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California Supreme Court clarifies economic loss rule

9/26/24

By: Joseph A. Gonnella and Alexander Tang

In a matter of first impression, the California Supreme Court in Rattagan v. Uber Technologies, Inc. recently answered a question previously left open in its economic loss rule jurisprudence: Whether a plaintiff may assert a tort claim for fraudulent concealment related to the performance of a contract. The Court clarified the limited circumstances of how and when tort claims can be pursued in disputes arising from a contract. 

Traditionally, the economic loss rule barred tort recovery for purely economic losses arising from a breach of contract absent a showing of personal injury or property damage. The policy rationale for the economic loss rule was “[u]sing contract law to govern commercial transactions lets parties and their lawyers know where they stand and what they can expect to follow legally from the words they have written. But if a disappointed buyer has the option of abandoning the contract and suing in tort, the significance of the contract is diminished and the doctrines that protect the integrity of the contractual process are reduced in importance.” Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.Rptr.2d 834, 843 (internal citations omitted). 

In the ruling issued in Rattagan, the Court held that a plaintiff may only assert a separate claim of fraudulent concealment based on conduct occurring in the course of a contractual relationship “if the elements of the cause of action can be established independently of the parties’ contractual rights and obligations and the tortious conduct exposes the plaintiff to a risk of harm beyond the reasonable contemplation of the parties when they entered into the contract.” Rattagan v. Uber Technologies, Inc. (2024) 324 Cal.Rptr.3d 433, 466 (emphasis added). To help trial courts apply this new test, the Court instructs: 

When evaluating whether the parties’ expectations and risk allocations bar tort recovery, the court must consider the alleged facts. First, applying standard contract principles, it must ascertain the full scope of the parties’ contractual agreement, including the rights created or reserved, the obligations assumed or declined, and the provided remedies for breach. Second, it must determine whether there is an independent tort duty to refrain from the alleged conduct. Third, if an independent duty exists, the court must consider whether the plaintiff can establish all elements of the tort independently of the rights and duties assumed by the parties under the contract.

The guiding and distinguishing principle is this: if the alleged breach is based on a failure to perform as the contract provides, and the parties reasonably anticipated and allocated the risks associated with the breach, the cause of action will generally sound only in the contract because a breach deprives an injured party of a benefit it bargained for. However, if the contract reveals the consequences were not reasonably contemplated when the contract was entered and the duty to avoid causing such harm has an independent statutory or public policy basis, exclusive of the contract, tort liability may lie. (Id. at 451.) 

The Court’s decision in Rattagan now provides a framework for pleading and analyzing the economic loss rule.  

For more information on the Rattagan ruling, please contact Joseph A. Gonnella at joseph.gonnella@fmglaw.com, Alexander Tang at alexander.tang@fmglaw.com, or your local FMG relationship partner.