Nebraska Supreme Court Adopts Restrictive Form of Economic Loss Doctrine
In a strange opinion that raises nearly as many questions as it answers, the Nebraska Supreme Court last week adopted a very restrictive form of the economic loss doctrine. See Lesiak v. Central Valley Ag Cooperative, Inc., 2012 WL 246641 (Neb. Jan. 27, 2012) (per curiam).
In Lesiak, a farmer contracted with the local ag coop for the "complete package": The coop would provide all of the farmer's diesel fuels, chemicals, fertilizer and seed for his 2,000-acre farming operation. As part of the package, the coop would test the farmer's soil in his various fields and then recommend which fertilizers, seed corn, pesticides and herbicides to use. In fact, the coop even applied the herbicide to the fields once the farmer was done planting them.
Apparently the coop used too high of a concentration of herbicide, allegedly harming the farmer's yield on his crops. The farmer sued and the case went to trial on the following theories: negligence, breach of the implied warranty of merchantability, and breach of the implied warranty of services.
There is no description of the contract, and no explanation of why there was no breach of contract claim.
At trial, the court granted summary judgment on the implied warranty of services claim, holding that the common law only recognizes such warranties in the construction context. The Lesiak court affirmed that holding.
The trial court also granted summary judgment on the negligence claim, holding that such a claim was barred by the economic loss doctrine. The Nebraska Supreme Court reversed this holding, and it is this holding that I'll focus on in this blog post. (There was also a lengthy discussion of why the trial court was wrong to direct a verdict on the plaintiffs' proof of damages, but I won't get into that here. Amazingly, however, the court set out a complicated formula for how damages could be calculated, holding that no expert testimony was necessary because Nebraska jurors were more than capable of making such calculations themselves. Maybe they are really good at word problems in Nebraska.)
The Nebraska Supremes traced the history of the economic loss doctrine, from California's articulation of it in 1965 in Seely through its adoption by the U.S. Supremes in East River Steamship in 1986. The court noted that Nebraska previously had adopted the economic loss doctrine, but had only applied it in product liability cases involving a defective product. It viewed the Lesiak case as an opportunity to define the boundaries of what it viewed as an ever-expanding doctrine.
The court held:
[W]e hold that the economic loss doctrine precludes tort remedies only where the damages caused were limited to economic losses and where either (1) a defective product caused the damage or (2) the duty which was allegedly breached arose solely from the contractual relationship between the parties. And economic losses are defined as commercial losses, unaccompanied by personal injury or other property damage.
2012 WL 246641 at *11.
The court explained that the doctrine's underlying rationale is to preserve the distinction between contract and tort where both theories could apply, and thereby preserve the ability of the parties to privately order the risk of loss through contract. It noted that "[i]f a party could simply avoid its contractual bargain by suing in tort, which often offers more generous terms of recovery, then the effectiveness of contract law would be reduced." Id.
The court then made a logical leap that does not necessarily follow:
But the opposite must also be true, and the same type of concern must also exist for tort law. While the doctrine has its place in the law of damages, it should not be interpreted so broadly as to undermine tort law and preclude remedies in situations which, historically, have presented viable tort cases. That is to say, the doctrine should not be expanded to allow traditional tort remedies to drown in a sea of contract.
Id. at *12.
The court said that it was reaffirming the doctrine's "continued application in the products liability context," namely that "where a defective product causes harm only to itself, unaccompanied by either personal injury or damage to other property, contract law provides the exclusive remedy to the plaintiff." Id. This, the court reasoned, was merely the loss of the benefit of the bargain, "which is the essence of a warranty action."
The court gave no hint, however, of the fact that courts in other states have been struggling for decades about precisely what "harm to the product itself" actually means. For example, where the product is a motor that has been incorporated into a boat, if the motor's failure causes the complete destruction of the boat, is that damage to "other property," or is it the type of economic loss that the parties can be expected to have bargained over in the contract? The opinion in Lesiak suggests that Nebraska would take a very narrow view of the applicability of the economic loss doctrine in any such situation.
The court also justified its "new" rule that the doctrine applies where "the alleged breach is only of a contractual duty, and no independent tort duty exists." Id. (Of course, I have to ask myself, if no independent tort duty exists, why do you need the economic loss doctrine to bar tort claims in the first place?) The court said that it "serves to 'weed[] out cases involving nothing more than an allegedly negligent failure to perform a purely contractual duty -- a duty that would not otherwise exist.'" Id. (citation omitted). Apparently some Nebraska decisions previously had recognized a cause of action for "negligent performance of a contract." In such cases, the economic loss doctrine would now bar recovery, so long as there was no independent duty in tort.
The Nebraska Supreme Court then sought to apply its newly-demarcated economic loss doctrine to the facts in Lesiak. It held that the trial court had improperly invoked the doctrine to grant summary judgment to the defendant on the negligence claim:
The question still remains whether the doctrine bars the Lesiaks' negligence claims here. It does not. It is true that the alleged breach was of a contractual duty which would not have existed but for the creation of the contractual relationship between the Lesiaks and [the coop]. But the damage allegedly caused by the breach was not purely economic loss; rather, [the coop's] actions allegedly caused damage to the Lesiaks' corn, which qualifies as "other property" -- that is, property other than the property that was sold pursuant to the contract. Thus, this case is removed from the doctrine's reach.
Id. at *13. So apparently you still can have a cause of action for negligent breach of a contractual duty in Nebraska, so long as the damage is to something other than the product sold in the contract.
In reaching this conclusion, the court specifically rejected the approach of other courts that would view the crop loss as part of the parties' "disappointed commercial expectations" and thus would apply the economic loss doctrine to bar tort claims by reasoning that the parties could best assign the risk among themselves through contractual bargaining, rather than tort. See id. (rejecting Grams v. Milk Prods., Inc., 699 N.w.2d 167 (Wisc. 2005)). The Nebraska Supremes explained:
[A]lmost nothing would qualify as "other property" under the "disappointed expectations" test. This is because the "disappointed expectations" test precludes tort remedies whenever the purchaser should have anticipated the occurrence of the damage at issue -- in essence, whenever the occurrence of the damage was reasonably foreseeable. Thus, under this test, if "other property" damage occurs, but it was foreseeable at the time of contracting, then all tort theories would be precluded. Therefore, the only circumstance in which tort theories would not be precluded would be when the damages were not foreseeable. But, of course, then a plaintiff would likely have no remedy in tort either. In effect then, the "disappointed expectations" test eliminates tort remedies for damage to "other property," but that type of damage has traditionally been recoverable in tort.
. . . But where the damages were never bargained for and are not expressly dealt with in the contract, it makes no sense to preclude a party's traditional tort remedies.
Id. at *13 - *14.
The opinion in Lesiak certainly piques one's curiosity as to what the provisions of the underlying contract were and if there was a way in which the entire economic loss discussion could have been avoided. But for now, it is enough to know that Nebraska has squarely placed itself in the restrictive camp when it comes to the application of the economic loss doctrine to bar tort claims -- even negligent breach of contract.
