The Economic Loss Rule and
Legal Perspectives for Natural
Gas Operators
By Jim Sienicki & Marc Erpenbeck
Snell & Wilmer L.L.P.
2012 Western Regional Gas Conference
August 22, 2012
What Is the Economic Loss Rule?
•
The Economic Loss Rule is easy to state, but can
be very difficult to apply.
•
In certain circumstances, a contracting party is
limited to contract remedies for the recovery of
damages unaccompanied by physical injury to a
person or other property.
•
In other words: If there is a contract, the injured
party is limited to the rights and remedies
specified in a contract for purely economic losses
©2012 Snell & Wilmer L.L.P.
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Economic Loss Rule
•
Why Does This Matter to You?
-
Do your contractual terms matter?
-
Are your rights & obligations limited by
contract?
-
What damages are available?
©2012 Snell & Wilmer L.L.P.
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Economic Loss Rule cont’d
•
The Economic Loss Rule is a matter of
state law that varies state to state, and is
not applied consistently.
-
Some jurisdictions will not apply the Rule if:
•
It is not a products liability case
•
The claim is against a licensed professional
who solely provides services (e.g.,
architect, engineer, construction manager,
accountant, lawyer)
©2012 Snell & Wilmer L.L.P.
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Economic Loss Rule cont’d
- Some jurisdictions will not apply the Rule if:
• The damage was sudden or calamitous
(e.g., gas explosion)
• There was a high degree of risk to the
public
• Negligent misrepresentations
• Intentional or egregious torts
• Parties involved were not in a direct
contract
©2012 Snell & Wilmer L.L.P.
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The Purpose of the Economic Loss
Rule
1. To assure that contract law does not
“drown in a sea of tort.”
-
i.e., to prevent a party from side stepping an
unfavorable contract
2. Encouraging parties to negotiate a
contract and establish ground rules for
their relationship.
©2012 Snell & Wilmer L.L.P.
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Example of State Variations: Economic
Loss Rule for Design Professionals?
Arizona
California
Colorado
Nevada
New Mexico
Utah
Yes, if the Plaintiff and Defendant have a contract.
Perhaps. Courts are approaching the issue as a
fact-specific inquiry. Conflicting case law at the
intermediate appeals court.
Yes if the parties are in privity; no if there is no
privity and a tort duty of care exists independently of
contract. It may not be extended to noncommercial transactions.
Yes if parties are in privity and claims arise out of
that contract; no, if claim is being asserted by
homeowner against contractor.
No if claim is professional malpractice asserted by
client in contractual privity; unclear as to non-clients
using an independent duty test.
Maybe. Several earlier cases suggest yes although
subsequent case law is not clear.
©2012 Snell & Wilmer L.L.P.
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Contract Law vs. Tort Law: Goals
•
Contract Law:
-
•
Goal of Contract Law: Encourage parties to
mutually define their roles, allocate risks, and
identify available remedies
Tort Law:
-
Goal of Tort Law: Compensate an injured party
for injuries resulting from another person’s
conduct
©2012 Snell & Wilmer L.L.P.
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Contract Law vs. Tort Law: Claims &
Damages
•
Contract Law:
-
-
Typical Claim: Breach of Contract or
Warranties
Damages Available:
•
•
•
•
“Benefit of the Bargain” Damages (Expectation
Damages)
Put parties in the position they would have been in
if the contract was fully performed as agreed upon
Reliance Damages
Restitution Damages
©2012 Snell & Wilmer L.L.P.
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Contract Law vs. Tort Law: Claims &
Damages cont’d
•
Tort Law:
-
-
Typical Claim: Negligence, negligence per se,
negligent misrepresentation, intentional torts,
product liability
Damages Available:
•
•
•
•
•
Compensatory Damages
Pain and Suffering
Emotional Distress
Put parties in the position they were in before the
injury
Punitive Damages
©2012 Snell & Wilmer L.L.P.
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Contract Law vs. Tort Law
•
Contract Law:
-
Parties can prospectively limit the type of
damages and amount of damages available to
the injured party
•
-
Example: Limitation of liability provisions in the
contract; waiver of consequential damage; indemnity
provisions; insurance provisions; waiver of
subrogation provisions.
Insurance may not protect against a party’s
breach of a contract claim for a duty that
arises out of the contract without a specific
contractual liability rider
©2012 Snell & Wilmer L.L.P.
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Contract Law vs. Tort Law cont’d
•
Tort Law:
-
-
-
-
Parties cannot prospectively limit the type of
damages and amount of damages available to
the injured party
Insurance generally protects a negligent party
(but usually not intentional torts)
Duty usually arises out of the common law or
statute
Generally has shorter statute of limitations
than contract claims
©2012 Snell & Wilmer L.L.P.
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Arizona Economic Loss Rule –
Products Liability
•
Salt River Project Agricultural Improvement
& Power Dist. v. Westinghouse Electric
Corp. (1984)
•
An electric utility company sued the seller of an allegedly
defective control device after a turbine exploded and
caught on fire. AZ Supreme Court precluded recovery
under contract. Did allow a tort claim for strict products
liability. (ELR did not apply).
