5.6.5. The Midwest, 1965-Present: Freedom to Bear Risk - The Economic Loss Doctrine


 

Economic loss doctrine adopted

Ohio

1989

Indiana

1983 (by statute)

Illinois

1982

Michigan

1992

Wisconsin

1987

Iowa

1984

Minnesota

1981


Key cases:

Moorman Manufacturing Co. v National Tank Co. – Illinois, 1982 (435 N.E.2d 443); Huron Tool & Engineering Co. v Precision Consulting Services, Inc. – Michigan, 1995 (532 N.W.2d 541); Determan v Johnson – Iowa, 2000 (613 NW2d 259)

  • The modern emphasis on autonomy is often viewed as a triumph of liberalism (or, in the eyes of critics, libertinism) – but the rise of the “economic loss” doctrine shows that view is too simple. 
  • The doctrine first appeared in the 1980s, partly as a reaction to the success of strict liability.   Many judges felt the doctrine had gone too far:  when someone is deceived into entering an agreement, he should be limited to a breach-of-contract claim and should not be allowed to use tort law even though it usually allows a higher amount of damages than contract law.  Some of their decisions echo decisions of the late 19th century holding that liberty of contract trumps the state’s interest in protecting workers and consumers who enter into oppressive contacts out of ignorance or lack of economic power. 
  • Courts in the Midwest, like other regions, are still struggling to define the limits of the economic loss doctrine and the extent to which the state may regulate the process of making contracts.  In Moorman, the Illinois supreme court adopted the doctrine with a strong statement that the central purpose of strict liability, to allocate cost of inevitable harms of modern products to their producers, should not apply to situations where the injured person has (or could have) negotiated directly with the producer about the feature that caused the injury.  But the court then went on to create a liberal exception for consumers:  they may still make tort claims and obtain larger damages for intentionally deceptive statements. 
  • In Huron Tool, Michigan adopted a more conservative position, limiting the exception to intentional deceptions not related to contract matters that could have been negotiated.  The Huron Tool rule has been widely followed but is controversial.  By contrast, in Determan the Iowa supreme court left the door open to adoption of exceptions in a variety of circumstances; in 2010, the court expanded the exception to include even negligent misstatements.        


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Courtesy Wikimedia Commons






“We believe it is preferable to relegate the consumer to the comprehensive scheme of remedies fashioned by the Uniform Commercial Code [governing business contracts], rather than requiring the consuming public to pay more for their products so that a manufacturer can insure against the possibility that some of his products will not meet the business needs of some of his customers.”- Justice Thomas Moran, in Moorman

 “Fraud in the inducement presents a special situation where parties to a contract appear to negotiate freely – which normally would constitute grounds for invoking the economic loss doctrine– but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party’s fraudulent behavior.” -Judge Michael Kelly, in Huron Tool

“[T]he line between tort and contract must be drawn by analyzing interrelated factors such as the nature of the defect, the type of risk, and the manner in which the injury arose.  These factors bear directly on whether the safety-insurance policy of tort law or the expectation-bargain protection policy of warranty law is most applicable to a particular claim.” -Justice Marsha Ternus, in Determan