SC Supreme Court limits economic loss rule to product cases

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SUMMARY

• South Carolina Supreme Court limits economic loss rule to product liability when only the product itself is damaged
• Court reverses summary judgment in Carroll’s negligence claim against Isle of Palms Pest Control
• Justices say pest control company acted beyond contract by secretly switching to liquid termite treatment
• Decision refines rule, reaffirming it does not apply to services, residential homes, or professional negligence

The economic loss rule applies only in the product liability context and when the only injury is to the product itself, the South Carolina Supreme Court has ruled, reversing summary judgment on a negligence claim.

James E. Carroll Jr. signed a contract with Isle of Palms Pest Control for termite protection service. The contract specified the protection would consist solely of the installation and monitoring of bait stations on his property.

However — without notifying Carroll — the pest control company abandoned the bait station system and began treating his home with a liquid application. There was evidence that the application was done negligently.

Carroll renewed the bait station contract each year for a decade. Ten years later, it was discovered that his house was riddled with termites, and he sued the pest control company for negligence and breach of contract.

The trial court granted the pest control company’s motion for summary judgment on the negligence claim, ruling that because Carroll’s damages all flowed from the failure to provide adequate termite protection, the economic loss rule operated to confine his remedy to the breach of contract action.

When the court of appeals affirmed, Carroll asked the state’s highest court to weigh in.

Judge D. Garrison Hill reversed in an opinion joined by Judges John Cannon Few, George C. James, Jr. and Letitia H. Verdin.

The decision is Carroll v. Isle of Palms Pest Control, Inc., No. 2023-001655.

The court traced the evolution of the economic loss rule to a 1989 decision in Kennedy v. Columbia Lumber & Manufacturing Co., where the court held the rule “simply states that there is no tort liability for a product defect if the damage suffered by the plaintiff is only to the product itself. In other words, tort liability only lies where the damage done is to other property or is personal injury.”

That decision also expressed the court’s dissatisfaction with applying the rule when the “product” was a residential home, noting that even if the only loss was the diminished value of the home, the home buyer could pursue tort remedies against a builder if certain conditions were met.

Twenty years later, the court revisited the rule in Sapp v. Ford Motor Co., where it affirmed summary judgment to Ford on the buyer’s tort claims because the only damage was to the product itself.

The court also noted the “confusing corridors” of the economic loss rule around the country, which it said “seems to attract withering criticism and relentless controversy whenever it creeps beyond the product setting.”

“Perhaps the best definition is this: the economic loss rule ‘means there is no recovery in tort for pure economic loss, except when there is,’” the court wrote. “Put another way, anyone who can explain the economic loss rule does not truly understand it.”

The court followed the path of supreme courts in Florida and Tennessee by returning to the roots of the rule by limiting its scope to product cases.

“[W]e hold that the rule applies only in the product liability context and when the only injury is to the product itself,” the court said. “In such instances, the loss is economic or commercial, and the remedy is limited to the laws of contract or warranty. Where, however, the defective product causes personal injury or damage to other property, the plaintiff may also look to the law of torts.”

The court also stressed what the economic loss rule is not.

“It is not a doctrine that says economic damages may not be recovered in tort,” the court explained. “Adhering to our precedent, we also reaffirm 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.”

This refinement of the economic loss rule was “a homecoming,” the court added. “The rule appeared as an anchor thrown out to keep tort law from drifting into the well-marked domain of contract law. But the boundary separating these domains in not new. We have long recognized the general rule that ‘where there is no duty except such as the contract creates, the plaintiff’s remedy is for breach of contract, but when the breach of duty alleged arises out of a liability independent[] of the personal obligation undertaken by contract, it is a tort.’ Close examination reveals that Kennedy was saying the same thing.”

The case at issue demonstrated the futility of seeking a coherent application of the economic loss rule when no product was manufactured or sold, the court said.

“Apart from the product liability setting, restricting an injured party to a contractual remedy for conduct that breaches a duty independent of the contract is nonsense,” the court wrote.

Applying the updated economic loss rule to Carroll’s negligence claim, the court reversed summary judgment in favor of the pest control company.

“[W]e first rule that the economic loss rule does not apply because the contract did not involve the sale of a product,” the court said, and the duty allegedly breached by the pest control company was not a duty solely defined by the parties’ contract. “[The pest control company’s] conduct in secretly treating Carroll’s home with liquid termiticide was beyond the parties’ bargain. If [the pest control company] had just abandoned the contract, then we would agree Carroll’s sole remedy would be for breach of contract, for [the pest control company] would have merely failed to do what they promised. But [the pest control company] did not stop there. They undertook a separate act, outside the parties’ bargain. By doing so, their duty to Carroll was no longer defined and bound up by the contract but by the law’s command that they use due care.”

The court reversed and remanded.

Chief Judge John W. Kittredge filed a separate opinion, concurring in the result but writing separately to emphasize that the court should “remain vigilant” to its longstanding rule that “[o]rdinarily, where there is no duty except such as the contract creates, the plaintiff’s remedy is for breach of contract, when the breach of duty alleged arises out of a liability independent[] of the personal obligation undertaken by contract, it is a tort.”

Neither Robert T. Lyles Jr., of Lyles & Associates in Mount Pleasant, who represented Carroll, nor Columbia attorney Kelley S. Cannon, of Howser Newman & Besley, who represented the pest control company, responded to a request for comment.

EXTERNAL LINKS

• South Carolina Judicial Branch Opinions
• Analysis: “Businesses beware: South Carolina Supreme Court undermines contractual protections of economic loss rule.”
• Analysis: “South Carolina Reins in Economic Loss Rule”