In William Lansing v. Doe, 2019 Ore. App. LEXIS 1564, the Court of Appeals of Oregon considered whether the Economic Loss Doctrine (ELD) applied to the plaintiff’s claims based on purportedly faulty construction work in a home. In determining that damage to persons or property is not a purely economic loss in the context of the ELD, the court concluded that the plaintiff could proceed with a negligence claim against a contractor that performed work on the home. Continue reading
Often times, both contract and tort claims co-exist in a subrogation matter and the line between the two can be blurred. This is especially true in the context of damages resulting from new home construction defect claims. However, states are increasingly attempting to define the scope of when the “gist of the action” is based in contract only. In Tingler v. Graystone, 834 S.E.2d 244 (Va. 2019), the Supreme Court of Virginia defined that scope in terms of new home construction. The court defined the “source of duty rule” by holding that claims of nonfeasance sounding only in contract do not give rise to an independent tort claim. The court also reiterated its application of the economic loss doctrine, stating that, when negligent actions result in damage to property other than the product itself, there can be a viable tort claim. Continue reading
In Hexagon Holdings Inc. v. Carlisle Syntec, Inc. No. 2017-175-Appeal, 2019 R.I. Lexis 14 (January 17, 2019), the Supreme Court of Rhode Island, discussing claims associated with allegedly defective construction, addressed issues involving intended beneficiaries to contracts and the application of the economic loss doctrine. The court held that, based on the evidence presented, the building owner, Hexagon Holdings, Inc. (Hexagon) was not an intended third-party beneficiary of the subcontract between the general contractor (A/Z Corporation) and the subcontractor, defendant McKenna Roofing and Construction, Inc. (McKenna). In addition, the court held that, in the context of this commercial construction contract, the economic loss doctrine applied and barred Hexagon’s negligence claims against McKenna. Continue reading
In Kmart Corp. v. Herzog Roofing, Inc., 2018 Wisc. App. Lexis 842, the Court of Appeals of Wisconsin considered whether the economic loss doctrine barred the plaintiff’s negligence claims against the defendant roofer for damages resulting from the collapse of a roof. The Court of Appeals held that, while some of the plaintiff’s property damages were unrelated to the scope of the contract, the economic loss doctrine still applied to those damages because they were a foreseeable result of the defendant’s breach of the contract. This case establishes that in Wisconsin, the economic loss doctrine bars tort claims for damage to property unrelated to the contract if those damages were a reasonably foreseeable risk of disappointed expectations of the contract. Continue reading
In Beaufort Builders, Inc. v. White Plains Church Ministries, Inc., 783 S.E.2d 35 (N.C. Ct. App. 2016), the Court of Appeals of North Carolina addressed whether the economic loss rule barred the negligence claim of White Plains Church Ministries, Inc. (White Plains) against Charles F. Cherry (Cherry), the owner of Beaufort Builders, Inc. (Beaufort Builders). The court held that, because the economic loss rule would bar White Plains’ negligence claims against Beaufort Builders, White Plains could not pursue a third-party negligence claim against Cherry, individually.
In Severn Peanut Company, Inc. v. Industrial Fumigant Company, 807 F.3d 88 (4th Cir. (N.C.) 2015), the United States Court of Appeals for the Fourth Circuit (Fourth Circuit), applying North Carolina law, considered whether a consequential damages clause in a contract between the Severn Peanut Company, Inc. (Severn) and Industrial Fumigant Company (IFC) barred Severn and its subrogating insurer, Travelers Property Casualty Company of America (Travelers), from recovering over $19 million in damages that Severn suffered as the result of a fire and explosion at its Severn, North Carolina plant. The Fourth Circuit, rejecting Severn’s unconscionability and public policy arguments related to the consequential damages clause and finding that the economic loss doctrine barred Severn from pursuing negligence claims, affirmed the trial court’s judgment granting summary judgment in IFC’s favor.
By: Edward Jaeger and Michael Wolfer
In Gongloff Contracting, L.L.C. v. L. Robert Kimball & Associates, Architects and Engineers, 119 A.3d 1070 (Pa. Super. 2015), the Pennsylvania Superior Court recently held that a negligent misrepresentation claim against an architect does not require a plaintiff to make allegations of an express misrepresentation by the architect in order to survive a motion for judgment on the pleadings based on the economic loss doctrine. The court held that, pursuant to Bilt-Rite Contractors, Inc. v. The Architectural Studio, 581 Pa. 454 (2005), a plaintiff may sufficiently plead a negligent misrepresentation claim by asserting that the architect’s design documents contained false information.
