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Tennessee’s Economic Loss Rule Still Applies Only to Purely Economic Losses

May 6, 2016

SPO GO Holdings, Inc., v. W&O Construction Company, Inc., and the City of Spring Hill, Tennessee, 2016 WL 2607005

Please contact Zach Jett with questions.

SIGNIFICANCE

A recent decision by the U. S. District Court for the Middle District of Tennessee, applying Tennessee law, denied Defendant’s Rule 12(b)(6) Motion to Dismiss for failure to state a claim because the Court found Plaintiff’s negligence claim was not barred by the Economic Loss Rule. In doing so, the Court upheld long-standing Tennessee law that the Economic Loss Rule does not extend to service contracts where Plaintiff suffers property damage as a result of Defendant’s alleged tortious acts.

RELEVANT LAW

The economic loss rule is “a judicially created principle that reflects an attempt to maintain separation between contract law and tort law by barring recovery in tort for purely economic loss.” Lincoln Gen. Ins. Co. v. Detroit Diesel Corp., 293 S.W.3d 487, 488 (Tenn. 2009). In essence, “[t]he economic loss doctrine provides that ‘[i]n a contract for the sale of goods where the only damages alleged come under the heading of economic losses, the rights and obligations of the buyer and seller are governed exclusively by the contract.’” Messer Griesheim Indus., Inc. v. Cryotech of Kingsport, Inc., 131 S.W.3d 457, 463 (Tenn. Ct. App. 2003) (quoting, Trinity Indus. v. McKinnon Bridge Co., 77 S.W.3d 159 (Tenn. Ct. App. 2001)).

BACKGROUND

The SPO GO Holdings, Inc., v. W&O Construction Company, Inc., and the City of Spring Hill, Tennessee matter stems from damage to a golf course as a result of sewer line installation construction. The City of Spring Hill solicited bids for an extension of a sewer line that ran parallel to a creek and through a golf course owned by Plaintiffs. The golf course is an Arnold Palmer signature design course, meaning it was built to exacting specifications using particular materials, design principals, and product standards. W&O Construction Co. Inc. entered into a contract with Spring Hill for the project (Plaintiff was not a party to the contract). W&O’s work began on Phase I in November 2014 and was to be completed within 120 days. Phase 1 not complete until August 7, 2015. Once complete, the course needed to be returned to its pre-work condition to meet the signature design specifications.

W&O attempted to repair Plaintiff’s golf course rather than hire a qualified golf course architect or Plaintiff-approved contractors to complete restoration work for damage caused by its construction during the Phase I work. W&O had no prior experience in golf course restoration. W&O was unsuccessful. Plaintiff hired a third party with significant experience in restoring signature golf courses to complete restoration work. Plaintiff was charged $157,000.00 by the third party to repair damage to the signature golf course. In addition to economic losses caused by the Phase I delay, Plaintiff incurred damages to its property.

ISSUES

Plaintiff alleged it suffered damages because Phase I was not completed on time including, among other things, lost membership and outings, numerous lost rounds of golf, and other expenses related to course maintenance. Plaintiff also alleged it incurred damage to its property as a result of W&O’s actions. Plaintiff filed a four-count Complaint, naming Defendants Spring Hill and W&O alleging, in part, negligence. W&O filed a partial Motion to Dismiss, asserting Plaintiff’s negligence claim was barred by the Economic Loss Rule.

RULING

The Court dismissed Defendant’s motion to dismiss because the Plaintiff claimed it suffered substantial damages to its property as a result of W&O’s negligence, in addition to lost profits. In short, the Court found the economic loss rule was not applicable to the facts as alleged. The Court further notes some federal district judges predicting Tennessee law have held that the economic loss doctrine does not extend to contracts for the provision of services.

ANALYSIS

Notwithstanding that “Tennessee’s highest court has never addressed whether the economic loss doctrine applies outside the products liability context,” Ham v. Swift Transportation Company, Inc., 694 F. Supp. 2d 915, 922 (W.D. Tenn. 2010), and that, “[i]n addressing the contours of the doctrine outside of that context, many federal courts have concluded that the doctrine should not be extended beyond cases involving the sale of goods,” Lick Branch Unit, LLC v. Reed, 2014 WL 546696, at *16 (E.D. Tenn. 2014), W&O argued Plaintiff’s negligence claims were barred by the economic loss doctrine. In doing so, it acknowledges that “Tennessee Courts have stated that negligent construction claims arising in Tennessee are permitted and are not precluded by the ‘Economic Loss Rule,’ John Martin Co. v. Morse Diesel, Inc., 819 S.W.2d 428 (Tenn. 1991),” but argues that “a plaintiff may only maintain an action for purely economic loss when the claim is based upon negligent supervision or negligent misrepresentation.” AmSouth Erectors, L.L.C. v. Skaggs Iron Works, Inc., 2003 WL 21878540 (Tenn. Ct. App. Aug. 5, 2003)(emphasis added).” Neither John Martin nor AmSouth are on point as both deal strictly with purely economic losses.

IMPLICATION

In Tennessee, the Economic Loss Rule does not bar a plaintiff from seeking damages in tort from a defendant subcontractor whose allegedly negligent conduct resulted in damages to plaintiff’s property that are distinguishable from lost profits. The SPO GO Holdings court confirms that Tennessee does not extend the Economic Loss Rule to contracts for the provision of services. Of course, we will have to wait and see if the appellate courts continue to uphold this line of reasoning. For now, the Economic Loss Rule does not limit recovery to strictly contractual remedies when there is damage to “other property” in Tennessee.