The economic loss rule exists in contract law to provide for the recovery of damages by a party that has suffered an economic loss — as opposed to tort law that provides a basis for recovering for property damage or personal injury. How the economic loss rule is applied varies from state to state and economic loss can include damages that result from lost sales, performance delays, benefit of the bargain losses, or other types of financial harm.

The origin of the economic loss rule can be found in case law: specifically, Seely v. White Motor Co., a 1965 California products liability case involving a defective truck accident. The accident caused damage only to the truck; there were no injuries to persons or property. However, the California Supreme Court held the truck manufacturer liable for economic loss based on its warranty agreement with the purchaser. The Court said it was reasonable to bring a tort case against the manufacturer for damage to other property or personal injury due to a defective product — but not to permit a plaintiff to recover only for economic loss outside a warranty agreement.

In 2010, the Arizona Supreme Court found that the economic loss rule, when applied to construction defect cases, does not permit recovery in tort for purely economic losses. The economic loss rule respects the allocation of risk and the recovery for losses when there is a contract; in other words, the existence of a contract bars tort damages. If there is a contract, the parties are limited to the benefit of their bargain, but the rule does not apply when there is no bargain that requires its application. However, contracting parties may expressly reserve tort remedies.

It is important to consider the practical implications of the economic loss rule. Carefully defining the scope of warranties and remedies in contracts is critical because it is likely that allocations of risk will be enforced by a court. It is also likely that tort claims that seek to avoid these risk allocations will be rejected.

When you are facing any type of business dispute, you need an experienced Arizona trial attorney to obtain the best possible result. Contact Mestaz Law at (602) 806-2068 to speak with us about your case.