Tiara: A Sea of Change or Barely a Ripple?

Tiara: A Sea of Change or Barely a Ripple?

I. Introduction
The Florida Supreme Court’s recent decision in Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc., 110 So. 3d 399 (Fla. 2013), held that Florida’s Economic Loss Rule (“Rule”) applied only in products liability cases and receded from all inconsistent prior holdings. This follows the Court’s recent trend in trying to limit the scope of the Rule.[i] The decision will affect the way in which real estate lawyers view their practices. But first, some background is needed.

II. History of the Rule in Florida
The Rule is a judicially created doctrine that sets forth the circumstances under which a tort action is prohibited if the only damages suffered are economic losses, typically costs of repair and replacement of the defective product or consequential loss of profits in the absence of any claim of personal injury or damage to other property.

Originally, the Rule appeared in both state and federal courts in products liability type cases in response to attempts to apply tort remedies to traditional contract law damages.[ii] Despite being grounded in the products liability context, the Rule was also applied to circumstances where the parties were in contractual privity and one party sought to recover tort damages for contractual matters.[iii] The Rule has been described as “the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care and thereby encourages citizens to avoid causing physical harm to others.”

The first Florida Supreme Court case applying the Rule was Florida Power & Light Co. v. Westinghouse Elec. Corp., 510 So. 2d 899 (Fla.1987). The Rule in products liability contexts developed to protect manufacturers from liability for economic damages caused by a defective product beyond those damages provided by warranty law.[iv] The Florida Power Court adopted the products liability Economic Loss Rule, precluding recovery of economic damages in tort where there is no property damage or personal injury.

In that case FPL entered into contracts with Westinghouse in which Westinghouse agreed to design, manufacture, and furnish two nuclear steam supply systems, including six steam generators. FPL discovered leaks in all six generators. FPL brought suit, alleging that Westinghouse was liable for breach of express warranties in arising out of the contracts and for negligence, and sought damages for the cost of repair, revision, and inspection of the steam generators. The Court concluded that warranty law was more appropriate than tort law for resolving economic losses in this context, and held that “a manufacturer in a commercial relationship has no duty under either a negligence or strict products liability theory to prevent a product from injuring itself.”[v] The court concluded that warranty law was more appropriate than tort law for resolving economic losses where nuclear generators were faulty but damaged only themselves.

A few months after deciding Florida Power, the Supreme Court applied the Rule in the contractual context.[vi] In AFM, AFM entered into an agreement with Southern Bell to advertise in the yellow pages. A series of errors resulted in AFM’s number being disconnected or improperly directed to other Bell customers. The court extended the Rule to preclude a negligence claim arising from breach of a service contract in a nonprofessional service context.

Subsequent to AFM the Court decided HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238 (Fla. 1998). In HTP the court reviewed the AFM decision and stated that the “Economic Loss Rule has not eliminated causes of action based upon torts independent of the contractual breach even though there exists a breach of contract action. Where a contract exists, a tort action will lie for either intentional or negligent acts considered to be independent from acts that breached the contract.”[vii]

After the AFM and HTP decisions, the court then began to try and limit the application of the Rule, beginning with Moransais v. Heathman.[viii] The Moransais case was the first one where the court looked at the landscape created by the Rule and began to move away from a broad application of the Rule. The court allowed a claim of negligence against an engineering professional and stated that the Rule was “primarily intended to limit actions in the product liability context and its application should generally be limited to those contexts or situations where the policy considerations are substantially identical to those underlying the product liability-type analysis.”

The court in Indemnity Insurance v. American Aviation, Inc.,[ix] limited the Rule to situations where: (1) the parties were in contractual privity; or (2) the manufacture of a defective product that damages only itself, with the application of several established exceptions, such as claims for professional negligence, fraudulent inducement or negligent representation. The court explained in great detail the two categories when the Rule would apply. However, the court also stated that the exceptions which it had created to the Economic Loss Rule remained untouched. These exceptions included the “other property” exception in the products liability context and professional malpractice, fraudulent inducement, negligent misrepresentation, or free-standing statutory causes of action in the contractual privity context.[x]

III. The Tiara Decision
In Tiara the condominium association retained Marsh & McLennan as its insurance broker to secure condominium insurance coverage. The broker secured windstorm coverage through Citizens Property Insurance, which issued a policy that contained a loss limit in an amount close to $50 million. In September 2004, the condominium sustained significant damage from hurricanes Frances and Jeanne. The Association was assured by the broker that the loss limits coverage was per occurrence (meaning almost $100 million in coverage as opposed to half of that amount if it was in the aggregate). The Association proceeded with the remediation. However, Citizens claimed that the loss limit was $50 million in the aggregate, not per occurrence. Eventually, the Association and Citizens settled for approximately $89 million, which was less than the more than $100 million spent by the Association. In October 2007, the Association filed suit against Marsh, alleging (1) breach of contract, (2) negligent misrepresentation, (3) breach of the implied covenant of good faith and fair dealing, (4) negligence, and (5) breach of fiduciary duty. The trial court granted summary judgment in favor of Marsh on all claims and Tiara appealed to the Eleventh Circuit.