•
Expressly declined to follow the majority rule for ELR and
instead embraced a narrower, case-specific approach.
©2012 Snell & Wilmer L.L.P.
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SRP v. Westinghouse Electric Corp.
(1984) cont’d
•
Arizona considers three non-dispositive factors (not a bright line
test) to determine whether tort or contract law should apply when
property has been damaged:
•
(1) The nature of the defect causing loss, (turns on whether
quality or safety concerns are primarily implicated)
•
(2) How the loss occurred, (whether the loss results from a slow
deterioration or a sudden accident or calamity) and
•
(3) “The type of loss for which the plaintiff seeks redress.”
(examines the nature of the loss claimed as well as any other
contemporaneous losses)
©2012 Snell & Wilmer L.L.P.
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Arizona Economic Loss Rule –
Products Liability
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In the products liability context, Salt River declined to
categorically bar tort recovery of economic losses.
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Applying a narrow version of the Economic Loss Doctrine,
Salt River held that a commercial could assert a products
liability claim against a commercial seller for economic
losses for which the contract disclaimed liability.
©2012 Snell & Wilmer L.L.P.
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The Economic Loss Rule – U.S.
Supreme Court Decision
•
East River Steamship Corp. v. Transamerica
Deleval, Inc. (United States Supreme Court, 1986):
-
-
Boat charter company charters the boat “as-is” from
owner. No remedy against owner. Owner had no claim
against turbine manufacturer under its contract. Charter
sues the turbine manufacturer (whom it did not have a
contract with) for defective design and installation of
turbines on 4 different steamships.
Sued under negligence for installation and strict products
liability for the costs paid to manufacturer for repairs,
amounts paid to owner when out of commission, and lost
profits (approx. $8 million total).
©2012 Snell & Wilmer L.L.P.
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The Economic Loss Rule - U.S.
Supreme Court Decision cont’d
-
-
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Court declined to follow numerous courts (including Arizona’s)
evaluation of potential risks of harm, because they were too
uncertain.
“Even when the harm to the product itself occurs through an
abrupt, accident-like event, the resulting loss due to repair costs,
decreased value, and lost profits is essentially the failure of the
purchaser to receive the benefit of its bargain -- traditionally the
core concern of contract law. . . when a product injures itself, the
commercial user stands to lose the value of the product, risks the
displeasure of its customers who find that the product does not
meet their needs, or, as in this case, experiences increased
costs in performing a service. Losses like these can be insured.”
Charter was left with no remedy.
©2012 Snell & Wilmer L.L.P.
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Arizona Economic Loss Rule and the
Gas Industry
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Valley Forge Insurance Company v. Sam’s
Plumbing, LLC (Az. Ct. of Appeals 2009)
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Facts:
•
•
•
•
An explosion at a shopping center in Pinal County, AZ
Negligent installation by a plumbing contractor performing
gas-line work for one of the center’s tenants allegedly caused
the explosion.
The explosion damaged not only the gas line and the tenants
space, but also significant portions of the shopping center
structure. No one was injured.
The shopping center’s insurance – Valley Forge - fully
compensated the shopping center owner.
©2012 Snell & Wilmer L.L.P.
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Valley Forge v. Sam’s Plumbing
cont’d
•
Insurance company then sued the plumbing contractor,
charging him with negligence and seeking to recover the $1.1
million paid to the center’s owner.
•
Insurance claimed ELR did not apply because the plumbing
contractor’s negligence damaged more than the tenant’s
space or the gas lines (the subject of the bargain with the
tenant) – it damaged the entire shopping center.
•
Trial Court held ELR applied – no recovery.
©2012 Snell & Wilmer L.L.P.
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Valley Force v. Sam’s Plumbing
cont’d
Appeal:
•
Trial Court reversed – ELR is not a bar. Held that the same
three factor test used in product liability applies to
construction defects.
•
Plumbing contractor had a duty, “separate from any
contractually assumed obligation, to exercise reasonable
care in any work undertaken. This duty included the specific
duty to take precautions to avoid dangerous gas explosions.
Insofar as [the plumbing contractor] breached that duty—a
factual question that remains to be determined—it is liable
for the actual damages that were caused.”
©2012 Snell & Wilmer L.L.P.
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Arizona Economic Loss Rule –
Construction Defects
•
Flagstaff Affordable Housing Limited
Partnership v. Design Alliance, Inc. (2010)
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Arizona Supreme Court case
Contracting parties cannot pursue tort claims for
economic losses (unaccompanied by harm to
person or “other property”) unless specified in
the contract.
◦
◦
Does not use Salt River’s Three Factor Test
Creates different test for construction defect as
opposed to product liability
©2012 Snell & Wilmer L.L.P.
