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Long has the inconsistent expansion and contraction of the economic loss rule and its exceptions frustrated South Carolina jurists and practitioners alike. Now, the South Carolina Supreme Court hopes to provide clarity by "clearing out...the thicket that had grown around [t]he Court's past economic loss rule precedent" through its decision in Carroll v. Isle of Palms Pest Control, Inc.1 After years of loose play with the reins of the economic loss rule, the Court has firmly haltered it back to its original purpose of application in product liability cases, but such restrictions may come at a cost to service providers.
How did we end up here?
Just as the Court in Carroll began its opinion with a brief history of the economic loss rule in South Carolina, it may be helpful to do the same here.2 Arising first by judicial creation in California, the economic loss rule was established as a legal principle to prevent a party from recovering in tort for purely economic damages arising from a contract. The rule was ushered into South Carolina jurisprudence in 1988 by Carolina Winds Owners' Ass'n, Inc. v. Joe Harden Builder, Inc., where the court applied the rule to prevent owners of a condominium building from recovering against the builder in tort.3 Shortly thereafter, in Kennedy v. Columbia Lumber and Mfg. Co., Inc., the Court carved away at the rule to create room for an exception in the residential home building context by allowing a homebuyer to seek damages in tort when a builder breaches its legal duty via violation of applicable building codes, industry standards, or by constructing a home the builder knows or should know may cause physical harm—an outcome supported by the long-held judicial policy of protecting homebuyers for whom a home is likely the largest purchase of their lives.4
Nearly two decades later, the Court in Colleton Preparatory Academy, Inc. v. Hoover Universal, Inc., embracing the doctrine of caveat venditor, expanded the exception it created in Kennedy to apply in the commercial real estate construction and manufacturing context, effectively creating a rule of the exception.5 Colleton Prep's reign as good law lasted only one year before the Court explicitly overruled it in Sapp v. Ford Motor Co., qualifying Kennedy as a "very narrow" exception and holding that the economic loss rule will apply to bar a plaintiff's recovery for pure economic loss in tort absent personal injury or damage to other property while affirming Kennedy's exception for residential real estate construction.6 South Carolina courts operated under this guidance until Carroll.
The Case at Bar: Carroll v. Isle of Palms Pest Control, Inc.
Carroll arose from a contract between a homeowner and a pest control company for termite protection services consisting of a specific baiting system that the company promised to maintain.7 The contract contained a provision limiting the pest control company's liability to $250,000.8 At some point and unbeknownst to Carroll, the company jettisoned the baiting system outlined in the contract and began, as the evidence suggested, negligently applying a liquid treatment.9 Carroll, having no knowledge of the change in approach, continued to renew the baiting system contract year after year.10 Ten years after the original agreement, the homeowner discovered extensive termite damage and brought an action for negligence and breach of contract against the pest control company.11
The trial court, applying the economic loss rule, granted summary judgment in favor of the defendants on the homeowner's negligence claim.12 The Court of Appeals affirmed summary judgment.13 On review, an exasperated South Carolina Supreme Court addressed the economic loss rule and issued the following critical holdings:
"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."14
"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."15
"[T]he mere failure to perform a contract, without more, cannot support a tort action. Instead, there must be some "active negligence or misfeasance" that occurs outside the terms of the contract. Mere nonfeasance is not enough. The cause of action for failing to perform or negligently performing a contract is breach of contract."16
"In a non-products case, if a party breaches a duty independent of his contractual obligations, a tort remedy is allowed, unless the parties' contract has expressly excluded tort remedies and the exclusion comports with public policy."17
Applying its new interpretation, the Court reversed the lower courts and determined the economic loss rule was inapplicable because the termite control contract was not for the sale of a product. However, for fear of creating too clear a rule, the Court then found the pest company's act of abandoning the termite bait stations and treating the home with a liquid pesticide was sufficiently "beyond the parties' bargain" to create a duty independent of the company's contractual duty, consequently entitling the homeowner to seek damages in tort.
In his concurrence, Chief Justice Kittredge, perhaps forecasting the trouble lower courts will have in differentiating between contractual duties and tort-based duties after the Carroll decision, wrote "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 the contract, it is a tort.," and cautioned lower courts to "follow, not erode, that rule."18
What This Means for Service Providers
If Carroll could be reduced to something resembling a bright-line rule, it would be that the economic loss rule only applies to prevent tort recovery in the product liability context where the injury suffered is solely to the product itself, and the proper cause of action for failure to perform or for negligently performing a contract is breach of contract unless a party breaches a duty outside of the contract. What is even more unclear after Carroll are the qualifications for an act to be deemed "beyond the parties' bargain." Certainly, an argument could be made that the termite company's substitution of liquid repellant for bait stations was simply a failure of the termite company's obligation to perform the contract according to the agreed specifications and not an act of "active negligence" outside the terms of the contract.19
Based on Carroll, there appears to be potential for service providers, particularly those in the construction industry, where contractual specifications are innumerable, to face greater risk of liability in tort for noncompliance with such specifications. If courts take a liberal approach when determining whether a duty's inception was in contract or tort, contractual breaches could be treated as arising in tort, eliminating any limitations of risk carefully set forth in the contract. As such, service providers should be most deliberate in drafting their contracts to contemplate and include in its terms all duties that could arise in performance of the contract so as to limit a court's ability to conclude such a duty is beyond the contract and sounding in tort. Their contracts should also expressly exclude tort remedies to the maximum extent permitted by law, while being wary of the courts' reluctance to enforce lopsided provisions that may be deemed "unconscionable" when a gross disparity in bargaining power exists.20
Though the court may have successfully cleared "the thicket that had grown around [the Court's] past economic loss rule precedent" by limiting its application to product liability, it may have also stirred a disruption that will muddy the waters between tort and contract. One thing is for certain though, lawsuits will continue. In time we will see how lower courts operate under the new precedent.
Footnotes
1 Carroll v. Isle of Palms Pest Control, Inc., 446 S.C. 177, 918 S.E.2d 532 (2025), reh'g denied (Aug. 11, 2025).
2 Id.
3 Carolina Winds Owners' Ass'n, Inc. v. Joe Harden Builder, Inc., 297 S.C. 74, 374 S.E.2d 897 (Ct. App. 1988).
4 Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 346, 384 S.E.2d 730, 737 (1989).
5 Colleton Preparatory Acad., Inc. v. Hoover Universal, Inc., 379 S.C. 181, 666 S.E.2d 247 (2008), overruled by Sapp v. Ford Motor Co., 386 S.C. 143, 687 S.E.2d 47 (2009).
6 Sapp v. Ford Motor Co., 386 S.C. 143, 149-50, 687 S.E.2d 47, 49-51 (2009), abrogated by Carroll v. Isle of Palms Pest Control, Inc., 918 S.E.2d 532 (S.C. 2025).
7 Carroll, 446 S.C. at 181, 918 S.E.2d at 534.
8 Id.
9 Id.
10 Id.
11 Id.
12 Id.
13 Id.
14 Id. S.C. at 186, S.E.2d at 537.
15 Id.
16 Id.
17 Id. S.C. at 188, S.E.2d at 538.
18 Id. S.C. at 192, S.E.2d at 540.
19 Id. S.C. at 187, S.E.2d at 537.
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