The Economic Loss Rule in Construction Law

• Author: Carol J. Patterson - Ross J. Altman - Stephen A. Hess - Allen Overcash
• Pages: 653-716

CHAPTER

653

21.01 INTRODUCTION

This chapter addresses the Economic Loss Rule, a common law doctrine that

limits the legal theories on which a plaintiff may rely and thus affects the

type of damages a plaintiff can recover in tort. More precisely, the Economic

Loss Rule is the name given to several related legal limitations on the claims

available and the associated relief that parties in commercial and contractual

relationships may recover for tort claims such as negligence and strict liability.

This chapter focuses on the way different jurisdictions have both formulated

and applied the rule in the context of construction disputes. To begin to under-

stand the rule, though, one must rst understand its origins and purpose based

on the differences between contract law and tort law.

At common law, there were bright-line distinctions between civil actions

brought in contract and those brought in tort. Elements of proof were differ-

ent, as were recoverable damages. Proof of a tort was generally more bur-

densome—requiring proof of a duty of care, foreseeability, “but for” and

proximate causation, rather than simply a contract and a breach. At common

The Economic Loss Rule

in Construction Law

A. HOLT GWYN AND LUKE J. FARLEY, SR.

21

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CONSTRUCTION LAW

654

law, contracting parties were free to assign various risks between them, and

such assignments were generally upheld. If one commercial party was dam-

aged by a contractual partner’s act, the remedy was ex contractu. There was

no tort recovery. This separateness survives today in article 2 of the Uniform

Commercial Code.1 But in many other areas of commerce, the distinctions and

barriers between contract and tort law can be as blurred as the colored glass in

a kaleidoscope.

A construction project is a monumental mix of goods and services com-

bined to create a new and functioning edice. Whether a building, a water-re-

taining structure, or a system to generate or distribute power, today’s projects

are complex, requiring coordination among numerous participants who have

different expertise. Specialization in the furnishing of construction goods and

services permeates the construction industry. Some buildings are still built of

bricks and mortar, but increasingly structures consist of sophisticated compo-

nents installed by specialists using delivery systems with ever more complex

relationships and risk allocations. Amenities found in today’s starter houses

make them complex structures in comparison to the multistory ofce buildings

of the 1930s.

As construction projects become more complex, they cost more. Owners,

like all consumers, don’t want to pay more.2 This puts pressure on construc-

tion design, especially the design of components. Cost concerns now lter into

the design of every construction material. And, because speed of installation

is a function of overall cost, price also affects components’ means and meth-

ods of application. Designers of construction components continually look for

ways to make products that cost less, are quicker and easier to install, provide

a more desirable appearance, and perform better than last year’s models. A

quantiable improvement in any of these characteristics will increase market

share. But as construction component design is revisited and revised in the

name of cost, performance characteristics are often affected. When the perfor-

mance criteria of components are materially altered, the performance of major

building systems may be compromised. The redundancies of conservative

design that were de rigueur for buildings in decades past too often play second

ddle to the latest bells and whistles of convenience.

1. For buyers and sellers of goods, Article 2 of the Uniform Commercial Code codies the

rules for contract formation, acceptance, rejection, cover, disclaimers, damages, and consequen-

tial and incidental damage waivers.

2. Many off-the-shelf consumer goods decrease in price as availability increases. Consumers

of many goods—especially newer technology goods—have become accustomed to getting more

for the same price as last year, or even more for a lesser price.

pat54645_03_b03_497-844.indd 654 6/28/19 1:53 PM

The Economic Loss Rule in Construction Law 655

Then, too, the increasing complexity of buildings and components has

challenged the architect’s role. Architects formerly were the arbiters of com-

ponent design and selection. This has changed. Product design, and more

recently system design, has devolved to component manufacturers. No lon-

ger is the architect the project’s most knowledgeable leader. As observed by

a leading Columbia University professor, by the end of the 1970s, architects

came to know less and less about more and more until some were said “to

know nothing about everything.”3

The construction design landscape is evolving, and the designers in the

manufacturing sector are on the leading edge. Selection and coordination of

building components, long the province of design professionals, are in today’s

world being usurped by contractors and component manufacturers. Through

“value engineering” or outright design delegation,4 architects defer to com-

ponent designers. Indeed, contractor-led design-build arrangements often

relegate the architect to backroom subcontractor status. The ability to select

the component is accompanied by the responsibility to coordinate the cho-

sen products with the building’s structure and complementing systems. In this

area, design professionals hand off much of their former role, if not all of their

responsibility.5

Specialization in the construction industry has also transformed the contract

process and contractual relationships. Virtually all projects involve dozens of

contracts. Specialized equipment must be furnished and installed by ever-more

specialized subcontractors and suppliers. The traditional Design-Bid-Build

project delivery method is but one of many available contractual schemes.

3.

MariO salVadOre

, W

hy

B

uildinGs

S

tand uP: the strenGth Of architecture (

1980). No longer

is the architect capable of the expertise required by the court in Hubert v. Aitken, 2 N.Y.S. 711

(C.P. 1888), aff’d, 25 N.E. 954 (N.Y. 1890) (“he is an expert in carpentry, cements, mortar, in the

strength of materials . . . new conveniences . . .”).

4. The American Institute of Architects’ standard general conditions of the contract between

owner and contractor now explicitly allow the delegation of the architect’s design responsibility

to the contractor and its subcontractors. See American Institute of Architects, AIA A201–2007,

General Conditions of the Contract for Construction, §3.12.10 (2007).

5. Design professionals “of record” retain liability, especially to their clients, for adequate

and code-compliant design, whether the design professional performs the work or delegates it

to others

. Justin sweet

, L

eGal

A

sPects Of

A

rchitecture

, E

nGineerinG and the

C

OnstructiOn

P

rOcess

§15.10(B) (4th ed. 1989). See also Johnson v. Salem Title Co., 425 P.2d 519 (Or. 1967) (struc-

tural engineering requirements were non-delegable, even to a professional engineer). The result

is different if the design professional never had the responsibility as part of its scope of services.

See Aleutian Constructors v. United States, 24 Cl. Ct. 372 (1991) (specications required contrac-

tor to design and build roof); Mudgett v. Marshall, 574 A.2d 867 (Me. 1990) (error of structural

engineer hired by design-build contractor not imputed to owner’s design professional not hired

to design building).

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