The Successful Defense
of Design Professionals
Denise J. Wachholz
I. Introduction
The successful defense of claims against design professionals starts before any
plans are drawn. It starts with contract negotiation. When litigation ensues,
defending the design professional includes consideration of the economic loss
rule defense, contractual defenses, and statutory defenses, such as statutes of
repose and limitations. (Note: This article does not consider claims for
personal injury or damage to property other than the project for which the
design professional was hired, where the defenses discussed herein may not
apply).
This article
primarily addresses the economic loss rule’s application to tort claims brought
against design professionals, which has been a “hot topic” recently in a number
of states. This article is loosely organized around Arizona’s 2010 decision in
Flagstaff Affordable Housing Limited Partnership v. Design Alliance, Inc.,
223 P.3d 664 (Ariz. 2010), in which the Arizona Supreme Court considered the
rule’s application to construction litigation where Arizona law governs.
The Arizona Supreme
Court granted review in Flagstaff Affordable Housing, supra to address
whether: (1) the economic loss rule should apply in construction litigation,
and, if so, (2) whether the economic loss rule barred the owner’s professional
negligence claim for recovery of the costs of remediating alleged design defects
in an eight-building apartment project in Flagstaff, Arizona. In numerous prior
decisions, Arizona’s Court of Appeals had applied the economic loss rule to
preclude tort claims against contractors (see citations in Flagstaff
Affordable, supra, 223 P.3d at 669). In 1984, however, the Arizona Supreme
Court had permitted a contractor to sue the project’s architect despite lack of
privity, where alleged design errors increased the contractor’s costs over the
amount of the contractor’s bid, which had been based on the architect’s plans
for the project. Donnelly Construction v. Oberg/Hunt/Gilleland, 677 P.2d
1292 (Ariz. 1984). Most practitioners assumed that the Donnelly decision
meant that the economic loss rule did not apply to claims against design
professionals. Nevertheless, the Arizona appellate courts had not expressly
considered the rule’s application to an owner’s tort claims against a design
professional (the architect) where there was direct privity of contract between
the owner and the architect.
Flagstaff Affordable Housing begins by gutting the support for all of
Arizona’s prior appellate decisions that had applied the economic loss rule in
construction cases. The Arizona Supreme Court found that the line of case law by
the Court of Appeals applying the economic loss rule in construction cases was
based upon a misinterpretation of a 25-year old Arizona Supreme Court’s
decision. Flagstaff Affordable Housing, supra at 668-669. After
dismantling this prior case law, the Arizona Supreme Court then decided as a
question of first impression that the economic loss rule applies in Arizona
construction cases. The court stated in relevant part:
Today we apply the [economic loss] doctrine in a
construction defect case and hold that a property owner is limited to its
contractual remedies when an architect’s negligent design causes economic loss
but no physical injury to persons or other property. [223 P.3d at 665.]
II. The Economic Loss Rule (or “Economic Loss Doctrine”)
A. What Is the “Economic Loss Rule”?
There is contract law and there is tort law. Speaking in generalities, tort law
– statutory or judicially developed – more often applies to disputes between
parties whose relationship is unplanned and limited to the injury that brings
the parties into court. Such parties do not have an opportunity to decide
between themselves the “law” that will apply to their relationship. “Contract
law,” again, speaking in generalities, applies to parties who voluntarily create
a commercial relationship between themselves, and are, theoretically, in the
position (and have the financial incentive) to contract for the “law” that will
apply to disputes that may arise in the future.
The economic loss
rule is a defense to tort claims for recovery of economic losses (hence the name
“economic loss rule”). When a party to a construction-related contract sues due
to disappointed commercial expectations, should the claimant be permitted to
circumvent limitations on recovery that the parties agreed to, or could have
agreed to, in their contract, by suing in tort? The economic loss rule’s answer
to that question is “no.”
In a case where a
plaintiff’s contract remedies are precluded, the economic loss rule can knock
out the entire case. This occurred in Flagstaff Affordable, supra.
There, the owner stipulated that its breach of contract claim was precluded by
Arizona’s statute of repose (A.R.S. §12-552) (which applies only to contractual
construction claims). The owner’s only other claim was for professional
negligence, such that application of the economic loss rule resulted in full
dismissal of the lawsuit.
Flagstaff Affordable highlights that, in practice, there is no one
economic loss rule, but versions that vary in scope from one jurisdiction to
another. See Flagstaff Affordable, supra at 670-71. The scope of the rule
can extend to bar tort claims for any economic loss that does not involve
personal injury or damage to other property, id. at 667, to a narrower
version of the rule (the one adopted in Flagstaff Affordable, supra) that
applies only in a lawsuit where the plaintiff and defendant have a direct
contractual relationship. Id.
[I]n the context of construction defects, we
adopt a version of the economic loss doctrine and hold that a plaintiff
who contracts for construction cannot recover in tort for purely economic loss,
unless the contract otherwise provides. [Id. at 670-71, emphasis added.]
