Economic Loss Doctrine Inapplicable Defense to Farmers’ Claims for Over-Application of Purchased Chemical Herbicide

January 30, 2012 | Erika Eckley

When can a farmer recover money damages for the reduced crop yield caused by improper application of herbicide recommended by and purchased from a contracted provider? In this case, the Nebraska Supreme Court clarified Nebraska law regarding when non-contractual damages for property loss can be recovered. Generally, claims for recovery of commercial losses caused by damage to a product without an accompanying physical injury are limited to remedies contemplated by the parties and documented in the parties’ contract. This is called the economic loss doctrine. Most courts hold that the doctrine applies equally to all consumers. Consequently, these types of cases are decided by contract law, with contract-based damages. The doctrine also applies to damages to “other property” that is damaged from the purchased product if the damage was or should have been reasonably contemplated by the contracting parties. In other words, under the economic loss doctrine, when a party suffers only economic loss unaccompanied by a physical injury from a defective product, then the party’s remedy should reside only in contract law rather than relying on the broader damages available under tort law. See East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858 (1986).

In this case, issues arose out of a contract for inputs between a farm couple (husband and wife) and an agricultural cooperative.  The farmers purchased a “complete package” from the co-op which included all necessary inputs such as fuels, chemicals, fertilizers, and seed. As part of the package, the co-op conducted soil tests on the farmers’ property and made recommendations regarding the appropriate products to be sold to the farmers. After planting their corn in the spring, the farmers purchased the co-op’s recommended herbicide, which was applied to the farmers’ fields by the co-op. Following the application of the herbicide, the farmers reported much lower yields from the fields upon which the herbicide was applied. The farmers sued alleging negligence, breach of implied warranty of merchantability, and breach of implied warranty of services.

The co-op moved for summary judgment, which was granted as to the breach of implied warranty of services and negligence claims. The trial court found that Nebraska law did not recognize a claim for the breach of implied warranty of services outside of a contract in the building and construction context. The court also held that the negligence claim was precluded by the economic loss doctrine. The claim proceeded to trial on the breach of implied warranty of merchantability claim. At the close of the farmers’ evidence, the court granted the co-op’s motion for a directed verdict asserting that the farmers had failed to provide sufficient evidence upon which a jury could determine what amount of damage was attributable to the application of the herbicide versus other sources. Because there were two sources of damage to the crops, the farmers had to prove to the jury what portion was attributable to the co-op.

The farmers appealed all of the court’s rulings. Because a determination of whether there was sufficient evidence presented regarding damages would affect the other questions on appeal, the court reviewed this question first.  The general rule is that when a growing crop is injured, but not entirely worthless, the measure of damages is the difference between the value of the probable crop at maturity versus the actual value of the crop after the injury reduced by the expense of fitting for the market the portion of the crop that did not mature. Upon review, the appellate court held that the farmers presented sufficient evidence upon which the jury could have established a reasonable basis to estimate the extent of damages caused. The motion for directed verdict was, therefore, improperly granted.

The appellate court agreed, however, that no claim for an implied warranty of services existed. Nebraska law does not recognize the claim outside the context of contracts for buildings and construction. To recover under this theory, the facts must demonstrate the finished product is capable of having hidden defects of which a plaintiff could not be aware. The court held that a corn crop did not fit within these facts and affirmed the trial court’s granting summary judgment on this claim.

Of primary importance, the court clarified Nebraska previous cases on the application of the economic loss doctrine. After reviewing the theory and purpose behind the economic loss doctrine the court adopted a specific rule for when the economic loss doctrine precludes tort remedies. The court held that the economic loss doctrine will prohibit tort damages two specific situations:  (1) in product liability cases when the only harm caused by a defective product is to the product itself; or (2) when the duty allegedly breached arises solely from the contractual relationship between the parties and there are no other personal injuries or property damage. The court specifically stated that past cases applying the doctrine differently by allowing tort claims in a contractual context were not inconsistent with the adopted rule because the same result would have occurred in those cases if this rule was applied.

In this case, the court found that the farmers did not allege that the herbicide was defective. Instead, the damage that the farmers’ suffered occurred because of the co-op’s alleged negligence in the application of the herbicide. The duty that was breached did arise from a contractual relationship between the parties, which would seem to mean that the economic loss doctrine would apply. But, the property damage caused by the alleged breach was to the corn crop. The corn crop under these facts was considered “other property,” which is property other than the herbicide sold to the farmers under the contract. The co-op argued that the farmers’ claim for damages to the corn crop was based on nothing more than “disappointed expectations” arising out of the contract, which should not be recoverable outside the terms outlined in the parties’ contract. The co-op asked the court to adopt the “disappointed expectations” test as other state courts had done, which would preclude tort damages for economic harm to property when arising out of an alleged breach of a contractual duty.

Instead, the court determined the application of a “disappointed expectations” theory would destroy the “other property” exception to the economic loss theory previously adopted by the Nebraska court. The court explained that if the test were adopted, the parties would be required to contract for all foreseeable damage that could be caused from the contract at the time the contract was formed or there would be no recovery for losses. If the damage alleged was foreseeable at the time of contracting, then all recoverable damages and other legal remedies would be determined only pursuant to the terms of the contract. If the damages were not foreseeable at the time of the contract formation, however, then the test would not apply. Under circumstances in which the damages were not foreseeable, however, the court recognized that there would also be no recovery of tort damages allowed because a basic element of negligence requires that damages be foreseeable to be compensable. The court determined that the farmers’ claim for negligence against the co-op in this case was not precluded by the economic loss theory because the damage was to other property and the district erred in granting summary judgment to the defendant on this claim. The court reversed the trial court on this issue and remanded for a new trial consistent with the entire opinion.

What this decision makes clear is that parties to a contract involving the purchase of products would do well to be specific about what can property damage will be recovered in the event the product malfunctions or does not perform as expected. Even though the farmers were able to bring their claim for negligence in this case, the economic loss doctrine could still preclude recovery in many situations common to the agricultural industry. Lesiak v. Central Valley Ag Coop., Inc., No. S-10-323, 2012 WL 246641 (Neb. Sup. Ct. Jan. 27, 2012).