Jurisdictions Where the Economic Loss Doctrine Bars Extra-Contractual Claims Highlight the Importance of Well-Drafted Contracts
By Sarah A. Johnson, Esq.
The economic loss doctrine is the legal principle that economic loss may not be recovered under a negligence or tort theory.1 “Economic loss” has been defined as damages for inadequate value, cost of repair and replacement of a defective product, or the consequent loss of profits, as well as the loss of value of the product due to its inferior quality.2 The theory behind this doctrine is that a purchaser’s wish to reap the benefits of his bargain is not an interest protected by tort law.3 Rather, the remedy for economic loss relating to the purchaser’s disappointed expectations properly lies in contract.4
How the Economic Loss Doctrine Affects Engineers
As an engineer, the essence of this doctrine for you is that, in jurisdictions where it is applied, only parties that are in privity (or have a contract) with you can file a claim against you for defective design and construction. In the context of construction defects, the economic loss doctrine bars recovery for consequential economic loss under a tort theory, including damages for deterioration from latent defects and other damages incidental to the construction defect.5 Of course, there are certain circumstances where the economic loss doctrine is unlikely to apply, such as cases involving bodily injury, property damages beyond those to the building or project being constructed, or fraud.6
How Different Jurisdictions Apply the Economic Loss Doctrine
Some jurisdictions apply the economic loss doctrine rather widely, barring extra-contractual claims against design professionals.7 Other jurisdictions refuse to apply the doctrine to design professionals based on certain exceptions for negligent misrepresentation, professional services, or even the lack of an actual contract between the parties.8 Yet other jurisdictions apply the doctrine to design professionals in some circumstances but not others, creating exceptions for claims involving residential property; sudden, dangerous, or calamitous events; or defects creating substantial and unreasonable risk of death or personal injury.9 Finally, other jurisdictions have no case law or conflicting case law, making application of the doctrine uncertain.
How to Limit Your Liability with a Well-Drafted Contract
Despite the fact that the case law regarding application of the economic loss doctrine is in flux in many jurisdictions and the fact that the economic loss doctrine is not always a complete bar to extra-contractual claims against you, it highlights the importance of your written contracts. If the party bringing the claim against you is limited to contractual claims, you will be able to limit your liability with a well-drafted written contract. This is because the contract provisions will be largely determinative of your ultimate liability when the claimant is barred from bringing extra-contractual claims against you.
Thus, the economic loss doctrine can be a helpful (albeit often imperfect) tool in combating errors and omissions claims when you have taken the time to utilize a well-drafted written contract.
1Moorman Mfg. Co. v. Nat’l Tank Co., 435 N.E.2d 443, 450 (Ill. 1982).
2Redarowicz v. Ohlendorf, 441 N.E.2d 324, 327 (Ill. 1982).
4Moorman Mfg., 435 N.E.2d at 450.
5Washington Courte Condo. Ass’n-Four v. Washington Golf Corp., 501 N.E.2d 1290, 1294 (Ill. App. Ct. 1986) (finding that damage to insulation, walls, ceiling, floors, and electrical outlets was incidental to the defective windows and sliding glass doors that caused water infiltration).
6Moorman Mfg., 435 N.E.2d at 449 (defining economic loss as being without any claim of personal injury or damage to other property); Vukovich v. Haifa, Inc., No. 03-737, 2007 U.S. Dist. LEXIS 13344, at *24-25 (D. N.J. Feb. 28, 2007) (finding that the economic loss doctrine does not bar claims of fraud in the inducement).
7See, e.g., Flagstaff Affordable Hous. L.P. v. Design Alliance, Inc., 223 P.3d 664, 670-71 (Ariz. 2010) (finding that the economic loss doctrine barred the plaintiff building owner from pursuing a tort action for design and construction defects against the defendant architect); Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E. 2d 722, 739 (Ind. 2010) (finding that the economic loss doctrine barred the plaintiff library from pursuing tort action against the engineers that performed the design and inspection of the library’s parking garage, which was allegedly defective).
8See, e.g., City of Cairo v. Hightower Consulting Engineers, Inc., 629 S.E.2d 518, 525 (Ga. Ct. App. 2006) (finding that a “misrepresentation exception” to the economic loss doctrine allowed the city to pursue a negligence claim against the engineering firm that evaluated a site for building a wastewater disposal system that malfunctioned after construction); Waldor Pump & Equip. Co. v. Orr-Schelen-Mayeron & Assocs., Inc., 386 N.W.2d 375, 377-78 (Minn. Ct. App. 1986) (finding that a subcontractor could sue an engineer in tort for negligently rejecting sludge pumps, resulting in increased costs to the subcontractor and that the economic loss doctrine does not apply to the rendition of professional services); Lord v. Customized Consulting Specialty, Inc., 643 S.E.2d 28, 33 (N.C. Ct. App. 2007) (finding that because there was no contract between the plaintiff homeowners and the subcontractors, the economic loss doctrine did not apply to preclude the homeowners from pursuing negligence claims for construction defects against the subcontractors).
9See, e.g., A.C. Excavating v. Yacht Club II Homeowners Ass’n, 114 P.3d 862, 868-70 (Colo. 2005) (refusing to apply the economic loss doctrine with respect to claims involving residential property and finding that an independent duty of care is owed in the construction of homes); Menard, Inc. v. Countryside Indus., Inc., No. 01 C 7142, 2004 U.S. Dist. LEXIS 10820, at *9-14 (N.D. Ill. June 14, 2004) (describing an exception to the economic loss doctrine for sudden, dangerous or calamitous events that cause personal injury or damages to property other than the defective product itself); Milton Co. v. Council of Unit Owners of Bentley Place Condo., 708 A.2d 1047, 1054 (Md. Ct. Spec. App. 1998) (describing an exception to the economic loss doctrine where the defect creates a substantial and unreasonable risk of death or personal injury and parties share an intimate nexus).