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The Economic Loss Rule Unleashed: How Cook v. Orkin Potentially Broadens the Scope of the ELR

Commercial Litigation Update Lyzzette M. Bullock

In a case about a rather horrific two-decade-long termite infestation, the Arizona Court of Appeals appears to have expanded the scope of the Economic Loss Rule ("ELR") to service contracts, and for the first time specifically held that the ELR applies to fraud and misrepresentation claims. Before the Court of Appeals issued its opinion in Cook v. Orkin Exterminating Company, Inc. last month, Arizona courts limited the application of the ELR to negligence claims in construction defect and product liability cases. Now it appears that Arizona courts will apply the ELR to any service contract, a move that will significantly impact the viability of tort claims in contract cases. That is good news for defendants and bad news for plaintiffs.

The Economic Loss Rule Restricts Tort Remedies in Contract Cases.

When the underlying issues in a lawsuit involve a contract, Arizona's ELR precludes tort recovery for a purely economic loss, unless the loss is accompanied by physical injury to a person or property other than the property at issue in the case. The effect of this rule is that courts will dismiss tort claims in cases where the ELR applies and limit a plaintiff's remedies to only those remedies specifically provided for in the contract. Courts designed this rule to protect parties' contractual expectations, the assumption being that if parties want the ability to recover tort remedies, parties will expressly provide for those remedies in their contracts.

Cook v. Orkin Signals That Service Contracts Are Fair Game, and Your Recovery is Limited to Contractual Remedies.

In Cook v. Orkin, homeowners filed breach of fiduciary duty and tort claims against a pest control company for the company's failure to eradicate termites in their home. The construction company that built plaintiffs' house used dirt that was not treated with termiticide to backfill the basement. After the house was completed and the homeowners moved in, they spent nearly the next two decades regularly treating their home for severe termite infestations. The homeowners sued the pest control company for breach of fiduciary duty, negligence, fraud and misrepresentation. The Superior Court ruled that the plaintiffs had not pled adequate facts that would give rise to a claim for breach of fiduciary duty and that their tort claims were barred by the ELR. The Court of Appeals affirmed that decision and, in a footnote, specifically held that the ELR applied to the homeowners' fraud and misrepresentation claims.

At its core, the holding in Cook v. Orkin signals two important issues worthy of attention. First, as the court notes, "a contracting party is limited wholly to its contractual remedies for purely economic loss related to the subject of the parties' contract." In other words, in cases where the ELR applies, if the remedy is not provided for in the contract, the remedy is not available to either party. Second, the ELR is no longer limited to product liability and construction defect cases. Service contracts appear to be fair game.

The immediate impact of Cook v. Orkin is likely to be an increase in motions to dismiss tort claims in lawsuits that involve contracts and in which the plaintiff does not claim physical injury to a person or another's property. The long-term impact is that the Economic Loss Rule is expanding in scope, and contracting parties will need to draft their contracts with care and precision to provide exactly the remedies that they desire.

For more information on this case and the Economic Loss Rule, please feel free to contact Lyzzette Bullock at (602) 229-5208 / or your Quarles & Brady attorney.