The appeals court concluded that summary judgment was proper as to all counts except the negligence and breach of fiduciary duty claims. As to these two claims, the Eleventh Circuit certified a question to Florida Supreme:

DOES AN INSURANCE BROKER PROVIDE A “PROFESSIONAL SERVICE” SUCH THAT THE INSURANCE BROKER IS UNABLE TO SUCCESSFULLY ASSERT THE ECONOMIC LOSS RULE AS A BAR TO TORT CLAIMS SEEKING ECONOMIC DAMAGES THAT ARISE FROM THE CONTRACTUAL RELATIONSHIP BETWEEN THE INSURANCE BROKER AND THE INSURED?

The Florida Supreme Court, stating that the certified question was premised on the continuing applicability of the Rule in cases involving contractual privity, rephrased the certified question by the Eleventh Circuit as follows:

DOES THE ECONOMIC LOSS RULE BAR AN INSURED’S SUIT AGAINST AN INSURANCE BROKER WHERE THE PARTIES ARE IN CONTRACTUAL PRIVITY WITH ONE ANOTHER AND THE DAMAGES SOUGHT ARE SOLELY FOR ECONOMIC LOSSES?

In answering the rephrased certified question, the Florida Supreme Court noted its experience with the Rule over time and the need to create exceptions to the Rule demonstrated that expansion of the Rule beyond its origins “was unwise and unworkable in practice, [and] . . . today we return the Economic Loss Rule to its origin in products liability.”[xi]

IV. Negligence in Economic Situations After Tiara

A. What is Negligence?

Negligence applies a general community standard to conduct, while contract law applies a privately agreed upon standard to conduct. The Florida Supreme Court Standard Jury Instruction for each is telling:

401.4 NEGLIGENCE

Negligence is the failure to use reasonable care, which is the care that a reasonably careful person would use under like circumstances. Negligence is doing something that a reasonably careful person would not do under like circumstances or failing to do something that a reasonably careful person would do under like circumstances.

Now compare the negligence jury instruction with the instruction for breach of contract:

416.3 CONTRACT FORMATION — ESSENTIAL FACTUAL ELEMENTS]\

(Claimant) claims that the parties entered into a contract. To prove that a contract was created, (claimant) must prove all of the following:

1. The essential contract terms were clear enough that the parties could understand what each was required to do;

2. The parties agreed to give each other something of value. [A promise to do something or not to do something may have value]; and

3. The parties agreed to the essential terms of the contract. When you examine whether the parties agreed to the essential terms of the contract, ask yourself if, under the circumstances, a reasonable person would conclude, from the words and conduct of each party, that there was an agreement. The making of a contract depends only on what the parties said or did. You may not consider the parties’ thoughts or unspoken intentions.

In other words, negligence analysis takes the decision making power out of hands of the contracting parties and has a jury determine what the proper standard of care is for a particular act.[xii] By contrast, parties to a contract are held to the standard of care set forth in the contract. And under a contractual approach, generalized principles such as “good faith” do not apply to non-contractual terms and cannot be used to override contractual terms.[xiii]

B. Justice Pariente’s Concurrence

Justice Labarga’s opinion in Tiara is clear: the Economic Loss Rule does not apply outside of the products liability context.[xiv]Justice Pariente’s concurrence, in which Justice Labarga joined, is more nuanced. For example, Justice Pariente states the Tiaradecision does not upset traditional contract principles: “Our decision is neither a monumental upsetting of Florida law nor an expansion of tort law at the expense of contract principles. To the contrary, the majority merely clarifies that the Economic Loss Rule was always intended to apply only to products liability cases.”[xv] Justice Pariente further states:

The majority’s conclusion that the Economic Loss Rule is limited to the products liability context does not undermine Florida’s contract law or provide for an expansion in viable tort claims. Basic common law principles already restrict the remedies available to parties who have specifically negotiated for those remedies, and, contrary to the assertions raised in dissent, our clarification of the Economic Loss Rule’s applicability does nothing to alter these common law concepts. For example, in order to bring a valid tort claim, a party still must demonstrate that all of the required elements for the cause of action are satisfied, including that the tort is independent of any breach of contract claim. . . (citations omitted)).”

