Courts struggle with the "economic loss rule"

Recent decisions indicate a reversal of the trend to basing
decisions solely on economic factors

November 01, 2000 |

The trend for courts to reject the "economic loss rule" and allow lawsuits against design professionals by parties who have no contractual relationship with them has been a significant aspect of liability cases. The economic loss rule holds that actions may not be brought solely for economic losses. But some recent decisions have been based on the older rule that a third party may not maintain an action against an architect or engineer when the only loss was economic, as long as physical injury or property damage is not involved.

In a recent case decided on this murky issue, a Missouri court of appeals allowed a suit against an engineer who performed strength tests of a foundation for a concrete supplier. The plaintiff alleged that the engineer's representations of the tests were inaccurate and therefore caused damage to the owner.

The engineer claimed that it owed no duty to the owner because there was no contractual relationship between them and the claims were only for economic loss. The appeals court, however, held that "privity is not an element of the tort of negligent misrepresentation." Rather, the court stated, the plaintiffs' actions were guided by the information provided by the engineer.

Significantly, the same court had ruled in 1993 that an A/E firm was not subject to a tort claim because of the absence of a contractual relationship, even though in that case there was a close connection between the parties. In the recent case, the court held that the plaintiffs had a recognized property interest and that the loss resulting from faulty testing was a foreseeable event. [(Miller v. Big River Concrete, 14 S.W. 3d 129 (Mo. App. 2000)].

But in Illinois, which has been a leader in strict application of the economic loss doctrine to design professionals, an appeals court recently declined to follow the negligent misrepresentation exception to the economic loss rule. It held that the furnishing of information by the professional firm was "incidental" to the finished "product"-the designed and constructed building.

Extending its earlier controversial ruling that architects and engineers provide a "product," even though in the form of plans and specifications, the Illinois court said the negligent misrepresentation exception did not apply because "the focus of an engineer's or architect's work is usually tangible (e.g., a building) and the designer is not in the business of providing information. Any information provided is merely incidental to the finished product. Thus, the negligent misrepresentation exception. . . does not generally apply to engineers and architects," the court said. [(Tolan & Sons, Inc. v. KLLM Architects, Inc., 719 N.E. 2d 288 (ILL. App. 1999)].

Tort or contract remedy?

A court of appeals in the state of Washington applied a two-level test to distinguish between tort remedies and contract remedies. A geo-technical firm retained by a developer to analyze soil suitability was sued when buildings began to sink, resulting in extensive damage. The building owners sued both the developer and the engineering firm, alleging a negligent soil analysis. The engineering firm appealed, claiming that the economic loss doctrine barred the suit for lack of a contract between the property owners and the engineering firm.

The court noted that previous decisions had established that tort law has traditionally redressed injuries imposed by law, rather than contract. Contract law provides rules when an individual bargains for a product of particular quality for a particular use.

The court ruled in favor of the design firm, commenting that the damage was not caused by a defective product but by an allegedly defective service. Elaborating on its decision, the court noted that an overlapping of boundaries between contract and tort principles would decrease the predictability of risk allocation.

Milton F. Lunch is former general counsel of the National Society of Professional Engineers, and presently is a consultant on architect/engineer legal matters. No statement in this article should be acted upon until your attorney assures you that it applies to your situation.

COAA documents opposed

The Associated General Contractors of America has joined a chorus of opposition to contract documents published earlier this year by the Construction Owners Association of America (COAA), a relatively new organization representing mainly public agencies such as hospitals, universities and school districts.

Design professional groups had previously criticized the COAA documents as one-sided and an attempt to arbitrarily impose absolute duties and responsibilities on design professionals. They said the documents do not acknowledge that design is not an exact science-as court rulings over the years have held. (BD & CJuly 2000).

AGC also objected to a "take-it-or-leave-it" adversarial tone of COAA documents governing construction, and said they turn equitable risk allocation on its head by shifting unacceptable levels of risk to the contractor.

AGC Counsel Mark McCallum notes that the COAA owner-contractor document places most risks on the contractor "regardless of whether the placement of a particular risk contravenes established industry customs and practices or constitutes a risk that the contractor cannot foresee, control or manage."

McCallum cites language which makes the contractor the guarantor of the design, as well as a requirement that the contractor must comply with "all" laws, codes and regulations.

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