In Nami Resources Company, LLC v. Asher Land and Mineral, Ltd., — S.W.3d –, 2015 WL 4776376 (Ky. App. Aug. 14, 2015), the Court of Appeals of Kentucky recently declined to expand the scope of the economic loss doctrine, holding that the doctrine precludes misrepresentation claims only in commercial product liability cases.
In Nami Resources, Nami Resources Company, LLC (“NRC”) extracted gas from property owned by Asher Land and Mineral, Ltd. (“ALM”) pursuant to a contract. Under the contract, NRC agreed to pay ALM 1/8th of the gas’ market price. A dispute developed over the amount of royalties that NRC paid to ALM under the contract. ALM sued NRC, asserting, among other things, a claim for breach of contract and a tort claim for fraudulent misrepresentation. NRC argued that ALM’s misrepresentation claim was barred by the economic loss doctrine, contending that ALM’s claims were founded on contractual duties and that, absent a basis independent of the alleged breach of contract, ALM could not maintain its tort claims.
In Donatelli v. D.R. Strong Consulting Engineers, Inc., 312 P.3d 620 (Wash. 2013), the Supreme Court of Washington, in a 5-4 decision, addressed the application of the economic loss rule – more properly considered the independent duty doctrine – in a case where the plaintiffs alleged that the defendant committed professional malpractice. Although the court concluded that the plaintiffs’ negligence and negligent misrepresentation claims were not barred by the economic loss rule, the analysis adopted by the Supreme Court requires trial courts to engage in an analysis of the applicable contract’s terms before analyzing whether the defendant-design professional owed the plaintiff or plaintiffs duties arising independent of the contract.
In Donatelli, the plaintiffs, Karen and Steve Donatelli, hired defendant D.R. Strong Consulting Engineers, Inc. (D.R. Strong) to assist them with developing their real property into two short plats. According to the Donatellis, D.R. Strong orally agreed to, among other things, prepare drainage and soil erosion plans, prepare necessary reports and County permit applications, and take all other actions necessary to get the plats recorded. D.R. Strong represented that it would be able to finish the project within one and one-half years at a cost of approximately $50,000. In October of 2002, D.R. Strong secured preliminary approval of the plats from the County. The approval was valid for a period of 60 months. After D.R. Strong secured the preliminary approval, it sent the Donatellis a “revised” proposal for engineering services. In the revised proposal, D.R. Strong agreed to perform six phases of engineering services for an estimated fee of $33,150. Mr. Donatelli signed the proposal. After Mr. Donatelli signed the revised proposal, D.R. Strong purportedly assumed a managerial role over the project and worked closely with other contractors, builders and vendors involved with the project. Ultimately, D.R. Strong charged the Donatellis a fee of approximately $120,000 for its services.
In October of 2007, the preliminary approval for the plats expired and the project was still not complete. Before D.R. Strong could obtain a new preliminary approval, however, the Donatellis suffered substantial financial losses and, eventually, lost the property in foreclosure. Consequently, the Donatellis sued D.R. Strong, claiming damages in excess of the sum of $1.5 million. In their complaint, the Donatellis asserted, among other things, negligence and negligent misrepresentation claims. D.R. Strong moved for partial summary judgment on the Donatellis’ negligence and negligent misrepresentation claims, arguing that these claims were barred by the economic loss rule. The trial court denied the motion and the Court of Appeals affirmed the trial court’s decision, holding, based on the independent duty doctrine, that because professional engineers owe duties to their clients independent of any contractual duty, the Donatellis’ negligence and negligent misrepresentation claims were not barred. The Supreme Court granted D.R. Strong’s petition for review.
To address D.R. Strong’s claims, the Supreme Court set forth a brief history of Washington’s application of the economic loss rule. As noted by the court, the state, historically, applied the rule to bar a plaintiff from recovering in tort when the defendant’s duty to the plaintiff was governed by contract and the plaintiff’s only damages were economic damages. In construction cases, however, the economic loss rule is considered a misnomer as the phrase “independent duty doctrine” more accurately describes how Washington courts determine whether a contracting party in a construction case can seek tort remedies from another party to the contract.