B. What Is “Economic Loss”?
“Economic loss” is a monetary loss. Judge Posner, writing for the Seventh
Circuit, has noted that the better terminology may be “commercial loss” because
personal injury and property damage are also losses that are routinely
monetized. Miller v. U.S. Steel Corp., 902 F.2d 573, 574 (7th Cir. 1990)
(“We have a body of law designed for [commercial disputes]. It is called
contract law.”).
In Flagstaff
Affordable, supra, the Arizona Supreme Court defined “economic loss”
in a construction case as follows:
We begin by clarifying terminology
...
“Economic loss,” as we use the phrase, refers to pecuniary or commercial damage,
including any decreased value or repair costs for a product or property that
is itself the subject of a contract between the plaintiff and defendant, and
consequential damages such as lost profits. [223 P.3d at 667, emphasis added.]
“Economic loss” has also been described as those losses that flow from the lost
benefit of the bargain. A federal court applying Maine law put it this way:
Peachtree
[a decision by the Maine Supreme Court] cited
approvingly an Illinois case that described recoverable economic loss [under the
economic loss rule] as “damages for inadequate value, costs of repair and
replacement of defective product, or consequent loss of profits-without any
claim of personal injury or damage to other property.” 659 A.2d at 270 n. 4
(citing Moorman Mfg. Co. v. Nat'l. Tank Co., 91 Ill.2d 69, 61 Ill. Dec.
746, 435 N.E.2d 443, 449 (1982)). It [Peachtree] also cited approvingly a
U.S. Supreme Court admiralty case describing why economic loss should not be
recovered in tort where there is a contractual relationship: “when a product
injures itself, the commercial user stands to lose the value of the product,
risks the displeasure of its customers who find that the product does not meet
their needs, or, as in this case, experiences increased costs in performing a
service. Losses like these can be insured. Society need not presume that
a customer needs special protection.” Id., n. 5 (citing East River SS
Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 871-72, 106 S.Ct. 2295,
90 L.Ed.2d 865 (1986)).
Maine Rubber Int’l. v. Envir. Mgmt. Group, Inc., 298 F.Supp.2d 133,
138, fn. 6 (D.Me. 2004)(Emphasis added).
Personal injury, or damage to property other than that which is the subject of
the parties’ contract, are not “economic losses” for purposes of the economic
loss rule. “The doctrine does not bar tort recovery when economic loss is
accompanied by physical injury to persons or other property.” Flagstaff
Affordable, supra, 223 P.3d at 671.
Depending on the jurisdiction, the personal injury exception to the rule may
require actual injury. An “imminent risk of danger [to persons]” does not take
the claim outside of the economic loss rule. Indianapolis-Marion County
Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 733 (Ind.
2010) (Owner alleged repair/reconstruction costs of $40-50 million where, midway
through construction, expert for Owner determined underground parking garage
that was to serve as foundation for public library would be “at serious risk for
structural failure if construction were to continue”, were not excepted from the
economic loss rule by the potential risk for personal injury, 929 N.E.2d at
724). Cf. Affiliated FM Ins. Co. v. LTK Consulting Services, Inc., 243
P.3d 521, 528 (2010)(held economic loss rule did not apply where engineer’s
design caused fire on a monorail “imperiling people and property ...”)
What constitutes “damage to other property” can be problematic. See,
e.g., Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C.,
929 N.E.2d 722 (Ind. 2010) (having to reconstruct a substantial portion of
parking garage for public library project at estimated cost of $40-50 million
not “damage to other property”). See, e.g.
C. Purpose of the Economic Loss Rule
The policy behind the economic loss rule is to allow private parties to
determine, in advance, the rules and remedies that will apply to their
contractual situation. The parties’ advance determination of future disputes
promotes certainty. The contracting parties are in a better position to
identify, to allocate and to insure against risk before disputes arise than are
courts post hoc. The Washington Supreme Court has articulated the policy
underlying the economic loss rule as follows:
We follow the . . . line of [prior Washington]
cases and maintain the fundamental boundaries of tort and contract law by
limiting the recovery of economic loss due to construction delays to the
remedies provided by contract. We so hold to ensure that the allocation of risk
and the determination of potential future liability are based on what the
parties bargained for in the contract. We hold parties to their contracts. If
tort and contract remedies were allowed to overlap, certainty and predictability
in allocating risk would decrease and impede future business activity. The
construction industry in particular would suffer, for it is in this industry
that we see most clearly the importance of the precise allocation of risk as
secured by contract. The fees charged by architects, engineers, contractors,
developers, vendors, and so on are founded on their expected liability exposure
as bargained and provided for in the contract. As Justice Cardozo warned, the
expansion of duty in tort to include economic interests would expose defendants
to a liability in an indeterminate amount for an indeterminate time to an
indeterminate class. The hazards of a business conducted on these terms are so
extreme as to enkindle doubt whether a flaw may not exist in the implication of
a duty that exposes to these consequences. [Cit. omit.]
A bright line distinction between the remedies
offered in contract and tort with respect to economic damages also encourages
parties to negotiate toward the risk distribution that is desired or customary.
