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

I just finished an essay on the economic loss doctrine (available on SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2160298). I had a chance to talk to one of the law review editors that had been working on the piece and a discussion ensued.  Surely, he understood that the modern application of the judicially-created economic loss doctrine redirects some purchasers of defective goods away from an action in tort for negligence orstrict liability against a product manufacturer. What is less widely understood is how this is actually done in by courts. Moreover, whether courts provide a defensible rationale is yet another problem.

Quite simply, 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”), 680 F. Supp. 2d 780 (E.D. La. 2010), which involved installation of defective Chinese drywall in certain homes built after Hurricanes Katrina and Rita. In a seeminglystrange argument, the defendants argued that only some of the purchasers of the drywall should be able to make tort claims that arose from the same defective drywall. The odd part about the argument was that it was based on the manner of purchase made, with an attempt to categorize purchasers (an by extension, application of the economic loss doctrine to preclude tort claims) as: 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.

While the court did not invest in this type of distinction, the decision surely left open the demarcation between the inner-workings of Article 2 remedies and tort doctrine.  Essentially, how do we define the product purchased by buyers when it might be installed in a larger unit, like a home. My Essay concludes that modern application of the economic loss doctrine serves the desired purpose to preserve the boundary between tort and contract, but surely there must be a less obscure approach that lends greater surety to parties and which does not require judicial intervention in most cases. Evaluating both the product attributes and the gravamen of the claim yields a basic tool that is more principled in application than an approach dependent on only one portion of the analysis, as has been done on an ad hoc basis by some courts. This would seem to involve an examination of the rationale for limiting Article 2 claimants to statutory remedies and being satisfied that, in true bargain cases, this is sufficient. While it appears that the Chinese Drywall court came to an acceptable resolution in the case, the failure of the court to embrace a meaningful methodology continues to leave litigants with less certainty as to the nature of permissible claims.  Closer examination of the deal in fact made by the parties would seem to permit resolution in these types of cases.

- JSM