Ohio’s Economic Loss Rule And The Limitation Of Damages
Ohio’s Economic Loss Rule prevents recovery in tort for damages that arise under a contract. A tort is any wrongdoing for which an action for damages may be brought, except when that wrongdoing is a breach of contract. The law calls a contract loss an “economic” loss and the thought is that when parties form a contract, they have an opportunity to consider the economic consequences of a breach and that those consequences are measurable. That is not the case with a tort, like when someone is personally injured. Corporex Dev. & Constr. Mgt., Inc. v. Shook, Inc., 106 Ohio St.3d 412, 2005-Ohio-5409, 835 N.E.2d 701 (2005) (Headnote: With regard to the economic loss rule, tort law is not designed to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement; that type of compensation necessitates an analysis of the damages which were within the contemplation of the parties when framing their agreement, and remains the particular province of the law of contracts.)
In Ohio, our courts will not permit a party to convert a contract claim into a tort claim, and they will not allow a recovery under both contract and tort law. The exception to this rule is if a party engages in fraud in inducing another party to enter the contract.
We see the Economic Loss Rule being an issue in the business litigation when a party seeks to avoid a limitation of damages provision in a contract that is unfavorable. Often times sophisticated contracts will limit the damages a party can allege and recover in the event of default or breach. However, if a claim can be made that a party was fraudulently induced in entering into the contract, then that party can seek recovery in both contract and tort because those are separate recoveries. Contracts should have limitations of damages provisions, but parties must be careful to make full disclosure of all facts from the outset to avoid a tort claim that might defeat the limitation.