We preserve the incentive to adequately self-protect during the bargaining
process. [Cit. omit.] If we held to the contrary, a party could bring a
cause of action in tort to recover benefits they were unable to obtain in
contractual negotiations. [Emphasis added.]
Berschauer/Phillips Construction Co. v. Seattle School District No. 1
,
881 P.2d 986, 992-93 (Wash. 1994) (held contractor who alleged economic losses
due to delay caused by the project’s architect, engineer and inspector limited
to remedies provided in contractor’s contract with owner). Cf. Affiliated
Fam. Ins. Co. v. LTK Consulting Services, Inc., 243 P.3d 521 (Wash.
2010)(engineer’s design for monorail system resulted in fire; economic loss rule
did not bar tort claims).
In Flagstaff Affordable, the Arizona Supreme Court framed the policy
reasons for its application of the economic loss rule in construction cases:
[I]n construction defect cases involving only
pecuniary losses related to the building that is the subject of the parties'
contract, there are no strong policy reasons to impose common law tort liability
in addition to contractual remedies. When a construction defect causes only
damage to the building itself or other economic loss, common law contract
remedies provide an adequate remedy because they allow recovery of the costs of
remedying the defects, and other damages reasonably foreseeable to the parties
upon entering the contract. [Flagstaff Affordable, supra, 223 P.3d at
669-70, internal cit. omit.]
D. Contexts Where the Economic Loss Rule
Is Applied
The economic loss rule is most readily applied in commercial contexts where
employment of contracts is de rigeur.
Nor does the fact that the doctrine applies to
product defects necessarily establish that it should also apply to construction
defects. The economic loss doctrine may vary in its application depending on
context-specific policy considerations. To determine whether the doctrine should
apply here, we must consider the underlying policies of tort and contract law in
the construction setting ...
The contract law policy of upholding the
expectations of the parties has as much, if not greater, force in construction
defect cases as in product defect cases. Construction-related contracts often
are negotiated between the parties on a project-specific basis and have detailed
provisions allocating risks of loss and specifying remedies. In this context,
allowing tort claims poses a greater danger of undermining the policy concerns
of contract law. That law seeks to encourage parties to order their prospective
relationships, including the allocation of risk of future losses and the
identification of remedies, and to enforce any resulting agreement consistent
with the parties' expectations. [Flagstaff Affordable, supra, 223 P.3d at
669.]
As in other states, the economic loss rule was first applied in Arizona to
cases involving sales of goods. In Flagstaff Affordable, the Arizona
Supreme Court traced Arizona’s history of the economic loss rule back to a
products case.
Bearing these definitions in mind, we return to
Salt River [a 1984 Arizona Supreme Court decision]. There, an electric
utility company asserted contract and tort claims against the seller of a
control device that had allegedly malfunctioned and damaged the utility's
turbine unit. This Court held that the utility could not recover in contract
because the seller had, consistent with the Uniform Commercial Code, disclaimed
certain warranties and otherwise limited its liability. The Court, however,
rejected the seller's argument that the contractual provisions also precluded a
tort claim for strict products liability.
In the context of an alleged product defect,
Salt River considered whether a plaintiff could seek tort recovery for
economic losses related to the defendant's contractual performance. In resolving
this question, the Court noted the distinct policies served by tort and contract
law. Strict liability promotes product safety and spreads the costs of
accidents. Contract law, in contrast, seeks to preserve freedom of contract and
to promote the free flow of commerce. These goals are best served by allowing
the parties to specify the consequences of a breach of their agreement.
Accordingly, “[w]hen a defect renders a product substandard or unable to perform
the functions for which it was manufactured, the purchaser's remedy for
disappointed commercial expectations is through contract law.”
The Court in Salt River acknowledged that
most courts had held that economic loss resulting from a product defect
(including damage to the product itself) is not recoverable in tort absent
accompanying physical damage to other property or personal injury. [223 P.3d at
667, int. cit. omit.]
Note that the Uniform Commercial Code and products case law may apply in
construction litigation with allegations of defective products brought against
the product supplier. E.g., Oceanside at Pine Point Condo. Owners Ass’n. v.
Peachtree Doors, Inc., 659 A.2d 267 (Me. 1995) (owners’ claims against
suppliers of doors and windows).
The economic loss rule can be invoked against as well as in favor of
design professionals. The following case analyzed a contractor’s attempt to have
an architect’s indemnity claim dismissed under the economic loss rule. In
Waynesborough Country Club of Chester County v. Diedrich Niles Bolton
Architects, Inc., 2008 WL 687485 (E.D. Pa. 2008) (applying Pennsylvania
law), the owner separately contracted with the architect and contractor for
design and construction of a country clubhouse. When the owner sued the
architect because the new clubhouse leaked, and the architect “third partied in”
the contractor, the issue arose whether the economic loss rule barred the
architect’s third-party claims against the contractor.
[The architect]'s claims for indemnity and
contribution can be based only on [the contractor]'s alleged negligence vis á
vis [the architect].
