Businesses Beware: South Carolina Supreme Court Undermines Contractual Protections of the Economic Loss Rule

Businesses — especially service providers like contractors, subcontractors, consultants and design professionals — rely on their contracts to define their risks in the marketplace. For decades, a legal doctrine known as “the economic loss rule” has worked to rein in creative attempts to circumvent the terms of parties’ contracts; however, the doctrine recently suffered a body blow at the South Carolina Supreme Court. The decision, Carroll v. Isle of Palms Pest Control Inc.,^[1] makes it much less certain that service providers can count on their contracts to protect them.

The Carroll opinion, issued on July 23, wrestled with whether the economic loss rule should bar a plaintiff’s negligence claim when there were allegations the defendants acted negligently outside the scope of the contract at issue. The court ultimately answered that question in the negative, holding “that the [economic loss] rule applies only in the product liability context and when the only injury is to the product itself.” This case has the potential to undermine the confidence of any business that relies on contractual limitations to protect itself from unlimited exposure when providing services.

The contract at issue in the case, which contained a $250,000 damages cap, specified that the defendants would install and monitor termite bait stations at a residential home in Isle of Palms owned by the plaintiff, Carroll. Unbeknownst to Carroll, however, the defendants did not use the bait station system specified in the contract, instead opting to treat the home with a liquid application. There was evidence that the defendants were negligent in the application of the liquid treatment. The homeowner renewed the bait station contract annually until extensive termite damage was discovered roughly 10 years after the parties entered into the original agreement.

The trial court granted the defendants’ summary judgment motion as to Carroll’s negligence claim after determining the economic loss rule limited his remedy to breach of contract. The trial court’s straightforward application of South Carolina’s established jurisprudence concerning the economic loss rule had the effect of capping the applicator’s liability at the contractual limit of $250,000. The South Carolina Court of Appeals affirmed, and the South Carolina Supreme Court granted discretionary review of the case.

Overview of the Economic Loss Rule

The economic loss rule emerged to curb unforeseeable exposure to product manufacturers. Put simply, “if the only damage caused by a product defect was to the product itself, the buyer was limited to the remedies guaranteed by the contract or the law of warranty.” As one commentator illustrated: “An exploding toaster entitles anyone it injures to collect tort damages from the seller; if the toaster won’t toast, however, the remedies must be found under the law of contract.”^[2] Over time, the economic loss rule was expanded to other contexts, eventually applying to virtually all commercial contracts and ensuring that commercial actors could rely upon the terms of their contracts to define their obligations and potential risks.

The Carroll Decision

But, as the Carroll court explained, the extension of the economic loss rule beyond its original products liability context resulted in a confusing legal doctrine that is ill-defined and poorly understood. As the Carroll court noted: “Perhaps the best definition is this: the economic loss rule ‘means there is no recovery in tort for pure economic loss, except when there is.’ Put another way, anyone who can explain the economic loss rule does not truly understand it.”

Aiming to bring clarity to this context, the Carroll court sought to trim back the economic loss rule to its roots, announcing the following key holdings, which the court described as “a homecoming”:

• “First, we hold that the rule applies only in the product liability context and when the only injury is to the product itself. In such instances, the loss is economic or commercial, and the remedy is limited to the laws of contract or warranty.”
• “Where, however, the defective product causes personal injury or damage to other property, the plaintiff may also look to the law of torts.”
• “Adhering to our precedent, we also reaffirm that the economic loss rule does not apply in the context of the sale or construction of a residential home or to the rendering of services by professionals, such as accountants, lawyers, engineers, and architects.”

The court went on to explain: “The cause of action for failing to perform or negligently performing a contract is breach of contract. We believe this supplies a limiting principle sufficient to protect the boundary between tort and contract law, without saddling the analysis with the economic loss label and all its baggage.”

The Carroll court then proceeded to apply these principles in a way that raises questions about the extent to which service providers can truly rely on contractual limitations of damages.

At the outset, the court declined to employ the economic loss rule since the contract did not involve the sale of a product. Next, the court examined the “fundamental contractual analysis” to determine whether the duty breached by the defendants was one solely defined by the contract at issue, concluding that the defendants’ act of “secretly treating Carroll’s home with liquid termiticide was beyond the parties’ bargain.” Rather than characterizing this as a failure to perform or a negligent performance of a contractual duty, the Carroll court held the defendants “undertook a separate act, outside the parties’ bargain.” In so doing, the Carroll court discounted the fact that the case arose out of the termite applicator’s failure to perform its contractual obligations — namely, installing and monitoring termite baits.

In reaching its decision, the Carroll court acknowledged that some courts have applied the economic loss rule to claims (including those outside of the product context) where the loss simply relates to the subject matter of the contract at issue. Rejecting this formulation of the economic loss rule, the court explained that “restricting an injured party to a contractual remedy for conduct that breaches a duty independent of the contract is nonsense” because it “would drown tort law in a sea of contract.” Had the court accepted this application of the rule, presumably Carroll would have been limited to contract remedies — including the $250,000 damages cap — since the loss (i.e., termite damage) related to the subject matter of the parties’ contract.

The court ultimately reversed the decision to grant summary judgment as to Carroll’s negligence cause of action.

Practical Consequences of Carroll

On its face, the Carroll decision may seem straightforward and innocuous enough. However, when applied in the context of construction litigation (or, indeed, any commercial dispute), it has the potential to create substantial uncertainty for owners, developers, architects, engineers, general contractors, subcontractors and all of their insurers. After all, in a construction defect case, parties are virtually always alleged to have performed some act “outside the parties’ bargain.” For example, the termite applicator in Carroll failed to perform its contractual obligation by substituting one pesticide for another, which is all too easily analogized to a contractor’s or subcontractor’s failure to comply with contractual specifications. Design professionals are likewise at risk under Carroll, given its express rejection of the economic loss rule to their professional duties. 

Commercial actors depend upon contractual limitations (e.g., limitations of liability) to render their performance while protecting their enterprise. Without contractual safeguards, any commercial actor faces the very real possibility of drowning in the proverbial “sea of tort.”

It remains to be seen how the Carroll court’s refinement of the economic loss rule will affect future litigation in South Carolina. But Chief Justice Kittredge appeared to forecast the need to rein in the application of tort law to contractual relationships, expressing caution in a brief concurrence:

“I write separately to emphasize this Court must remain vigilant to adhere to our longstanding rule that ‘[o]rdinarily, where there is no duty except such as the contract creates, the plaintiff’s remedy is for breach of contract, but when the breach of duty alleged arises out of a liability independent[ ] of the personal obligation undertaken by contract, it is a tort.’ Dixon v. Texas Co., 222 S.C. 385, 389, 72 S.E.2d 897, 899 (1952). I hope our decision today is read to follow, not erode, that rule.”

But as the Supreme Court’s decision in Carroll all too clearly demonstrates, courts may find it difficult to draw the line between contractual duties and tort-based duties that exist outside the contract.

Robinson Bradshaw attorneys are available to guide clients through contractual limitations and related claims. Contact the authors for more information.

[1] Carroll v. Isle of Palms Pest Control, Inc., No. 2023-001655, 2025 WL 2055721 (S.C. July 23, 2025).

[2] Ward Farnsworth, The Economic Loss Rule, 50 Val. U. L. Rev. 545, 547 (2016).