How Far Does the Economic Loss Doctrine Reach in Commercial Transactions?
When a product fails and causes damage to a commercial buyer’s business, instinct often says the answer lies in tort: negligence, misrepresentation, or failure to warn. However, Michigan’s economic loss doctrine frequently rejects such claims, leaving the Uniform Commercial Code (UCC) and the parties’ contract as the exclusive avenue for relief. A recent order from the Kent County Circuit Court in Fluresh, LLC v. Aerco International, Inc. offers a useful illustration of how broadly the doctrine reaches, even when the plaintiff did not personally sit across the negotiating table from the seller.
What is the Economic Loss Doctrine?
The economic loss doctrine is a rule that preserves the boundary between contract and tort. As a general matter, economic losses arising out of commercial transactions are not recoverable in tort. When sophisticated commercial parties bargain for the sale of goods, the UCC and the contract itself are the only frameworks for allocating risk.
The doctrine applies when (1) the parties are closely related and had the opportunity to negotiate the terms regarding the injury at issue, and (2) the plaintiff’s economic expectations can be satisfied through contractual remedies. When both prongs are met, tort claims are barred regardless of how they are pleaded.
What Happened in the Case?
In Fluresh, a cannabis cultivator hired an architect to specify equipment for its grow facility and a general contractor to build it. The general contractor subcontracted the plumbing work, and the plumbing subcontractor purchased a water heater for the project. After installation, the heater leached nickel into the irrigation water, contaminating the crop and causing its total loss. The cultivator sued the water heater manufacturer and the seller of the heater in tort, arguing that the seller knew the heater’s intended use and that its expert recommendations created a duty independent of any sale. The court rejected that argument and held that the cultivator’s losses were barred by the economic loss doctrine.
A common workaround to the economic loss doctrine is the “other property” exception, which provides that damage to property other than the defective product itself can sometimes support a tort claim. The destroyed cannabis crop would seem to fit that exception, but the exception is narrower than it appears. Lost inventory, ruined finished product, and consequential business damages may all still be treated as economic loss when they are the kind of harm a sophisticated buyer would foresee and could have allocated through warranty, limitation of liability, or insurance.
Practical Takeaways:
The economic loss doctrine has broad reach. Commercial plaintiffs who suffer damages, lost inventory, or disrupted operations often look first to tort theories for recovery. When a commercial buyer acts through agents and subcontractors to procure equipment for a larger project, those intermediaries are part of the buyer’s commercial structure, and the opportunity to negotiate protective terms is imputed to the buyer. If the essence is a commercial transaction for goods that did not perform as expected, the UCC controls and a tort claim is barred.
This article is for general informational purposes only and does not constitute legal advice. It addresses commercial disputes between businesses and does not concern consumer or individual vehicle matters.