[The contractor] argues that because its alleged
negligence caused only economic injuries, the claims must be dismissed under
Pennsylvania's economic loss doctrine. “Pennsylvania law does not recognize a
cause of action between parties not in privity of contract for negligent acts
that result in only economic injuries.”
* * *
Gittens-Altman v. HCB Contractors
is instructive here. In that case, after the general contractor filed suit
against the owners of a construction project, the owners filed a third-party
complaint against the project architect, with whom the owners were in
contractual privity. The owners sought indemnification and contribution based,
in large part, on the architect's general negligence. The architect then filed a
third-party complaint against a number of contractors and their sureties seeking
contribution and indemnification to the extent that the architect may be found
liable to the owners. A contractor's surety sought dismissal of the third-party
complaint, and the court held that the architect's contribution and
indemnification claims failed under Pennsylvania law. The court found that
Pennsylvania law does not recognize a cause of action between parties not in
privity of contract for negligent acts that result in only economic injuries.
Unlike DNB's claim here, Gittens-Altman v. HCB Contractors dealt with
third-party complaint allegations of breach of contract and recovery of costs
and attorneys' fees. The court found “no set of facts that would allow the
losses claimed to be characterized as other than economic losses” existed.
Therefore, the court applied the economic loss doctrine to dismiss the
third-party case.
When [the architect]'s pleading against [the
contractor] is read in the light most favorable to [the architect], however,
[the owner]'s complaint must be seen as seeking recovery for both economic
damages and property damage. [The owner] asserts that [the architect]'s breach
of contract and professional negligence “caused water to infiltrate the interior
of the clubhouse at various points causing [the owner] significant damages
including but not limited to requiring [the owner] to engage in costly
evaluations and renovations, requiring [the owner] to replace water damaged
items, and diminishing [the owner’s] use and enjoyment of the clubhouse.” Under the economic loss doctrine [the architect] may not seek indemnification or
contribution from [the contractor] for purely economic damages such as the
alleged loss of use of the clubhouse, but [the architect] may seek
indemnification or contribution for property damage. Accordingly, [the
architect]'s claims for common law indemnity and contribution survive dismissal
at this time. [Waynesborough, supra at *7-8, emphasis added.]
E. Who May Invoke the Economic Loss Rule as a Defense to
Tort Liability?
What class of construction defendants that may invoke the economic loss rule
varies from one jurisdiction to another. The principle divides are (1) privity;
and (2) whether the status of the defendant — professional or contractor — will
determine if the rule applies.
1. Contract Privity
As the theory behind the economic loss rule is to encourage contracts by not
dissipating their benefit by allowing additional remedies, there has to be a
contract in there somewhere. Some states require direct privity. Flagstaff
Affordable, supra. Others find that a series of related contracts suffices
even if there is no actual privity between the plaintiff and the defendant.
Indianapolis-Marion Public Library, supra.
The economic loss rule does not apply to all tort claims, even where there is
privity of contract. A recent Arizona decision applying Flagstaff Affordable
held that the economic loss rule did not bar a buyer’s fraud claim against the
seller of real property brought under Arizona’s Consumer Fraud Act, finding that
the rule cannot bar a statutory claim. Pena v. OPIC, 2010 WL 1998152
(Ariz. App. May 18, 2010) (unpublished).
Flagstaff Affordable
limited the rule’s application in Arizona to cases between contracting parties.
Although some courts
have applied the doctrine in that context [where there is no privity] ... we
decline to do so. The principal function of the economic loss doctrine, in our
view, is to encourage private ordering of
economic relationships and to uphold the expectations of the parties by limiting
a plaintiff to contractual remedies for loss of the benefit of the bargain.
These concerns are not implicated when the plaintiff lacks privity and cannot
pursue contractual remedies. See Vincent R. Johnson, The Boundary-Line Function
of the Economic Loss Rule, 66 Wash. & Lee L.Rev. 523, 556 (2009) (concluding
that when “established tort principles entitle a third party to protection under
tort law for economic loss, an agreement to which the third party never assented
should not be permitted to vitiate his or her right to tort remedies”). [223
P.3d at 671.]
Other courts have found that contractual privity is established by a series of
related contracts for the project, even if the claimant and design professional
did not directly contract with each other. Indiana-Marion Public Library,
supra.
Excel Constr. Inc. v. HKM Engineering, Inc., 228 P.3d 40 (Wyo. 2010),
despite the lack of privity, precluded a general contractor’s claims for
negligence and negligent misrepresentation for the cost of additional backfill
brought against the engineering firm that designed the town water/sewer system.
Noting that a “respectable number of states” do not require privity for
application of the rule, the court stated:
The Court continues to believe that parties to a
construction contract have the opportunity to allocate the economic risks
associated with the work, and that they do not need the special protections of
tort law to shield them from losses arising from risks, including negligence of
a design professional, which are inherent in performance of the contract.
