Tort, not contract: an argument for reevaluating the economic loss rule and classifying building damage as "other property" when it is caused by defective construction materials.

Author:Sieg, J. Brandon
 
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TABLE OF CONTENTS INTRODUCTION I. THE CONSTRUCTION CONTRACT A. The Owner-Architect Agreement B. The Owner-Contractor Agreement C. The Important Role of the Supply Team II. THE ECONOMIC LOSS RULE A. MacPherson v. Buick Motor Co B. Seely v. White Motor Co C. East River Steamship Corp. v. Transamerica Delaval Inc D. Saratoga Fishing Co. v. J.M. Martinac & Co III. THE ECONOMIC LOSS RULE IN CONSTRUCTION MATERIAL DEFECT CASES A. Application of the Economic Loss Rule in Construction Cases B. The Problem with Applying the Economic Loss Rule to Construction Material Defect Cases IV. PROPOSED SOLUTION A. Building Construction Should Be Distinguished from Product Manufacturing B. Saratoga, not East River, Provides the Ideal Framework for Construction Material Defect Claims C. There Is Precedent for Reevaluating the East River Analysis in Construction Cases D. This Proposed Solution Does Not Unfairly Burden the Supply Team CONCLUSION INTRODUCTION

A window and a lawnmower have one thing in common--you can buy both of them at Home Depot. (1) Each is a product that is widely available in the market. Yet, if a defect in either product damages another piece of your property, you will likely have very different options for recovery. Under the economic loss rule (ELR), a defendant window manufacturer, unlike the lawnmower manufacturer, may ask the court to find a contractual relationship linking the defective window with your damaged property to preclude your tort cause of action. (2)

Traditional concepts of products liability suggest that if the lawnmower blade flew off and broke your window, then you may sue the lawnmower manufacturer for this damage to your property. (3) The law will recognize a clear distinction between the lawnmower and your house as separate pieces of property. (4) The damage that the lawnmower caused to your house will likely support a tort cause of action against the lawnmower manufacturer. (5)

This analysis changes if your house were to be damaged by the window itself. Perhaps the seals within the window were defective, allowing water to penetrate into the wall cavity and ultimately causing your exterior wall to rot from within. In this situation, a court will likely consider whether there was any contract linking the window purchase and installation with the overall construction of the surrounding wall before evaluating the merits of your tort claim against the window manufacturer. (6)

For example, you might have spent the summer converting your garage into a new home office. You began by replacing your double-hung windows with some modern casement windows. After weekends of hanging drywall, leveling floors, and mitering trim, the room finally smells like fresh paint and is filled with new furniture.

Your neighbor was so impressed with your work that he hired a contractor to give his garage the same transformation. Amazingly, his renovation meticulously copied each of your construction details, even the make and model of your windows. Unfortunately, that window model was defective; the seals were not designed properly. After a few hard rains you both noticed water stains on your walls and carpet. The defective windows have thus ruined both renovations.

Fortunately for you, each of your construction materials was purchased separately as needed. Because no single contract governed your entire renovation or your expectations of the project, the law will likely recognize the damage caused to your walls by the leaking windows as property damage. (7) Because the windows damaged your other property, which is distinguishable from the windows, you will be permitted to bring a tort action against the window manufacturer. (8)

Your neighbor, on the other hand, having contracted for the entire renovation, will not be so lucky. Under the ELR, the law will look to this contract and interpret the completed renovation as a single product because the construction contract should have protected his expectations in the project. (9) The water damage to his walls will likely be categorized as disappointed expectations in the renovation rather than as damage to a separate, distinguishable piece of property. The ELR, then, will likely preclude your neighbor from suing the window manufacturer in tort for this economic loss. (10) If a warranty from the manufacturer does not cover the damage, then your neighbor's recovery will be limited to claims arising under his contract with the builder. The ELR will therefore force your neighbor to initiate a series of liability and indemnity actions, which will drag the contractor, subcontractor, and all other related parties into litigation before the claim eventually, if ever, reaches the negligent manufacturer. (11)

