One of the hottest topics in construction law these days is a legal doctrine known as the Economic Loss Rule. The rule prevents a plaintiff from recovering damages in tort when the plaintiff has only suffered economic harm without any injury to persons or property. See generally Dean v. Barrett Homes, Inc., 204 N.J. 286 (2010).
In addition, the rule bars parties to a contract from asserting tort claims to recover only economic damages. Plaintiffs would always prefer to recover damages for tort (i.e., claims sounding in negligence, fraud, misrepresentation, etc.) rather than breach of contract, because the former allows recovery of greater damages (such as punitive, exemplary and consequential damages) than the latter.
To avoid redundant tort claims, when parties have recourse via breach of contract, defendants often invoke the economic loss rule as a defense against these tort claims. However, what happens when the plaintiff and defendant do not have a contract or are not otherwise in contractual privity? Can a plaintiff who has suffered only economic harm without personal injury or property damage recover in tort against a third party?
In the construction context, can a general contractor, who has suffered only economic harm, recover in negligence against an architect, with whom the contractor has no contractual relationship? This exact question has been raised in courts across the country — and the answers have differed, depending on the applicable state’s law.
In Morganti Group, Inc. v. Stamford Phase Four JV, LLC, No. FSTCV-186038150S, 2019 WL 4898707 (Conn. Super. Ct. Sept. 11, 2019), a trial court in Connecticut recently addressed this issue. The general contractor sued the project architect, alleging negligence for breach of a “duty of care in the performance of [the architect’s] duty under its Contract with the Owner, because [the general contractor’s] timely, proper and efficient performance of its Contract was inextricably intertwined with, and dependent upon, the Architect’s proper performance of its … duties under its contract with the Owner.” Morganti Group, 2019 WL at *1.
More specifically, the contractor argued that the architect’s construction drawings had errors that delayed construction, causing the contractor to sustain costly changes and other delay damages. Id.
By way of background, the subject project was the construction of a high-rise apartment building. The defendant was the project architect/design professional, who was obligated “to prepare plans and drawings from which the contractor and its subcontractors would obtain the information necessary to construct the building, and its obligations also included project management which, in turn, included approvals of payments as appropriate.” Id. at *2.
The plaintiff/contractor alleged that the architect was negligent, breaching its duties to the contractor.
In response to the complaint, the architect moved to strike this claim for negligence, arguing that it is barred by the economic loss rule. The architect argued that the general contractor suffered only economic damages without any injury to person or property.
The court noted that “there is no question that the injuries claimed by the plaintiff are purely economic.” Id. Thus, the only issue to be decided was whether the economic loss rule applied to bar the contractor’s claim against the architect.
This precise legal issue had not been addressed previously by the Supreme Court of Connecticut. As a result, it was up to the trial court “to determine the legal sufficiency of the claim being asserted” and “[i]n a sense … predict what the Appellate Court or Supreme Court would do were the issue to come before it.” Id. at *11.
The court analyzed prior trial court decisions and some similar, though not identical appellate decisions, looking at issues of foreseeability, privity and public policy. Notably, the court did not consider the decisions of other courts around the country, including plaintiff’s argument that courts in 36 jurisdictions around the country held that the architect owed the general contractor a duty of care. Id. at *5.
Different courts treat the issues of foreseeability, privity and public policy differently — and the Superior Court in Connecticut was not about to arbitrarily decide what non-binding, non-precedential, out-of-state decision(s) it was going to follow.
Instead, the court circled back to other trial court decisions in Connecticut before concluding that the economic loss doctrine does not bar a contractor from suing an architect with whom it has no contractual privity, based on a theory of negligence:
“[This] was a discrete project, with essential reliance among parties who were contractually obligated to work together, albeit without a direct contractual relationship between them. Further, there is something of an agency flavor to the relationship between the architect and the owner/developer — the architect provided direction to the construction contractors as to the work to be done via the plans and drawings, performed inspections and monitoring of work on behalf of the owner/developer, and acted as an intermediary for the owner/developer with respect to certifying that work had been done so as to warrant payment to the plaintiff contractor.
“To the extent that this case involves claims of defective plans and drawings having been prepared by the defendant as the design professional, the contractor as the construction professional is far more likely to identify and seek remediation of such defects than would an owner/developer who is less likely to be aware of technical problems.
“Absent any possible right of the contractor to proceed directly against an architect, a design professional might be tempted to ‘tough it out’ by assuring the owner that there are no such problems, putting a contractor in an untenable position — build with defective plans or refuse to build without corrections made — without any direct legal recourse against the ultimately-responsible party.”
Thus, based on considerations of foreseeability, privity and public policy, this Connecticut trial court found that the general contractor has a cognizable claim in negligence against the project architect.
As a design professional, it is critical that you understand the economic loss doctrine and its applicability in the state(s) where you practice. The example in Morganti Group is just than — a single example from a trial court in Connecticut. Other state courts have similarly held that a design professional owes a duty of care to a contractor, who has relied upon the design professional’s plans and specifications in performing its construction work, notwithstanding the lack of a contractual relationship between the design professional and contractor.
However, courts in other states have found that the economic loss rule shields the design professional from tort liability for economic losses to entities with whom the design professional has no contractual privity.
In short, the court decisions on this issue are literally “all over the map.” However, now that you are aware of this issue, you can have an educated conversation with your construction attorney, who should be able to help you navigate the uncertain liability landscape of the economic loss rule.