228 P.3d at 45-46 (citing, e.g., BRW, Inc. v. Dufficy & Sons, Inc., 99
P.3d 66, 71-75 (Colo. 2004) (holding that economic loss doctrine barred
subcontractor's negligence and negligent misrepresentation claims against
engineering firm and inspector); SME Indus., Inc. v. Thompson, Ventulett,
Stainback & Assoc., Inc., 28 P.3d 669, 680-83 (Utah 2001) (holding that
economic loss doctrine barred subcontractor's negligence and negligent
misrepresentation claims against members of the design team); Blake Constr.
Co., Inc. v. Alley, 353 S.E.2d 724, 726-27 (Va. 1987) (holding that a
contractor cannot recover economic losses against a design professional in the
absence of contractual privity); Berschauer/Phillips Constr. Co. v. Seattle
Sch. Dist., 881 P.2d 986, 989-93 (Wash. 1994) (recovery of economic loss by
contractor against architect, structural engineer, and project inspector due to
construction delays was limited to remedies provided by construction contract)).
Cf. Donnelly Constr. Co. v. Oberg/ Hunt/Gilleland, 677 P.2d 1292 (Ariz.
1984) (architect, absent privity of contract, may be liable in tort to
contractor for economic losses alleged to have resulted from defective plans
applying Restatement (Second) of Torts §552); see Flagstaff Affordable, supra,
223 P.3d at 671-72.
2. Status of Defendant as Basis for Determining if Rule Applies
One problem for
courts in cases where design professionals have asserted the economic loss rule
has been that the rule generally does not bar tort claims against lawyers and
accountants for economic losses resulting from alleged deficiencies in their
services. Although design professionals through their plans and specifications
tell contractors what to build, and thus are integrally involved in creating the
project, they have historically been viewed more like providers of professional
services, lawyers and accountants, than contractors. Courts have expressed
concern that if the economic loss rule bars tort claims against design
professionals, clients’ rights against lawyers, accountants and similar
providers of professional services may erode. The reversed decision of
the Arizona Court of Appeals in Flagstaff Affordable Housing is a good
example of where the professional status of the defendant (architect) was the
basis for rejecting application of the economic loss rule. Flagstaff
Affordable, supra, 212 P.3d 125 (App. 2009), reversed and remanded,
223 P.3d 664 (Ariz. 2010).
If we were to limit actions against architects to
solely breach of contract in the absence of personal injury or physical harm to
property, we would be ignoring the origin of the duty to use ordinary skill,
care, and diligence. Application of the economic loss doctrine in this context
would have the effect of eroding this implied duty. We reject such an approach.
[212 P.3d at 129.]
Some courts have held
there is no policy reason for treating design professionals differently from
contractors. The Nevada Supreme Court came to this conclusion, stating:
We perceive no significant policy distinction
that would drive us to permit tort-based claims to recover economic losses
against design professionals, such as architects and engineers, who provided
their professional services in the commercial property development and
improvement process, when we have concluded that such claims are barred under
the economic loss doctrine if brought against contractors and subcontractors
involved in physically constructing improvements to real property. [Cit. omit.]
The work provided by construction contractors or the services rendered by design
professionals in the commercial building process are both integral to the
building process and impact the quality of building projects. Therefore, when
the quality is deemed defective, resulting in economic loss, remedies are
properly addressed through contract law.
Terracon Consultants Western, Inc. v. Mandalay Resort Group,
206 P.3d 81, 89-90 (Nev. 2009). Accord Flagstaff Affordable, supra
(following Terracon, supra).
Maine Rubber Int’l. v. Envir. Mgmt. Group, Inc., 298 F. Supp.2d 133 (D.
Me. 2004), addressed tort claims against an engineering firm for costs claimed
to have been incurred due to environmental conditions of property the claimant
purchased after having the firm perform an environmental assessment of the
property. The District Court held a Maine Supreme Court decision (Oceanside
at Pine Point Condo. Owners Ass’n. v. Peachtree Doors, Inc., 659 A.2d 267
(Me. 1995)) should be applied to bar the tort claims against the engineering
firm, and discussed the question of whether engineers should be treated like
contractors, or attorneys/accountants.
The difficult question is whether Maine would
carve out an exception to the economic loss doctrine for professional services
contracts. Courts that do create an exception express concern over the
elimination of tort recovery for professional malpractice, and cite the need for
such remedies against lawyers and accountants.
* * *
Other courts recognize that concern by simply
limiting the exception to professional services contracts that involve a
fiduciary or extra-conceptual relation (like attorney/client).
* * *
Other courts create no exception at all, at least
in the instances that have come before them.
* * *
[W]hatever the applicability of the economic loss
doctrine to suits against lawyers and accountants, the logic of Peachtree
encompasses the relationship here. These were two commercial entities able to
bargain over the terms of their agreement, and they entered into a written
contract to govern their relationship. There was no risk of harm either to
people or to other property. The critical issue here, as in Peachtree, is
value and quality of what was purchased. Following Peachtree, I conclude
that there is no reason not to leave Maine Rubber and EMG [the engineering firm]
to their bargain. It bears noting that such an outcome does not mean there is no
relief. Maine Rubber still has the traditional recourse for breach of contract
and any damages it can prove under contract law standards, given the contract it
entered into.
