Economic Loss: Commercial Contract Law Lives

William Mitchell Law Review Volume 27 | Issue 1 Article 1 2000 Economic Loss: Commercial Contract Law Lives Cortney G. Sylvester Follow this and additional works at: http://open.mitchellhamline.edu/wmlr Recommended Citation Sylvester, Cortney G. (2000) "Economic Loss: Commercial Contract Law Lives," William Mitchell Law Review: Vol. 27: Iss. 1, Article 1. Available at: http://open.mitchellhamline.edu/wmlr/vol27/iss1/1 This Article is brought to you for free and open access by the Law Reviews and Journals at Mitchell Hamline Open Access. It has been accepted for inclusion in William Mitchell Law Review by an authorized administrator of Mitchell Hamline Open Access. For more information, please contact . © Mitchell Hamline School of Law Sylvester: Economic Loss: Commercial Contract Law Lives ECONOMIC LOSS: COMMERCIAL CONTRACT LAW LIVES Cortney G. Sylvester t I. INTRO DUCTIO N ........................................... 417 FOUNDATIONS OF THE ECONOMIC Loss DOCTRINE ............. 419 II. A. Uniformity Of CommercialLaw ...................................... 420 B. UnderpinningsOf Strict Liability.................................... 421 C. Freedom To Contract..................................................... 422 III. EVOLUTION OF ECONOMIC Loss IN MINNESOTA .................. 423 A. InitialPhase-The 1980's............................................... 423 1. Superwood-The Rule Announced ............................ 423 2. Minneapolis Society Of Fine Arts-Component Products................................................................. 425 3. S.J. Groves-PredominanceOf Contract Claims ........... 425 B. Second Phase-The 1990's.............................................. 427 1. Hapka-More Limitation Than Exception ................... 427 2. Den-Tal-Ez-The Merchant Orientation...................... 428 3. Section 604. 10-The LegislatureResponds ................... 430 IV. INTO THE TWENTY-FIRST CENTURY .............................. 430 A. Definition Of "MerchantsIn Goods Of The Kind"............. 431 B. FraudAnd Misrepresentation......................................... 433 C. Statutory Claims........................................................... 436 V . C O NCLUSIO N ................................................. 437 I. INTRODUCTION In 1974, Grant Gilmore proclaimed that contract law was dead, transformed into a branch of the burgeonin body of tort law.' The validity of this claim is open to debate, but it is generally t Attorney with Halleland, Lewis, Nilan, Sipkins & Johnson, P.A., Minneapolis, Minnesota. The author wishes to thank other members of the firm for their excellent prior research and analysis of this subject. In addition, special recognition is due to Jessica Shaw, who mentored with the author while this article was written and who provided valuable assistance. 1. GRANT GILMORE, THE DEATH OF CONTRACT (1974). 2. "Reviewers found much of Gilmore's account inaccurate, incomplete, ex- Published by Mitchell Hamline Open Access, 2000 1 William WILLIAM Mitchell LawMITCHELL Review, Vol. 27,LAW Iss. 1 [2000], Art. 1 REVIEW [Vol.27:1 agreed that tort theories of recovery have become more prominent in areas once dominated by the rules of contract.3 Product liability is no exception. The previous century witnessed a virtual abandonment of warranty-a contract theory-in favor of strict liability for defective products, a new tort theory.4 The ascendance of tort law in product liability cases has understandable appeal in the context of bodily injury suffered by a consumer. Tort law is a flexible remedy, responsive to the specific facts of a case, the quality of the parties' conduct, and the extent to which an injury has affected the plaintiffs very personal circumstances. Tort doctrines arguably have less appeal, however, in the commercial context. Predictability and a common understanding of the "ground rules" for business transactions are important policy concerns typically undermined by the flexibility that gives tort law its vigor. Standing guard at the crossroads of tort and contract is the economic loss doctrine. Late in the last century, Minnesota moved to forestall the "death of contract" in commercial settings when first the state courts, and then the state legislature, adopted this doctrine. Recent years have seen that doctrine clarified. However, several issues surrounding recovery for economic loss are not been resolved. Careful attention to the foundational principles of the economic loss doctrine should allow Minnesota courts in the next century to prevent commercial law from "drown[ing] in a sea of tort. ' aggerated or unoriginal." Robert A. Hillman, The Triumph of Gilmore's "The Death of Contract", 90 Nw. U. L. REV. 32, 32 (1995) (citing James R. Gordley, The Death of Contract, 89 HARV. L. REV. 452 (1975) (book review); Robert W. Gordon, The Death of Contract, 1974 Wis. L. REv. 1216 (1974) (book review); MortonJ. Horwitz, The Death of Contract, 42 U. CHI. L. Rrv. 787 (1975) (book review); Ralph J. Mooney, The Rise and Fall of Classical Contract Law: A Response to ProfessorGilmore, 55 OR. L. REv. 155 (1976); Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 STAN. L. REv. 1161 (1975); Richard Danzig, The Death of Contract and the Life of the Profession: Observationson the IntellectualState of Legal Academia, 29 STAN. L. REV. 1125 (1977); AnthonyJ. Waters, For Grant Gilmore, 42 MD. L. REV. 865 (1983)). 3. Mark Pettit, Jr., Freedom, Freedom of Contract, and the "Rise and Fall," 79 B.U.L. REv. 263, 265-66 (1999); Barry Perlstein, Crossingthe Contract-Tort Boundary: An Economic Argument for the Imposition of ExtracompensatoryDamages for Opportunistic Breach of Contract,58 BROOK. L. REv. 877, 877-78 (1992). 4. Greenman v. Yuba Power Prods., Inc., 377 P.2d 897 (Cal. 1963); William L. Prosser, The Fall of the Citadel (Strict Liability to the Consumer), 50 MINN. L. REv. 791 (1966). 5. E. River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 866 (1986). http://open.mitchellhamline.edu/wmlr/vol27/iss1/1 2 2000] ECONOMIC LOSS Contract Law Lives Sylvester: Economic Loss: Commercial In this article, I will discuss the relatively brief history, and a blueprint for the future, of the economic loss doctrine in Minnesota. Initially, I will examine the origin of the doctrine and the policy concepts upon which it is founded. Second, I will look at how the doctrine has developed in Minnesota since its recognition in 1981. Finally, I will discuss three illustrative examples of outstanding issues regarding economic loss and how Minnesota courts should address them in coming years. II. FOUNDATIONS OF THE ECONOMIC Loss DOCTRINE The economic loss doctrine can trace its ultimate origins to the Uniform Commercial Code (U.C.C.). The Code was promulgated in 1951, adopted with minor revisions by Pennsylvania in 1953, and adopted6 by all the remaining states but one over the ensuing fifteen years. The ov (...truncated)