Daily Development for
Tuesday, October 7, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BROKERS; DUTY TO DISCLOSE; MISREPRESENTATION; "ECONOMIC LOSS:"The buyer of commercial property is not prevented by the "economic loss rule" from recovering damages for negligent misrepresentation by the seller's broker.

PK Ventures, Inc. v. Raymond James & Associates, Inc., 690 So.2d 1296 (Fla. 1997).

This case is part of a series of cases in which the Florida courts have wrestled with the question of the scope of damages available when a party is injured by a negligent misrepresentation in the context of a real estate sale. This citation, the most recent case, in fact involves a business broker, but the case law generally applies to brokers and other professionals who provide information in the course of a real estate transaction. In Woodson v. Martin, 685 So. 2d 1240 (Fla. 1996) the Florida Supreme Court decided that the "economic loss" rule did not apply to limit damages for negligent misrepresentation in the context of a residential property transfer. Here it extends the rule to commercial real estate transactions as well.

The only case that contains any really substantive discussion is the lower appeals court decision in Woodson, Woodson v. Martin, 663 So. 2d 1327 (Fla. App. 1995). That case gives one a good view of the dispute, with the Florida Court of Appeals referring the case on to the Supreme Court but splitting sharply upon which way it would recommend the Supreme Court to decide.

The "economic loss rule" states that victims of tortious conduct are entitled to damages only if they have suffered actual injury as a consequence of the conduct. Loss of expected financial gains is not an "actual injury" by these standards. If one suffers a breach of contract, then, of course, one can collect loss of expectation damages. This is because the breacher, by violation of the contract, has brought about the damages through its wrongful conduct. But tort law no longer imposes damages only upon parties guilty of "wrongful conduct" as that concept is commonly used.

"Fault," in tort, often is a shorthand term used to describe the fact that a party, due to social policy considerations, ought to bear the economic consequences of a loss. This view of tort law as a kind of "social insurance" that passes the cost of accident or injury to persons in a position to redistribute those costs to society through market pricing is one that we all learned in law school. The best model of such liability is the strict liability concept imposed upon manufacturers (and, in some states, builders). The "economic loss rule" recognizes the fact that the special public policy rationale for imposing liability upon tort defendants in these circumstances does not necessarily extend to making such them liable to fulfill all contract expectations of parties who might have a tort claim against them. If your catered art opening goes awry because the mayonnaise tastes awful, but no one got sick, you may have a claim against the caterer for breach of contract because she was careless in selecting the mayonnaise, but should you have a strict liability claim against the manufacturer of the mayonnaise for your economic costs (or lost sales)? The editor suspects that most people would answer in the negative. Strict liability isn't designed to address these kinds of losses.

But what about torts involving negligence? Specifically, what about torts involving negligent misrepresentation? Again, where there is a contract right, the party injured by the contract, such as a broker's client, can sue for foreseeable contract losses. But if the party making the representation has no contract duty to the party receiving it, such as where a seller's broker makes a representation to a buyer, is the broker liable in damages for the buyer's economic loss due to the buyer's reliance upon these representations?

In Casa Clara Condominium Ass'n v. Charley Toppino & Sons, Inc., 620 So.2d 1244 (Fla.1993), a case heavily discussed by all opinions in Woodson, the Florida Supreme Court held that homeowners whose condominium units were devalued because of concrete problems allegedly caused by the defendant cement contractor's negligent use of defective cement had no claim for damages against the contractor. They had no contract with the contractor, who had worked with the builder. Their sole claim was on warranty theories against the builder. Language in the opinion is consistent with the notion that homeowners never have a claim in tort for loss in the value of their property, but only for damages caused by physical injury to person or property.

Dissenters in Woodson argued that to follow Casa Clara literally in this case would render the tort of misrepresentation a nullity, because the whole idea of tortious misrepresentation is that the defendant caused the plaintiff to suffer an economic loss. One dissenting judge described the "duty of care" of the defendant as " a common law standard of care in negligence to protect a plaintiff's right to justifiably rely on the truth of certain representations even when the misrepresentation is the result of the defendant's negligent statement." To deny economic damages in these cases would be to deny operation of the tort theory at all.

Comment: The dissenting judges in Woodson issued a plea to the Florida Supreme Court not only to permit economic damages in the case of negligent misrepresentation, but to clarify those tort issues in which economic damages would be permitted. The Supreme Court declined the opportunity, reversing Woodson with a terse statement and following with an equally brief summary adoption of the economic damages rule for commercial cases in PK Ventures. In short, we have a rule, but not much of a reason.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

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