So the gist of reading the majority and concurring opinions together is that the Economic Loss Rule no longer applies in contract (i.e., non-products liability) cases, but traditional contract principles, including the principle that a party cannot use tort to contract damages, still apply. We know that Moransais v. Heathman holds that professionals such as lawyers may be liable for both contract and negligence liability, but what effect does the Tiara decision have on those types of situations that confront a typical real estate lawyer?

V. Selected Real Estate Actions After Tiara

A. Closings

The first question that comes to mind is what effect will the Tiara decision have real estate closings, a large portion of the practice of many lawyers. And the concern is, of course, whether a “community standard” will now apply to vary the obligations of the real estate contract, and especially, the closing requirements of the contract. Although it is too early to tell, it appears Tiara will have little effect.

Recall that real estate transactions are subject to the Statute of Frauds. And of course, Statute of Frauds contracts can only be varied by a writing signed by the party to be charged.[xvi] But what about oral agreements; can they modify closing requirements based on community standards? The Florida Supreme Court recently answered the question in the negative in DK Arena, Inc. v. EB Acquisitions I, LLC.[xvii] Presumably, Tiara cannot be read to overrule a decision of the same court issued just a few months earlier, and as a result, practitioners are probably secure in relying on written contracts for closings.

B. Leases

Leases can also be subject to the Statute of Frauds, as Florida Statutes section 725.01, points out:

Promise to pay another’s debt, etc.—No action shall be brought whereby to charge any . . . for any lease thereof for a period longer than 1 year unless the agreement or promise upon which such action shall be brought, or some note or memorandum thereof shall be in writing and signed by the party to be charged therewith or by some other person by her or him thereunto lawfully authorized.

Case law is clear that modification of leases is also governed by the Statute of Frauds, so practitioners are also safe relying on written leases.[xviii]

C. Quiet Title

Based on case law, there does not appear to be a community standard that is applied in quiet title actions. Specifically:

A complaint to quiet title must allege plaintiff’s title to the property in controversy, must show how plaintiff obtained title and the chain of title, must show the alleged cloud or defect on title and the basis upon which defendant claims an interest in or claims the title, and why defendant’s claim is not well founded. [xix].

This cause of action is based on record title, and thus, it does not appear that a community standard would apply to a quiet title action.

D. Ejectment

The Florida Supreme Court has promulgated an approved form of complaint for ejectment, which form is found at Florida Rules of Civil Procedure Form 1.940. This form reads:

Plaintiff, A. B., sues defendant, C. D., and alleges:

1. This is an action to recover possession of real property in County, Florida.

2. Defendant is in possession of the following real property in the county:

(describe property)

to which plaintiff claims title as shown by the attached statement of plaintiff‘s chain of title.

3. Defendant refuses to deliver possession of the property to plaintiff or pay plaintiff the profits from it. WHEREFORE plaintiff demands judgment for possession of the property and damages against defendant. Again, it is difficult to see how a community standard would apply to the factual question of whether a party who has no legal ownership is claiming possession. Presumably, no community standard would apply in this situation.

E. Slander of Title

Slander or disparagement of title follows the same legal principles as defamation generally.[xx] And as demonstrated by the standard jury instruction on defamation, a community standard has always applied to defamation:

Florida Standard Civil Jury Instruction 405.2

The claims [and defenses] in this case are as follows. (Claimant) claims that (Defendant) [made] [published] [broadcast] a false statement about [him] [her] [it] which caused [him] [her] [it[ harm. (Claimant) claims the statement was (identify the alleged defamatory statement and its alleged defamatory meaning).

Accordingly, Tiara does not affect this cause of action and a community standard will still apply.

F. Partition

Partition is a former common-law action that has been codified into Chapter 64 of the Florida Statutes. A review of the statute demonstrates that a community standard would probably not apply:

64.041 Complaint.—The complaint shall allege a description of the lands of which partition is demanded, the names and places of residence of the owners, joint tenants, tenants in common, coparceners, or other persons interested in the lands according to the best knowledge and belief of plaintiff, the quantity held by each, and such other matters, if any, as are necessary to enable the court to adjudicate the rights and interests of the party. If the names, residence or quantity of interest of any owner or claimant is unknown to plaintiff, this shall be stated. If the name is unknown, the action may proceed as though such unknown persons were named in the complaint.

