The Economic Loss Rule in Construction Law

• Pages: 615-666

The E conom ic Lo ss Ru le in  Cons truc tion  Law 615

23.0  in TRod ucT ion

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

brought in contract and those brought in tort. Elements of proof were different,

as were recoverable damages. Proof of a tort was generally more burdensome—

requiring proof of a duty of care, foreseeability, “but for” and proximate causa-

tion, rather than simply a contract and a breach. At common law, contracting

parties were free to assign various risks between them, and such assignments

were generally upheld. If one commercial party was damaged 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 con-

tract and tort law can be as blurred as the colored glass in a kaleidoscope.

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 3

The Economic Loss Rule

in Construction Law

A. HOLT GW YN

C H A P T E R

615

616 CO N S T RU C T I O N L A W

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-

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

are often complex, requiring coordination among numerous participants who

have different expertise. Specialization in the furnishing of construction goods

and services permeates the construction industry. We still build with bricks

and mortar, but we rely upon sophisticated components installed by special-

ists using delivery systems with ever more complex 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, pro-

vide a more desirable appearance, and perform better than last year’s mod-

els. 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

performance criteria of components are materially altered, the performance of

major building systems may be compromised. The redundancies of conserva-

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

second ddle to the latest bells and whistles of convenience.

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

lenged the architect’s role. Architects formerly were the arbiters of component

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

system design, has devolved to component manufacturers. No longer 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 noth-

ing about everything.”3

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.

3. MARIO SALVADORE, WHY BUILDINGS STAND UP: THE STRENGTH OF ARCHITECTURE (1980). No longer

is the architect capable of the expertise required by the court in Hubert v. Aiken, 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 . . .”).

The E conom ic Lo ss Ru le in  Cons truc tion  Law 617

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 morphed the contractual

process. Virtually all projects have dozens of contractual arrangements. Spe-

cialized 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 vehicles. Owners can choose

among construction managers, multi-prime contractors, design-builders, joint

ventures, and so on—the ability to customize the construction process grows

every year.6 But there is one industry constant: there are more and more enti-

ties providing specialized goods and services. Subcontractors, suppliers, and

subconsultants abound, in ever-deepening Dante-esque circles.

The monumental complexity of a construction project has strained the law

of contracts. When something goes wrong on a construction site, or when the

completed edice doesn’t deliver, there are usually a number of entities with

a hand in the cause. Proper installation is the rst place to check, but it is

often not the entire story. Products that perform well in one setting may, for

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, LEGAL ASPECTS OF ARCHITECTURE, ENGINEERING AND THE CONSTRUCTION PROCESS

§ 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).

6. The American Institute of Architects’ Standard Form of Agreement Between Owner and

Architect, AIA Document B101–2007 (2007) [hereinafter AIA Document B101–2007], provides

owners a menu of architectural services from which to choose.