South-Western Legal Studies in Business

Economic Loss Rule Prevents Claims in Tort
Description

Appeals court held where a defect in a product caused damage only to the product itself, the claim must be based on contract law for the economic loss to the product itself. There could be no claim in tort as no injury to persons or other property occurred.

Topic Contracts
Key Words

Tort; Product Failure; Damage; Economic Loss Rule

C A S E   S U M M A R Y
Facts

Rantec built steel shielded rooms padded with foam material to absorb light and sound for Lockheed. Lockheed uses these rooms to test antenna signals. At a room in California and then at one in New Hampshire, the sprinkler systems malfunctioned and flooded the rooms causing $400,000 damage to the rooms. Lockheed sued for the damage, claiming negligence and strict liability in tort. The statute of limitations for a warranty claim under the UCC had passed. The court held that the economic loss rule prevented Lockheed from making a tort claim. Lockheed appealed.

Decision

Affirmed. The New Hampshire high court defines economic loss as “the diminution in the value of a product because it is inferior in quality” and “that loss resulting from the failure of the product to perform to the level expected by the buyer.” It is “commonly measured by the cost of repairing or replacing the product.” Under the economic loss rule, when a product harms only itself, the loss is economic and may not be recovered in tort. Here, the defect only damaged the chamber itself, so there can be no recovery on the basis of negligence or strict liability, as those are tort claims. That a defect or accident may have posed a risk to persons or property does not take the case out of the economic loss rule.

Citation

Lockheed Martin Corp. v. RFI Supply, Inc., 440 F.3d 549 (1 st Cir., 2006)

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