loss rule did not apply because the plaintiffs who purchased homes: (1) were not in privity of contract with the sellers of the drywall, and (2) the defective drywall created a "hazard to health and property." (15) Therefore, the tort claims of the buyers in both categories were allowed to proceed. (16)

The purpose of this Essay is to analyze the treatment and the types of tort and strict liability claims that courts are likely to redirect toward the Code's Article 2 remedies. (17) Part I of this Essay examines the typical application of the economic loss doctrine. (18) Part II considers the bargain policy underlying the Code that supports imposition of the economic loss doctrine in a variety of claims touching Article 2 matters. …