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Flagstaff Affordable Housing –
Miscellaneous Arizona Holdings
•
Non-Contracting Parties
-
•
Post-Flagstaff Affordable Housing: Applicability of
the Economic Loss Rule to claims against noncontracting parties depends on the substantive law
at issue
Economic Loss Rule could apply even if
defendant breached duties imposed by law
•
-
Example - failure to comply with building codes
Economic Loss Rule applies to licensed design
professionals (but probably not all professionals –
like doctors or lawyers – where malpractice claims
will continue)
©2012 Snell & Wilmer L.L.P.
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The Economic Loss Rule in Arizona
Today
•
Two Separate Analyses Now In Arizona:
◦
Product Liability
-
-
◦
Example: a defective gas line or seal
Fact intensive Three Factor test.
No privity requirement.
Construction Defect
-
-
-
Example: faulty installation of a gas line
Bright line rule
Unreasonably dangerous activity not considered
in analysis
Privity required
©2012 Snell & Wilmer L.L.P.
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Arizona Economic Loss Rule and the
Gas Industry cont’d
•
How Would Valley Forge Be Decided
Today?
-
-
Different analysis – since Flagstaff and not Salt River would
apply.
Potential different tactics used by Plaintiff and Defendant
•
•
◦
-
-
“Chain of contracts” versus direct privity
Damage to non-contracted for property covered by ELR?
Is a gas line/tenant space just another part of the building?
Probably same result but for entirely different reason. Flagstaff
doesn’t look at the unreasonable dangerous analysis in
construction defect, but would look to privity.
Under Flagstaff, no privity between Contractor and Mall Owner,
thus ELR likely does not apply. If it followed the US Supreme
Court, there is a “chain of contracts” and ELR applies.
©2012 Snell & Wilmer L.L.P.
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Contract Drafting Tips
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Prime Contractor
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-
•
Subcontractor
-
•
Ensure that the owner does not preserve tort remedies in the
contract
Carefully draft limitations of liability, waiver of consequential
damages, indemnity insurance, and subrogation provisions
Ensure that prime contractor’s protections against owner’s tort
claims pass through to protect the subcontractor
Owner
-
Preserve tort remedies in the prime contract
Ensure that both contract and tort remedies are available
against both prime contractor and subcontractors
©2012 Snell & Wilmer L.L.P.
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Recent U.S. Supreme Court Cases Governing
Regulatory Fines and Procedures
•
Recent United States Supreme Court
opinions provide further protections for
corporate defendants
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Southern Union Company v. United States
(United States Supreme Court, 2012)
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Sackett v. EPA (United States Supreme Court,
2012)
©2012 Snell & Wilmer L.L.P.
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Recent Supreme Court Cases Governing
Regulatory Fines and Procedures
•
Southern Union Company v. United States
(United States Supreme Court, 2012)
◦
Facts:
-
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Natural gas distributor found guilty of violating
environmental laws for storage of mercury without a
permit.
◦ Criminal fines accrue on a daily basis
Jury was not asked to specify the duration of the violation.
Instead, judge imposed a criminal fine based on his own
determination of the duration of the violation.
©2012 Snell & Wilmer L.L.P.
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Recent Supreme Court Cases Governing
Regulatory Fines and Procedures cont’d
◦
Holding:
The Sixth Amendment reserves to juries the determination of
any fact that increases a criminal defendant’s maximum
potential sentence.
-
Applies to both criminal sentences and criminal fines.
$18,000,000 fine became a $50,000 fine.
◦
◦
◦
Importance of Case:
-
Criminal fines tied to the duration of a violation require a jury
to decide the defendant violated the law on each particular
day.
•
The court cannot assess a fine absent such jury findings.
Thus, it will be more difficult to assess large criminal
fines against businesses based on duration of the
violation.
©2012 Snell & Wilmer L.L.P.
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Recent Supreme Court Cases Governing
Regulatory Fines and Procedures cont’d
•
Sackett v. EPA (United States Supreme Court,
2012)
◦
Background:
-
◦
Property owners must obtain a permit before adding fill
materials to designated “wetlands”
Facts:
-
EPA accused homeowners of illegally filling in “wetlands”
on property. EPA issued compliance order to restore
“wetlands.”
©2012 Snell & Wilmer L.L.P.
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Recent Supreme Court Cases Governing
Regulatory Fines and Procedures cont’d
•
Sackett v. EPA (United States Supreme
Court, 2012)
◦
Essentially, the homeowners were left with two
options:
-
-
1. Accept EPA’s “wetlands” determination and stop
accruing penalties; or
2. Wait until the Enforcement Action was filed to
challenge EPA’s “wetlands” determination, while
allowing potential penalties of up to $75,000 per day
to accrue indefinitely
©2012 Snell & Wilmer L.L.P.
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Recent Supreme Court Cases Governing
Regulatory Fines and Procedures cont’d
◦
Holding:
-
◦
Defendants could challenge the Compliance Order
immediately
Impact:
-
-
In certain circumstances, a party can challenge agency
action without having to wait for enforcement proceedings
to commence
Restricts EPA from using heavy handed Compliance
Orders
©2012 Snell & Wilmer L.L.P.
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Conclusion
•
Questions or comments?
©2012 Snell & Wilmer L.L.P.
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