* * *
FN7. Such a relationship with equal bargaining
power is quite different than one with a substantial difference in hierarchical
status, like the relationship between a lawyer or accountant and his or her
client, where the source of the duty is not defined by an arm's length contract.
[298 F.Supp.2d at 137-138.]
The Fifth Circuit applied the economic loss rule to bar claims by the owner of
a ship against its design professionals, stating:
Plaintiffs argue that because Hvide contracted
only to provide professional services and did not manufacture any part of the
Oxy Producer, East River’s rationale for confining the parties to their
contractual remedies does not apply. It is true that some jurisdictions
recognize an exception to the economic loss rule when the underlying contract is
for the provision of professional services.
* * *
The question before us is whether such an
exception should be recognized in maritime tort. We conclude that East River’s
broad concern for preserving the integrity of contract law in commercial
settings applies equally to a case such as this where the professional services
are an integral part of the manufacture or construction of a product and where
the only injury alleged is to the product itself.
As in East River, the damage alleged here
is purely economic. Thus, the public policy concerns which underpin the
imposition of a duty in tort–the need to provide consumers with greater
protection from personal injury and property damage than is afforded by warranty
or contract–are not implicated.
Employers Ins. of Wausau v. Suwannee River Spa Lines, Inc. et al.,
866 F.2d 752, 762-63 (5th Cir. 1989).
3. Application to
Claims of Defective Services
In a vein similar to
the argument that claims against professionals are not subject to the economic
loss rule, plaintiffs have also argued that the rule does not apply to claims
where defective services are alleged. Indianapolis-Marion County Public
Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 741-42 (Ind.
2010), rejected the argument that the economic loss rule should not bar an
owner’s claims related to defective services (engineering) supplied to the
project.
F. Jurisdictions That Have Considered Application of the Economic Loss Rule to
Claims Against Design Professionals
1. “Thumbs Up”
The following
jurisdictions apply the economic loss rule to claims against design
professionals:
-
Arizona - Flagstaff Affordable Housing, supra; see, Cook v. Orkin
Exterminating Company, Inc., 609 Ariz. Adv. Rep. 46, 2011 WL 2162688
(Arizona Court of Appeals, 5/19/2011)(economic loss rule barred homeowners’ tort
claims for ineffective termite extermination services).
-
Nevada - Terracon Consultants Western, Inc. v. Mandalay Resort Group,
206 P.3d 81 (Nev. 2009) (contract between developer and defending
geotechnical engineering firm).
-
Utah - Cathco, Inc. v. Valentiner, 944 P.2d 365 (Utah 1997) (lawsuit
by developer against architect).
-
Washington - Berschauer/Phillips Construction Co. v. Seattle School
District No. 1, 881 P.2d 986 (Wash. 1994) (but see Affiliated FM Ins.
Co. v. LTK Consulting Services, Inc., 243 P.32 521 (Wash.2010)(rule
re-labeled as the “independent duty doctrine” and re-formulated to narrow
the scope of claims that will be precluded).
-
Hawaii - City Express, Inc. v. Express Partners, 959 P.2d 836 (Ha.
1998).
-
Illinois - F.H. Paschen v. Burnham Station, 865 N.E.2d 228 (Ill. App.
2007); Tolan and Son, Inc. v. KLLM Architects, Inc., 719 N.E.2d 288,
294 (Ill. App. 1999).
-
Texas - Akbani v. TRC Engineers, Inc., 2009 WL 2614473 (N.D. Tex.
August 25, 2009) (Texas economic loss rule barred owner’s claim against
civil engineer with whom there was contract privity).
-
Virginia - Sensenbrenner v. Rust, Orling & Neale Architects, Inc.,
374 S.E.2d 55 (Va. 1988).
-
Colorado - BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 67-68
(Colo. 2004) (steel subcontractor’s tort claim against engineer and
inspector barred by economic loss rule).
-
Wyoming - (Rissler & McMurry Co. v. Sheridan Area Water Supply Joint
Powers Board, 929 P.2d 1228 (Wyo. 1996) (economic loss rule barred
contractor’s negligence claim against engineer); Excel Constr. Inc. v.
HKM Engineering, Inc., 228 P.3d 40 (Wyo. 2010).
-
Federal maritime case law applies the rule in cases involving construction
of ships - East River Steamship Corp. v. Transamerica Delaval, Inc.,
476 U.S. 858, 106 S.Ct. 2295 (1986) (economic loss rule applied to bar tort
claims involving design and manufacturing defects that caused supertankers
to malfunction).
-
Indiana - Indianapolis-Marion County Public Library v. Charlier Clark &
Lindard, P.C., 929 N.E.2d 722, 736-37 (Ind. 2010)(finding project’s
series of related contracts met the “privity” requirement for economic loss
rule in owner’s case against contractors and design professionals were
direct privity and did not exist).
