The Seventh Circuit recently reversed a money judgment of $2.7 million awarded in favor of a furniture manufacturer holding that the economic loss doctrine, under Indiana law, barred the manufacturer from asserting a negligent misrepresentation claim based in tort law against a wood products supplier resulting from the delivery of allegedly non-conforming goods. JMB Mfg., Inc. v. Child Craft, LLC, 2015 WL 5000728 (7th Cir. Aug. 24, 2015)
In JMB Mfg., the parties include Child Craft, a children’s furniture manufacturer and JMB Manufacturing Inc. along with its owner and president Mr. Bienias. Child Craft contracted with JMB to supply raw wood components for a new planned line of high-end children’s furniture, although JMB did not manufacture the wood products itself. In the initial action, JMB sued Child Craft for failure to pay for $90,0000 worth of wood products it ordered, which Child Craft alleged did not conform to its specifications. Child Craft counter-sued alleging claims based in both contract and tort law to maximize its potential recovery against JMB. In its breach of contract claim, Child Craft sought to recover its labor costs for attempting to salvage the allegedly defective products. Child Craft also alleged a tort claim for negligent misrepresentation, seeking over $5 million in compensatory damages plus punitive damages of an additional $5 million. Id.
The economic loss doctrine precludes recovery for claims of liability sounding in tort where the loss suffered is purely economic in nature. The rationale supporting the rule is that contract law, unlike tort law, is designed to remedy economic losses and frustrated economic expectations between two contracting parties. In other words, a party may not recover losses under a tort theory where the same party could have protected itself from such losses through negotiated contractual indemnities or warranties. Contract law allows merchants to allocate the risks that may result from a potential breach: for example, a buyer may receive a lower price for assuming a higher risk of non-performance.
Although a few states have rejected the economic loss doctrine entirely, the majority of jurisdictions have adopted it in some form, albeit with a wide range of exceptions. Courts following Indiana law apply the economic loss rule to bar recovery in tort for “purely economic loss”–pecuniary loss unaccompanied by any property damage or personal injury. JMB Mfg., 2015 WL 5000728, at *4 (internal citation omitted). In JMB Mfg., the Seventh Circuit held that the rationale for the economic loss rule applies squarely to the facts of this case: in this contract for the sale of goods by one merchant to another, Child Craft could negotiate the scope of remedies for non-conforming goods. Id.
As the Court noted in the opening sentence of its opinion “this case presents a merchant’s creative effort to avoid the limited remedies that contract law provides for a sellers delivery of non-conforming goods.” This case should be a reminder to defendants that in cases involving breaches of a contract formed between commercially sophisticated parties courts will not find the type of special relationship necessary to allow a party to recover in tort because contract remedies are available–and more appropriate according to the Seventh Circuit.