Contract – Economic Loss Rule – Product Liability Context

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The economic loss rule applies only in the product liability context and when the only injury is to the product itself.

We reversed.

This appeal required us to revisit the economic loss rule. Petitioner James E. Carroll, Jr. signed a contract with Respondents for termite protection service for his Isle of Palms home. The contract specified the protection would consist solely of Respondents installing and monitoring “the Exterra Termite Interception and Baiting System for the purpose of controlling subterranean termite infestations of the covered property.” At the same time the contract was formed, Respondents provided a Disclosure Form to Carroll. In this form, Respondents represented they had told Carroll that “[b]aits offer no residual protection and thus reinfestation may occur unless they are monitored and replaced as necessary.” Because bait stations are considered an “alternative treatment,” the form also required Respondents to explain why standard termite treatment procedures would not be performed. Respondents’ stated reason was circular, as they explained only that “this type [of] treatment does not require the use of a liquid termiticide.” The contract further provided if new termite damage occurred, Respondents’ liability was limited to repair costs not to exceed $250,000. The contract stated it contained the parties’ entire agreement and could only be modified by a writing signed by both. Respondents never kept their promise to maintain the bait stations. Instead, without letting Carroll know, they abandoned the bait station system and began treating his home with a liquid application. There is evidence the application was done negligently. Oblivious to the change in treatment type, Carroll renewed the bait station contract each year. Some 10 years later, it was discovered Carroll’s home was riddled with termites. Carroll sued Respondents for negligence and breach of contract. The trial court granted Respondents summary judgment as to the negligence claim, ruling that because Carroll’s damages all flowed from Respondents’ failure to provide adequate termite protection, the economic loss rule operated to confine his remedy to the breach of contract action. The court of appeals affirmed.

The economic loss rule applies only in the product liability context and when the only injury is to the product itself. The economic loss rule is not a doctrine that says economic damages may not be recovered in tort. Adhering to our precedent, we also reaffirmed that the economic loss rule does not apply in the context of the sale or construction of a residential home or to the rendering of services by professionals, such as accountants, lawyers, engineers, and architects.

The case before us shows the futility of seeking a coherent application of the economic loss rule when, as here, no product was manufactured or sold. One might stretch and call the bait stations the product, but they were not damaged, and besides, the contract states Respondents retained ownership of them. Carroll could not be expected to consider, much less allocate, the risk posed by the infinite number of actions Respondents might take outside the scope of the contract. And it would be startingly illogical and unfair to conclude Carroll is limited to the remedies he negotiated for breach of the contract simply because conduct beyond the contemplation of the contract caused consequences that were within it.

The economic loss rule does not apply here because the contract did not involve the sale of a product. We next considered whether the duty Respondents breached was a duty solely defined by the parties’ contract. It was not. Respondents’ conduct in secretly treating Carroll’s home with liquid termiticide was beyond the parties’ bargain.

There is evidence sufficient to create a genuine issue of material fact that Respondent applied the termiticide negligently. At the summary judgment hearing, Carroll’s counsel repeatedly argued that Respondents had breached an independent duty separate from the duties found in the contract by applying the termiticide. The more difficult question is whether the allegedly negligent application was a proximate cause of the termite damage to Carroll’s home. It would be up to the jury to determine that, but there is enough evidence in the record to survive summary judgment. The jury could just as well decide Respondents’ breach of the contract by abandoning the bait stations was the sole proximate cause of the loss or that the loss was not proximately caused by either Respondents’ negligence or breach of contract. Applying the limiting principles of duty and proximate cause to this case reinforces our belief that they are sturdy enough to police the boundary line between tort and contract law, without the muddling mash-up that some jurisdictions have made of the economic loss rule. We believe the prudent course is to limit the economic loss rule to the product liability context, and we so held.

Reversed and remanded.

Carroll v. Isle of Palms Pest Control Inc. (Lawyers’ Weekly No. 010-040-25, 12 pp.) (D. Garrison Hill, J.) Appealed from Charleston County Circuit Court (Roger M. Young, Sr., J.) Robert T. Lyles, Jr., of Lyles & Associates, LLC, and Jody Vann McKnight, of McKnight Law Firm, both of Mount Pleasant, and Lee Anne Walters, of Walters Law Firm, of Beaufort, all for Petitioner. Kelley Shull Cannon, of Howser Newman & Besley, LLC, of Columbia, and Andrew Elliott Haselden, of Howser Newman & Besley, LLC, of Charleston, for Respondent Isle of Palms Pest Control, Inc. Robert Michael Ethridge and Mary Skahan Willis, both of Ethridge Law Group, LLC, of Mount Pleasant, for Respondent SPM Management Company, Inc. South Carolina Supreme Court