Pursuant to Washington’s independent duty doctrine, “an injury is remediable in tort if it traces back to the breach of a tort duty arising independent of the terms of the contract.” For example, a design professional may be sued in tort because, in addition to contractual duties, design professionals owe duties to their clients and to the public to act with reasonable care. However, in order to determine whether a design professional’s duties arise independent of his or her contractual duties, a court must first determine what terms the parties have agreed to, contractually, because, in some cases, a contract may address the professional’s common law duty to act with reasonable care. In addition, although design professionals generally have written contracts setting forth their obligations, engineers may assume additional professional obligations by their affirmative conduct. Thus, regardless of whether a plaintiff’s claims are framed in contract or in tort, the first step in analyzing a plaintiff’s professional malpractice claim is to determine the scope of the professional’s obligations.
Applying this analysis to the Donatellis’ negligence claim, the court held that questions of fact remained as to the scope of what D.R. Strong agreed to do contractually and what obligations it assumed by its affirmative conduct. Thus, it was impossible to determine, as a matter of law, what professional obligations D.R. Strong owed to the Donatellis, contractually or otherwise. Because the court could not determine the scope of D.R. Strong’s contractual obligations, it could not determine, as a matter of law, if any of D.R. Strong’s duties arose independent of the contract. Consequently, the court held that the trial court properly denied summary judgment in D.R. Strong’s favor with respect to the Donatellis’ negligence claim.
With respect to the Donatellis’ negligent misrepresentation claim, the court, applying an independent duty doctrine analysis, stated that a plaintiff seeking solely economic damages can pursue a negligent misrepresentation claim so long as the duty not to commit negligent misrepresentation is independent of the contract. The court found that D.R. Strong’s duty to avoid misrepresentations that induced the Donatellis to enter into a contract arose independent of the contract and that the Donatellis did not, in their subsequent contract, assume D.R. Strong’s duty to avoid misrepresentations. Thus, the court held that the Donatellis’ negligent misrepresentation claim was not barred by the independent duty doctrine.
In light of the foregoing, a defendant in a construction-related professional negligence action who seeks to preclude a plaintiff from pursuing tort claims based on the independent duty doctrine (formerly referred to as the economic loss rule) will need to, preliminarily, establish the terms of any contractual agreement between the parties. If the court cannot determine a contract’s terms as a matter of law, a defendant sued in the State of Washington should not be entitled to judgment as a matter of law with respect to a defense based on the independent duty doctrine.
For more information regarding this alert, please contact Ed Jaeger (215.864.6322 / firstname.lastname@example.org) or Bill Doerler (215.864.6383 / email@example.com).
In Rinehart, et. al. v. Morton Buildings, Inc., — P.3d –, 2013 WL 3835833 (Kan. July 26, 2013), the Supreme Court of Kansas addressed the question of whether the economic loss doctrine (ELD) applied to bar a negligent misrepresentation claim by a party who was not in privity with the defendant, Morton Buildings, Inc. (Morton). Although the Court of Appeals of Kansas held that the doctrine did not apply because the plaintiff, Midwest Slitting, LLC (Midwest Slitting), was not in privity with Morton, the Supreme Court declined the invitation to adopt a bright-line rule based on the absence of privity. Rather, the Supreme Court held that the question of whether the ELD will bar a tort-based claim, such as a negligent misrepresentation claim, depends on whether the claim is based on a duty that arises independent of the contract at issue and whether applying the ELD will comport with the historical policy justifications for adopting the ELD. Applying this analysis, the Supreme Court held that the negligent misrepresentation claims at issue were not barred by the ELD.
In Reinhart, Kenneth and Beverly Reinhart (the “Reinharts”) contracted with Morton to purchase a pre-engineered building to serve as both their personal residence and the location for their company, Midwest Slitting. Although Morton knew that Midwest Slitting would be using the building, Midwest Slitting was not a party to the building contract.