This Note will make two primary arguments. The first is that the mere presence of a construction contract should not preclude tort recovery against a remote manufacturer. For practical reasons beyond products liability law, construction projects require a complex series of interrelated contracts. (12) This arrangement prevents building owners from negotiating sales contracts directly with construction material manufacturers or suppliers. (13) Although warranty law might effectively shift the cost of damages caused by defective construction materials away from the building owner, (14) the net effect of the ensuing litigation tends to shield negligent manufacturers and suppliers from liability. (15)

The second argument is that, rather than stretching the product-component analysis discussed in East River Steamship Corp. v. Transamerica Delaval Inc., (16) the courts should look to Saratoga Fishing Co. v. J.M. Martinac & Co. (17) for guidance in construction material defect cases. (18) By characterizing the purchase of a product from the marketplace as a transition from manufacturing to the use of a product, Saratoga provides a framework that can appropriately distinguish between the sales contracts and the service contracts of a construction project. (19) This distinction will permit a building owner to pursue a tort claim directly against a construction material manufacturer or supplier without unnecessarily entangling the remaining project team in litigation. This approach focuses on the substance of construction contracts and the service that contractors provide rather than a common, but misguided, notion that contractors sell a discrete product, which they unilaterally created. While permitting tort claims against construction material manufacturers and suppliers, the Saratoga framework preserves the ELR as it pertains to risks that construction contracts can properly manage--such as defective construction or design. (20)

  1. THE CONSTRUCTION CONTRACT

    A brief introduction to construction contracts is necessary to show why they do not effectively negotiate the risk of product defects. Building construction often relies on a plethora of interrelated contracts, subcontracts, and sub-subcontracts, especially in the context of commercial construction projects. (21) Despite this multitude of contracts, the building owner (Owner) rarely negotiates directly with more than a few of the numerous parties required to complete the construction project (Project Team). (22)

    The Owner typically negotiates and contracts with only two distinct parties (23): (1) the architect (Architect), (24) who is responsible for designing the project, and (2) the prime contractor (Contractor), who is responsible for building the proposed design according to the Architect's drawings and specifications. Each of these parties subsequently delegates responsibility for design and construction through a series of subcontracts. It is therefore very unlikely that the Owner will ever have the opportunity, or knowledge required, to negotiate the risk of product failure directly with the construction material manufacturer, supplier, or product representative (collectively referred to as the "Supply Team") because these parties are so far removed from the Owner. (25)

    A. The Owner-Architect Agreement

    The construction process begins when the Owner contracts with an Architect to design the project. (26) The Architect may then subcontract with additional consultants such as engineers and interior designers for their specific expertise. (27) Collectively, these parties will form the design team (A/E), (28) with the Architect remaining directly liable to the Owner for the work of his consultants. (29)

    The A/E's ultimate purpose is to prepare the drawings and specifications to guide the Contractor's completion of the project. (30) It is important to distinguish the A/E's responsibility to provide plans and specifications from the Contractor's responsibility to direct "means and methods" of the project. (31) Although the A/E provides the cumulative design of the project, means and methods encompass the Contractor's process of physically constructing the building. (32) There is, in sum, a clear distribution of authority for different roles in a construction project.

    B. The Owner-Contractor Agreement

    The Owner-Contractor agreement governs the construction of the project. (33) The Contractor is responsible for a wide variety of tasks related to the daily operations of the project. Among these is a responsibility to purchase the construction materials and to warrant construction materials against defects. (34) This guarantee is typically limited to one year and may require the Contractor to correct any defects rather than pay liquidated damages. (35) Although this warranty is valuable to the Owner, especially in light of the ELR, the Contractor does not have the same capabilities to test for defects as the individual product manufacturers. (36)

    Like the Architect, the Contractor requires help from many other parties as subcontractors. (37) The Contractor and all of the parties with whom he subcontracts are generally referred to as the "Construction Team."

    C. The Important Role of the Supply Team

    The A/E cannot...

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