The Georgia Economic Loss Rule

By Hoft, John | Journal of Legal, Ethical and Regulatory Issues, July 1, 2007 | Go to article overview

The Georgia Economic Loss Rule


Hoft, John, Journal of Legal, Ethical and Regulatory Issues


ABSTRACT

The Georgia Economic Loss Rule is a common law rule that inhibits claimants from seeking tort damages for losses in disputes about the functionality of products that are traditionally remedied in contract actions. The rule arises out of a desire by the courts to maintain separation between damages for breach of contract and the more expansive damages recoverable in tort. The rule provides that absent injury to person or property, other than to a malfunctioning product itself, where the loss is a pecuniary one like loss of the value or use of the product itself or the cost of repairing it, the claimant may not sue the provider for negligence. Application of the rule limits the claimant to remedies for breach of contract or warranty. The rationale is that where only the defective product is damaged due to an inherent defect an action for recompense seeks merely the benefit of the claimant's contractual bargain. Unfortunately, the application of this rule can produce harsh results when the claimant's breach of contract claims are time barred. Several exceptions to the rule have emerged that ameliorate its sometimes harsh effect. This paper will explore the rule, its rationale, and its limitations in Georgia.

INTRODUCTION

In the early 1970's, Mr. Nick Long purchased a new General Motors automobile from the Jim Letts Oldsmobile dealership in Georgia. The engine persistently ran hot and was even blowing out the liquid in the radiator. Long returned the car to the seller for repairs on several occasions. Neither the dealership nor General Motors were able to correct the problem. After 22 months and 27,000 miles, Long alleged that the engine was completely destroyed. Long sold the car for less than its book value and sued General Motors in tort for negligently manufacturing the car and Letts for negligently failing to repair it. Long did not sue the manufacturer or seller for breach of contract or warranty. Long alleged that his compensatory damages included expenses for repairs, time lost from work, loss of use of the car while being repaired, and diminution in the value of the car due to its propensity to overheat. These kinds of compensatory general damages are typically recoverable in a tort action. The trial court, however, granted summary judgment in favor of General Motors and Letts on all of Long's negligence claims. Long appealed. The appellate court affirmed and held that the breaches of duty to produce a car that would not overheat and the duty to fix a car that does were only breaches of contract duties and that Long's lawsuit for negligent tort could not stand. The appellate court reasoned that where the only damages claimed were to the product itself, and the only loss claimed was the value or use of the thing sold or the cost of repairing it, and there was no accident and no physical damage to person or other property caused by the defective item, that such losses were only pecuniary and were not entitled to protection from mere negligence. The court explained that the breach of duties alleged by Long arose solely from the automobile contract and therefore Long's claim amounted to a breach of contract and not a viable claim for negligence (Long v. Jim Letts Oldsmobile, Inc., 1975).

This case illustrates the application of the Economic Loss Rule in Georgia. The decision reinforced the dichotomy between that which is actionable in tort with its attendant damages and that which is actionable in contract with damages that are limited and not as expansive as tort damages. This paper will explore the Georgia Economic Loss Rule and its impact on the recovery of damages in products and services cases.

TORT AND CONTRACT

In Georgia "A tort is the unlawful violation of a private legal right other than a mere breach of contract, express or implied" (Ga. Code: Torts - General Provisions, 1933). The terms "tort" and "trespass" are interchangeable (Southern Ry. Co. v. City of Rome, 1934). …

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