2. “Thumbs Down”
In Flagstaff Affordable, supra, the reversed Arizona appeals court
followed decisions from:
-
New York - (Robinson Redevelopment Co. v. Anderson, 547 N.Y.S.2d 458
(1989)).
-
Florida - Moransais v. Heathman, 744 So.2d 973 (Fla. 1999).
-
Missouri - Business Men’s Assurance Co. of America v. Graham, 891 S.W.2d
438 (Mo.Ct.App. 1994).
-
Mississippi - Magnolia Const. Co., Inc. v. Miss. Gulf S. Eng’rs. Inc.,
518 So.2d 1194 (Miss. 1988))
-
West Virginia - (E. Steel Constructors, Inc. v. City of Salem, 209 W.Va.
392, 549 S.E.2d 266 (2001); Cf.
The Missouri court’s decision in Business Men’s Assurance, supra, led to
a decision that highlights one of the problems of using status as the
determining factor in whether to apply the economic loss rule: City of
Kennett v. Wartsila North America, 2005 WL 3274334 (D.C. Mo. 2005), involved
a project owner’s lawsuit against an engineering firm hired to “engineer,
procure and construct a power plant ... ” See 2005 WL 3274334
at *1 (emphasis added). Due to the defendant’s status as an engineer, the
economic loss rule was held not to apply under Missouri law, even though the
contract was, in part, a construction contract.
G. Jurisdiction Where the Rule’s Application Is Still an Open Question
In Hunt Construction Group v. Brennan Beer Gorman/Architects, 607 F.3d
10 (C.A.2 2010), the Second Circuit certified the following questions to the
Vermont Supreme Court:
(1) Does the economic loss doctrine [in Vermont]
bar a contractor from seeking purely economic damages against design
professionals who allegedly provided negligent professional services in
violation of the design professionals’ contractual obligations with a mutual
counterparty?
(2) Does the economic loss doctrine apply to
claims of negligent misrepresentation? [At *7.]
* * *
Other state courts applying the professional
services exception have split on its role when parties share a mutual
contracting party, but do not themselves contract with one another. Several
state high courts have found such actions barred. The Colorado Supreme Court,
for example, has found that a “duty of care ... memorialized in ... contracts”
does not suffice to escape the economic loss rule; rather, a plaintiff must show
a “duty independent of the interrelated contracts.” BRW, Inc. v. Dufficy &
Sons, Inc., 99 P.3d 66, 74 (Colo. 2005). Accordingly, it barred a claim by a
subcontractor on a construction project against (a) a licensed engineer who
designed plans and specifications that the subcontractor was required to follow,
and (b) a company that was hired to inspect the construction and ensure that the
engineer's plans and specs were followed. Id. at 67. At least nine other
states have adopted similar rules.FN4
FN4. See Terracon Consultants W., Inc. v.
Mandalay Resort Group, 206 P.3d 81, 89 (Nev. 2009) (compiling and concurring
with cases from Hawaii, Illinois, New Hampshire, Ohio, Utah, and Wisconsin); Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wash.2d
816, 823 (1994) (“[T]he economic loss rule does not allow a general contractor
to recover purely economic damages in tort from a design professional.”); Blake Constr. Co. v. Alley, 233 Va. 31, 34 (1987) (“The architect's duties
both to owner and contractor arise from and are governed by the contracts
related to the construction project. While such a duty may be imposed by
contract, no common-law duty requires an architect to protect the contractor
from purely economic loss.”).
Note: Hunt Construction Group v. Brennan Beer Gorman/Architects, 607 F.3d
10 (2nd Cir. 2010) at *4-5. At the time this article was being written, the
Vermont Supreme Court had not yet written a published opinion answering the
Second Circuit’s certified questions. See American Indoor Air Quality
Assessment Services, Ltd. v. TOMI Environmental Solutions, Inc., Superior
Court of Orange County, Vermont, Civil Division, Docket No. 207-9-09 Oecv
(Minute Entry 4/26/2011) (noting that certified question still pending)).
H. Exceptions to the Economic Loss Rule
1.Where the Parties “Contract Away” the Economic Loss Rule Defense
Flagstaff Affordable
noted that parties to a design contract can “contract out of” the economic loss
rule. The court further stated in that regard:
In the construction context, the economic loss
doctrine respects the expectations of the parties when, as will often be true,
they have expressly addressed liability and remedies in their contract. Thus,
the parties can contractually agree to preserve tort remedies for solely
economic loss, just as they may otherwise specify remedies that modify common
law recovery. But if the parties do not provide otherwise in their contract,
they will be limited to contractual remedies for any loss of the bargain
resulting from construction defects that do not cause personal injury or damage
to other property. [Id. at 670, (int. cit. omit.).]
Design professionals entering into contracts where Arizona law will apply should
be aware of inadvertently signing a contract with a provision that waives the
protection of the economic loss rule.
