Sophisticated Buyer Beware: Updates to the Economic Loss Rule in Tennessee

Discussion has re-emerged in Tennessee regarding the economic loss rule, a judicially-created remedy that precludes contracting parties from pursuing tort remedies for purely economic losses arising out of a contractual relationship. On August 2, 2021, the Tennessee Supreme Court issued an opinion, addressing an issue of first impression in Tennessee—whether fraud is an exception to the economic loss rule.

In Milan Supply Chain Solutions, Inc. v. Navistar, Inc., W201800084SCR11CV, 2021 WL 3283067 (Tenn. Aug. 2, 2021), the parties entered into a contract whereby Navistar would provide new trucks to Milan. Navistar manufactured the trucks with engines using an emissions system that was not commonly used in the industry, which Navistar knew was problematic, but represented to Milan that the trucks would last a million miles based on rigorous field testing. The contract required Navistar to repair or replace defective truck components. Within a year of purchase, the trucks started to exhibit problems, but Navistar made all repairs pursuant to the warranties. On the basis that the repair rate on the trucks was too high, Milan filed suit against Navistar, alleging, among other things, negligent misrepresentation and fraud.

The economic loss doctrine originated in the context of products liability, where courts held that when a defective product damages itself without causing personal injury or damage to other property, a plaintiff cannot recover in tort for purely economic losses. Over the years, the doctrine expanded to apply to other contexts, as well. One exception to the economic loss rule is fraud. Although courts have taken different approaches to applying this exception, the majority of courts follow the broad approach, which operates to except fraudulent inducement claims seeking economic losses from the economic loss rule, because the duty not to commit fraud is independent of any contract. Allowing tort remedies is thus appropriate because fraud is conduct that should be deterred, and contracting parties do not account for the risk that a party will deliberately misrepresent terms critical to a contract.

In Milan, the Tennessee Supreme Court departed from this approach. Striking a balance between two concepts crucial to Tennessee law—freedom of contract and abhorrence of fraud—the Tennessee Supreme Court held that the economic loss doctrine precluded the fraudulent inducement claim, but declined to announce a broad rule either extending or exempting all fraud claims from the rule. Rather, the Court held that in contracts between sophisticated business entities, as was the case between Milan and Navistar, where a party claims fraudulent inducement seeking economic losses only, the economic loss doctrine applies if “the only misrepresentations . . . concern the quality or character of the goods sold,” because the parties are free to negotiate warranties to address those defects. Here, the reliability of the trucks were matters about which the parties contracted with equal bargaining power. However, the Court stopped short of deciding whether there may never be a fraudulent inducement exception to the economic loss rule.