Economic Loss Rule Precludes Recovery in Tort for Economic Losses Arising from Sale of Goods Governed by UCC Article 2

Economic Loss Rule Precludes Recovery in Tort for Economic Losses Arising from Sale of Goods Governed by UCC Article 2

The economic loss rule is a judge-made limitation on damages that courts use to preclude plaintiffs from recovering in tort for purely economic losses arising from sales of goods governed by UCC Article 2. Parties therefore may be limited to the remedies provided in the UCC itself, without regard to tort remedies. Implications of the economic loss rule are examined by Professor Jennifer Martin.

Excerpt:

Uniform Commercial Code Section 1-103(b) embraces liberal supplementation of the Code by directing that "[u]nless displaced by the particular provisions of this Act, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, Bankruptcy, or other validating or invalidating cause shall supplement its provisions." When it comes to remedies for breaches of sales of goods under UCC Article 2, this premise of liberal supplementation must be read alongside Article 2's remedy provisions and the common law's economic loss rule, which precludes a plaintiff from recovering in tort for purely economic losses. Even Section 2-721's directive regarding fraud in the sales of goods that provides that remedies for fraud or misrepresentation under Article 2 include remedies for sales of goods that do not involve fraud is read to constrain non-breaching parties to contract remedies under Article 2 in most cases.

While the doctrine has many adherents, courts seem to apply the doctrine with different limitations on its scope. For instance, in Lott v. Swift Transportation Company, Inc., 694 F. Supp. 2d 923, 930 (W.D. Tenn. 2010) [an enhanced version of this opinion is available to lexis.com subscribers], the district court predicted that the Tennessee Supreme Court would not extend the economic loss rule to cases involving contracts for services, stating

"[t]he Economic Loss Rule is a judicially created principle that requires parties to live by their contract rather than to pursue tort actions for purely economic losses arising out of the contract. The rule comes into play when the purchaser of a product sustains economic loss without personal injury or damage to property other than the product itself. In that circumstance, the purchaser must seek a remedy in contract, not in tort. Thus, when a purchaser's expectations in a sale are frustrated because a product does not work properly, the purchaser's remedies are limited to those prescribed by the law of contracts."

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