2. Negligent Misrepresentation Claims
A notable exception to the economic loss rule in some jurisdictions is a
contractor’s claim that defects in the project’s design plans caused the
contractor to incur unanticipated costs. For an exhaustive treatment of this
exception see “Tort Liability of Project Architect or Engineer for
Economic Damages Suffered by Contractor Subcontractor,” 61 A.L.R. 6th 445
(2011). Also see Indiana-Marion Public Library, supra (leaving open the
question of exception for negligent misrepresentation claims.)
3. Special Relationship Exception
A number of state high courts have held
that a contractor can sue a design professional in negligence for purely
economic losses based on the contractor’s “special relationship” to the design
professional recognized because the contractor must rely on the plans prepared
by the design professional. As the West Virginia Supreme Court put it,
[a] design professional (e.g. an architect or
engineer) owes a duty of care to a contractor, who has been employed by the same
project owner as the design professional and who has relied upon the design
professional's work product in carrying out his or her obligations to the owner,
notwithstanding the absence of privity of contract between the contractor and
the design professional, due to the special relationship that exists between the
two. Consequently, the contractor may, upon proper proof, recover purely
economic damages in an action alleging professional negligence on the part of
the design professional.
E. Steel Constructors, Inc. v. City of Salem,
209 W. Va. 392, 401 (2001). And, at least five other state courts allow suits by
contractors against design professionals with whom they were not in contractual
privity. See Tommy L. Griffin Plumbing & Heating Co. v. Jordon, Jones &
Goulding, Inc., 320 S.C. 49, 56 (1995); Jim's Excavating Serv., Inc. v.
HKM Assocs., 265 Mont. 494, 506 (1994); Mid-W. Elec. v. DeWild Grant
Reckert & Assocs. Co., 500 N.W.2d 250, 254 (S.D.1993); Forte Bros. v.
Nat'l Amusements, Inc., 525 A.2d 1301, 1303 (R.I. 1987); Donnelly Constr.
Co. v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 187 (1984), abrogated on
other grounds by Gipson v. Kasey, 214 Ariz. 141 (2007). At one point,
it could be said that this permissive rule was the majority position, see
Mid-W. Elec., 500 N.W.2d at 253, but it appears that it is no longer so.
III. Contractual Defenses to Claims Against
Design Professionals
Contractual
limitations on a design professional’s liability are generally enforced. See,
for example, 1800 Ocotillo, LLC v. WLB Group, Inc., 196 P.3d 222 (Ariz.
2008)(where contract between owner and civil engineer limited engineer’s
liability exposure to the amount of its fees, limitation enforced).
IV. Statutory
Defenses to Claims Against Design Defendants
Many
states have statutes of repose that will bar claims of defective construction or
design after the specified time period passes. See, e.g., Ariz. Rev.
Stat. § 12-552 (bars claims related to development of real property 8 years
after the substantial completion with one additional year given for latent
defects that are discovered during the eighth year).
Many states have also enacted statutes that require a plaintiff early in a case
against a design professional to have and disclose expert opinions that make out
a prima facie case of liability. Arizona’s statute, for instance,
requires that the plaintiff certify with its complaint whether expert opinion
will be needed to establish liability. Ariz. Rev. Stat. § 12-2602 ... where
opinion is certified as necessary, shortly after the complaint, the plaintiff
must serve a preliminary expert opinion affidavit that gives the expert’s
qualifications; the factual basis for each claim against the design
professional; the acts, errors or omissions that the expert opines breached the
standard of care; and how the identified acts, errors or omissions caused
damage).
V. Additional Sources
The following are useful resources for the practitioner presented with an
economic loss rule issue in a construction case:
1. Schneier, Marc M., Tort Liability of Project Architect or Engineer for
Economic Damages Suffered by Contractor or Subcontractor, 61 A.L.R. 6th 445
(2011) (supersedes Tort Liability of Project Architect for Damages Suffered
by Contractor, 65 A.L.R.3d 249 (1975)).
2. Looking Back to Look Ahead: Benchmarking Design Professional Liability
Claims, 28 No. 3 Construction Litigation Reporter 1 (2007), which can be
found on the Westlaw database, Construction Litigation Reporter (CONLITR).
3. Restatement (Third) of Economic Torts and Related Wrongs §8, Council Draft
No. 2, 2007 (draft by Professor Mark P. Gergen) (note discussion of same in Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C.,
929 N.E.2d 722, 727-28 (Ind. 2010)).
4. Sidney J. Barrett, Jr., Recovery of Economic Loss in Tor for Construction
Defects: A Critical Analysis), 40 S.C.L. Rev. 891 (1989).
5. Vincent R. Johnson, The Boundary-Like Function of the Economic Loss Rule,
66 Wash. & Lee L. Rev. 523(2009)
VI. Conclusion
Of the defenses available to design professionals in construction defect cases,
the economic loss rule’s application has been a particularly hot topic recently,
as indicated by the number of recent decisions across the country discussed in
this article. The role of the economic loss rule in construction litigation,
including its application to claims against design professionals, will no doubt
continue to evolve in the next few years. Stay tuned. |