G. Foreclosure

Like closings of purchase and sale contracts, it appears that foreclosure would be ripe for the application of a community standard to the action. But also like closings, certain principles call into question how much effect Tiara will have on foreclosures. Keeping in mind that foreclosures are merely enforcement of existing contracts, and that Justice Pariente’s concurrence states that traditional contract principles have not changed, it does not appear this area of law will be greatly affected. Specifically, courts enforce the contract terms as written in the note and mortgage unless a fraud or misrepresentation can be proven:

Boiled to its essence, the first fraud claim says that the lender falsely inflated the Vidals’ income in the loan application that they signed to get the loan; had the lender taken steps to verify their income then the exaggerated income would have been revealed. Of course, the Vidals want damages caused by the lender’s treachery. The Vidals were obviously in a position to know their own income. Signing off on their own fraudulent loan application precludes them from raising this fraud as an affirmative defense. ‘The recipient of a fraudulent misrepresentation is not justified in relying upon its truth if he knows that it is false or its falsity is obvious to him.’ The second claim of “fraud” is that the lender orally misrepresented the loan to be a fixed rate loan. However, the note and other documents the Vidals signed at the closing plainly indicate that the note had an adjustable rate. “A party cannot recover in fraud for alleged oral misrepresentations that are adequately covered or expressly contradicted in a later written contract.”[xxi]

H. Breach of Contract

Breach of contract situations not governed by the Statute of Frauds present the most uncertain area of post – Tiara application of the Economic Loss Rule. Granted, Justice Pariente re-affirms existing contract principles but the cause of action itself and the manner in which the cause of action is proven leads to a murky forecast of future effects. The applicable contract jury instruction reads:   Florida Standard Jury Instruction Contracts 416.4

BREACH OF CONTRACT – ESSENTIAL FACTUAL ELEMENTS

To recover damages from (defendant) for breach of contract, (claimant) must prove all of the following:

1. (Claimant) and (defendant) entered into a contract;

2. (Claimant) did all, or substantially all, of the essential things which the contract required [him] [her] [it] to do [or that [he] [she] [it] was excused from doing those things];

3. [All conditions required by the contract for (defendant’s) performance had occurred;]

4. [(Defendant) failed to do something essential which the contract required [him] [her] [it] to do] [(Defendant) did something which the contract prohibited [him] [her] [it] from doing and that prohibition was essential to the contract]; and

5. (Claimant) was harmed by that failure.

Specifically, what is “essential” to a contract is a question to which community standards may apply notwithstanding Justice Pariente’s statement that the Independent Tort Doctrine removes negligence from most contractual disputes.[xxii] Thus, community standards may become a standard by which non statute of frauds contracts are interpreted.

VI. Responses to Tiara

So how does a real estate practitioner react to Tiara? Here are three courses of action to consider.

A. Waiver of Jury Trial

The unease practitioners suffer arises not so much from the decision, but from a belief that juries will not understand and will not apply contract principles. The easiest way to allay such a concern is to include a jury waiver in contracts. Jury waivers are enforceable if they are conspicuous and voluntary.[xxiii] A typical waiver may read as follows:

Waiver of Jury Trial. THE UNDERSIGNED WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OR RELATED TO ANY ASPECT OF THE TRANSACTION IN CONNECTION WITH WHICH THIS DOCUMENT IS BEING GIVEN OR ANY DOCUMENT EXECUTED OR DELIVERED IN CONNECTION WITH SUCH TRANSACTION. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY THE UNDERSIGNED AND THE UNDERSIGNED ACKNOWLEDGES THAT NO ONE HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE UNDERSIGNED FURTHER ACKNOWLEDGES HAVING BEEN REPRESENTED IN CONNECTION WITH THE TRANSACTION WITH RESPECT TO WHICH THIS DOCUMENT IS BEING GIVEN AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED BY THE UNDERSIGNEDS’ OWN FREE WILL, AND THAT THE UNDERSIGNED HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH SUCH COUNSEL. THE UNDERSIGNED FURTHER ACKNOWLEDGES HAVING READ AND UNDERSTOOD THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION.

B. Limitation of Remedies

At the outset, practitioners should note the misconception of many that contracts require “mutuality of remedy” in order to be enforceable. Contracts require mutuality of obligation, i.e., consideration, but not mutuality of remedy:

The Buyers correctly note that the contracts’ remedial limitations favor the Developer. However, the Buyers led the circuit court into error by approaching the difference in the remedies available to the contracting parties as an issue relating to mutuality of obligation instead of mutuality of remedy. As this court has previously observed, “[m]utuality of obligation is sometimes confused with mutuality of remedy. Obligation pertains to the consideration while remedy pertains to the means of enforcement. Mutual obligation is essential, but the means of enforcement may differ without necessarily affecting the reciprocal obligations of the parties.”[xxiv]

Thus, contracts can be drafted to provide for different remedies of the parties, and presumably can be drafted to waive any tort or non-contractual remedies.