After a dispute arose over the building’s quality, the Rineharts and Midwest Slitting filed suit against Morton. Midwest Slitting alleged, among other things, that Morton misrepresented that the building would be completed in a timely manner, accommodate Midwest Slitting’s need to relocate its operations, and meet or exceed all industry standards. The jury found for Midwest Slitting and awarded Midwest Slitting damages.
On appeal, Morton argued that, although it had no contract with Midwest Slitting, the ELD barred Midwest Slitting’s negligent misrepresentation claim. The Court of Appeals of Kansas, establishing a bright-line rule that the ELD does not apply when the parties lack contractual privity, held that the ELD did not apply because Midwest Slitting was not a party to the contract. The Supreme Court of Kansas rejected the use of privity as a bright-line test for determining the boundaries of the ELD.
In its analysis of the question of whether the ELD barred Midwest Slitting’s negligent misrepresentation claims, the Supreme Court discussed the historical underpinnings for the doctrine. As stated by the court, originally, the ELD simply prohibited a commercial buyer of defective goods from suing in negligence or strict liability when the only injury consisted of the damage to the product itself. Although the doctrine originally applied to commercial product liability claims, the doctrine’s scope has been expanded in many of jurisdictions to “preserve distinctions between tort and contract law.”
The ELD was addressed in East River S.S. Corp. v. Transamerica Delaval, 476 U.S. 858 (1986), a case that is often cited by courts in support of their application of the ELD. In East River, the Court, addressing a claim by a commercial buyer of defective goods, applied the ELD and provided three justifications for doing so: 1) the claimed losses were easily insured; 2) contract and warranty law are better suited to commercial controversies because they allow the parties to allocate their respective risks; and 3) imposing tort liability for economic losses suffered by parties not in privity with the manufacturer would sanction indefinite damages beyond the confines of the commercial contract.
While many jurisdictions, under the guise of preserving distinctions between contract and tort law, have extended the boundaries of the ELD beyond commercial product liability cases, the Supreme Court of Kansas held that Kansas does not use the ELD to enforce the boundary between contract and tort law. Rather, Kansas courts determine whether a claim arises in contract or in tort by analyzing the nature and substance of the facts alleged in the pleadings. “A breach of contract claim is the failure to perform a duty arising from a contract, and a tort claim is the violation of a duty imposed by law, independent of the contract.” Under this test, the initial question to be resolved in considering whether the ELD applies in a particular case is whether the defendant owed the plaintiff a duty imposed by law, independent of the contract.
With respect to the negligent misrepresentation claims at issue, the Supreme Court held that the defendant owed the plaintiff a duty that arose by operation of law, independent of any contract between the parties. Although the court found that Morton owed Midwest Slitting a duty that arose by operation of law, the court did not base its finding that the ELD did not apply solely on the presence of an independent duty. Instead, in addition to identifying an independent duty, the court analyzed whether applying the ELD to Midwest Slittings claims would further the policy justifications for the ELD. The court, analyzing the policy justifications established in East River, held that the ELD’s purposes were not furthered by its application to the facts of the case.
Discussing the ELD’s policy justifications, the Supreme Court found that Midwest Slitting’s negligent misrepresentations claims were not governed by the Uniform Commercial Code’s warranty law. The court also found that permitting negligent misrepresentation claims does not subject a defendant to unlimited liability. Rather, the scope of liability, by the claim’s very nature, is limited to situations where the defendant, in the course of the defendant’s business, has supplied information to guide others in business transactions. Moreover, the only people who can pursue such claims are those for whose benefit the defendant supplied the information and those people that the defendant intends to influence or who the defendant knows will be influenced by the transaction.
Based on the analysis in Reinhart, Kansas courts analyzing a defendant’s argument that the plaintiff’s claims are barred by the ELD should focus not on whether there is a contract between the plaintiff and the defendant but, rather, on whether the defendant owed the plaintiff a duty that arose independent of the contract at issue. Once the court finds that the defendant owed the plaintiff a duty that arose independent of the contract, Kansas courts should analyze whether applying the ELD furthers the purposes of the doctrine. This analysis should be based on the three policy justifications established in East River. If the ELD’s purposes are not furthered by the application of the doctrine to the facts of the case, the ELD should not apply.
For more information regarding this alert, please contact Ed Jaeger (215.864.6322 / firstname.lastname@example.org) or Bill Doerler (215.864.6383 / email@example.com).