Tennessee Business Litigation Lawyers Blog
Recently, the Court of Appeals of Tennessee issued an opinion in the case of Vidafuel, Inc. v. Kerry, Inc., which gives Tennessee commercial litigators further guidance on the contours of the economic loss doctrine in Tennessee. To review, in the seminal 2021 case of Milan Supply Chain Solutions, Inc. v. Navistar, Inc., the Supreme Court of Tennessee held that, where two sophisticated businesses have a contract, the aggrieved party cannot assert a fraudulent inducement claim against the other party if the alleged misrepresentations concerned the quality or character of the goods involved. In such cases, the aggrieved party may only assert contractual, non-tort claims.
The reasoning for the economic loss doctrine is amply laid out in Milan Express. Boiled down, the policy behind the doctrine is to prevent contract law from being lost in a sea of tort law. Also, a policy behind the doctrine is that sophisticated businesses with the ability to negotiate contract terms should not have their contractual expectations undermined by the ability of a party to do an end run around negotiated terms by lobbing in tort claims.
After Milan Express, in the case of Commercial Painting Company, Inc. v. Weitz, the Supreme Court of Tennessee limited the application of the doctrine to products liability cases. I have noticed a misconception by some that “products liability” means cases in which someone or something is injured by a defective product. That is not the meaning of “products liability cases” as used by the Commercial Painting Court. The Commercial Painting case held that the economic loss doctrine does not apply to services cases. The doctrine does apply to defective products cases involving no injury to persons or property. For example, the doctrine applies where the defendant sells defective or non-conforming products to the plaintiff and the plaintiff is damaged by the mere fact that it did not receive what it paid for. The doctrine would not apply if the plaintiff’s warehouse burned down or one of its employees was injured because the defendant sold it a defective product that combusted and started a fire.
Here are the salient facts of the Vidafuel case:
- Vidafuel was a distributor of wellness/protein drinks.
- Kerry was a manufacturer.
- Vidafuel and Kerry engaged in extensive discussions and the production and evaluation of test products.
- Ultimately, Vidafuel and Kerry entered a written “Manufacturing and Supply Agreement” (the “Agreement”)
- Kerry warranted, in the Agreement, that it would manufacture the goods using good manufacturing practices, and that the goods it sold to Vidafuel would conform to the specifications in the Agreement.
- There were numerous issues with Kerry producing and delivering non-conforming products after the Agreement was signed.
- About ten months after the Agreement was signed, Kerry gave notice that it was terminating it.
- Vidafuel filed a suit against Kerry asserting claims for misrepresentation and fraudulent inducement.
- Vidafuel asserted no claims for breach of contract, breach of warranty, or claims based on the Uniform Commercial Code (“UCC”).
- The factual basis asserted for Vidafuel’s tort claims was that Kerry had knowingly made misrepresentations about its ability to supply the products, and had misrepresented that it could resolve the manufacturing issues that arose in the course of the parties’ pre-contract test runs and discussions.
The trial court dismissed all Vidafuel’s claims based on the economic loss doctrine. The court of appeals affirmed the trial court.
One of the reasons for the significance of the Vidafuel opinion arises from an argument made by Vidafuel that was not made in the Milan Express case. The resolution of that argument sheds further light on the boundaries of the economic loss doctrine.
In Milan Express, as discussed above, the court held that the economic loss doctrine applied when the alleged misrepresentations concerned the “quality or character of the goods.” Vidafuel argued that the misrepresentations upon which its claims were based did not relate to the quality or character of the goods which Kerry agreed to provide, but instead, related to Kerry’s ability to reformulate the products to conform, how the products would be manufactured, its quality control procedures, and its ability to deliver conforming products. The court of appeals rejected this distinction. It reasoned that, even if the alleged misrepresentations could be viewed as unrelated to the quality or character of the goods, they related closely to the subject of the parties’ contract and expected performance under it. This finding and reasoning is the significance of the Vidafuel case, in my opinion.
The facts of the case may lead one to ask why did Vidafuel not assert breach of contract, breach of warranty or UCC claims? I cannot say for sure, but the reason may be that its contractual remedies under the Agreement were so limited that such claims would not allow the award of sufficient damages to make them worth bringing. I have been involved with cases involving the sale of goods where the seller had contractually limited its liability for breach of warranty, or better yet for the seller, had contractually excluded warranties.
For Tennessee commercial lawyers, the Vidafuel case is an early and important steppingstone on the path of the economic loss doctrine in Tennessee jurisprudence.