C. Contractually Compensate for Increased Risk

The final approach a practitioner may want to employ is a discussion with their client that the area of contract law has changed and has become less clear. Armed with that information, clients can make a decision as to how to allocate risk in their contracts and whether they wish to adjust contract pricing in order to take into account the possibility of “contractual negligence” lawsuits.

VII. Conclusion

It is too early to tell whether every breach of contract claim will now give rise to a negligence claim as well. Although the majority opinion in Tiara does not specifically address this issue, the concurrence by Justice Pariente and the dissents by Chief Justice Polston and Justice Canady reflect the court has differing views on the topic.

Do we now, as stated by Justice Canady, “face the prospect of every breach of contract claim being accompanied by a tort claim” or the possibility that contract law will “drown[] in a sea of tort”?[xxv] Or does Justice Pariente’s opinion that “[b]asic common law principles already restrict the remedies available to parties who have specifically negotiated for those remedies”[xxvi] mean that contract law will survive Tiara without much change? Only time will tell.

 


[i] See Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999); Indemnity Insurance v. American Aviation, Inc., 891 So. 2d 532 (Fla. 2004).
[ii] Tiara, 110 So. 3d at 401.
[iii] Id.
[iv] See Id. (Fla.1987) (relying on East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986); Seely v. White Motor Co., 403 P.2d 145 (Cal. 1965)).
[v] Seely
[vi] See AFM Corp. v. Southern Bell Telephone & Telegraph Co., 515 So. 2d 180 (Fla. 1987).
[vii] Id. at 1239.
[viii] 744 So. 2d 973 (Fla. 1999).
[ix] 891 So. 2d 532 (Fla. 2004).
[x] Am. Aviation, 891 So. 2d at 543.
[xi] Tiara, 110 So. 3d at 407.
[xii] Adamo v. Manatee Condominium, Inc., 548 So. 2d 287 (Fla. 3d DCA 1989) (“The Florida Appellate (sic) decisions generally pertain to the use of OSHA regulations as the ‘community standard,’ when the plaintiff is an injured worker who brings a negligence suit sounding in tort for recovery against a property owner, or third party not protected by worker’s tort immunity.”).
[xiii] Snow v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 896 So. 2d 787, 792 (Fla. 2d DCA 2005); City of Riviera Beach v. John’s Towing, 691 So. 2d 519, 521 (Fla. 4th DCA 1997).
[xiv] Tiara, 110 So. 3d at 399.
[xv] Tiara, 110 So. 3d at 408.
[xvi] Wharfside at Boca Pointe, Inc. v. Superior Bank, 741 So. 2d 542, 545 (Fla. 4th DCA 1999) (“[An] agreement that is required by the statute of frauds to be in writing cannot be orally modified.”).
[xvii] 112 So. 3d 85 (Fla. 2013).
[xviii] Burdick v. Costilla, 97 So. 3d 316, 318 – 19 (Fla. 2d DCA 2013) (“Pursuant to section 689.01, Florida Statutes [ (2010) ], an assignment or sublease for a lease with a term of more than one year must be in writing and signed by the party to be bound with two subscribing witnesses.”)
[xix] Manuel Farach, 19 Florida Real Estate 483.
[xx] Callaway Land & Cattle Co., Inc. v. Banyon Lakes C. Corp., 831 So. 2d 204 (Fla. 4th DCA 2002).
[xxi] Vidal v. Liquidation Props., Inc., 104 So. 3d 1274, 1278 (Fla. 4th DCA 2013).
[xxii] Tiara, 110 So. 3d at 408 (“For example, in order to bring a valid tort claim, a party still must demonstrate that all of the required elements for the cause of action are satisfied, including that the tort is independent of any breach of contract claim.”)
[xxiii] Vista Centre Venture v. Unlike Anything, Inc., 603 So. 2d 576, 578 (Fla. 5th DCA 1992).
[xxiv] Redington Grand, LLP v. Level 10 Properties, LLC, 22 So. 3d 604, 608 (Fla. 2d DCA 2009).
[xxv] Tiara, 110 So. 3d at 414 (Canady, J., dissenting).
[xxvi] Tiara, 110 So. 3d at 408 (Pariente, J., concurring),

Supreme Court’s recent decision in Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc., 110 So. 3d 399 (Fla. 2013), held that Florida’s Economic Loss Rule (“Rule”) applied only in products liability cases and receded from all inconsistent prior holdings. This follows the Court’s recent trend in trying to limit the scope of the Rule.[i] The decision will affect the way in which real estate lawyers view their practices. But first, some background is needed.