CONSTRUCTION LAWLETTERS

FOR INDUSTRY PROFESSIONALS, MANAGERS, TRADES & SUPPLIERS

J. NORMAN STARK, ATTORNEY-AT-LAW

JURIS DOCTOR, B. ARCHITECTURE, B.F.A

Vol. 2001-7 sp  July, 2001

CONTRACT PRIVITY AFFECTED
BY ECONOMIC LOSS DOCTRINE

The economic loss doctrine, which originated in lawsuits arising from product defects generally, has been historically applied to the construction industry without modification.  The doctrine bars lawsuits for purely monetary loss, where either a contract does not govern the loss, or there is no contract. 

In construction claims, the doctrine is applied to protect architects, engineers and designers from suit where their designs are negligent in the timing of their completion or some other aspect, but do not cause personal injury or property damage, only economic loss.  Lacking either a contractual provision that addresses this specific issue, or a contract including provisions therefore, a contractor cannot bring suit against the architect for such “economic losses.”

The economic loss doctrine was initially supported by the United States Supreme Court as a preservation of the power of individuals to contract, and to limit risk and liability.  East River S.S. Corp. v. TransAmerica Deleval, Inc., 476 U.S. 858 (1986).  This doctrine, however, is being slowly whittled away by courts all around the country.
 
Cases in Wisconsin, New York and Florida have produced results restricting or entirely prohibiting the use of the economic loss doctrine to bar suits against design professionals.  Hydro Investors Inc. v. Trafalgar Power Inc., 227 F.3d 8 (2000); Moransais v. Heathman, 702 So. 2d 601 (1997).

In Ohio, a recent case has lessened the bite of  the economic loss doctrine when used to bar negligence claims.  The Ohio Court of Appeals held, in a very recent case, that a party could recover for purely economic losses caused by negligence, even though the two parties did not have a contractual relationship.  East Ohio Gas Co. v. Kenmore Construction Co. Inc., 2001 Ohio App. LEXIS 1444, C.A. Nos. 19567, 19790 (March 28, 2001).  East Ohio Gas sued Kenmore alleging that the excavation work by Kenmore damaged underground utility lines.  Kenmore counter-claimed for purely economic damages, contending that East Ohio Gas failed to properly designate the location of the lines.  The trial court ruled in favor of East Ohio Gas, stating that Kenmore’s negligence claim was barred by the economic loss doctrine, since East Ohio Gas had contracted  with a different party to designate the lines, not Kenmore.
 
However, the appellate court overruled that decision, holding that Kenmore may satisfy the privity of contract requirement, necessary to recover economic damages, if a substitute exists.  The court did not have to decide if a substitute did, in fact, exist, but remanded the case to the trial court for further proceedings.  In so doing, it opened the legal premise to permit subsequent courts to fashion substitute relationships, essentially nullifying the former protections available under the economic loss doctrine. 

It is foreseeable that A-E's, as design professionals, may now be faced with greater burdens than they may have bargained for.  And, the result may be a dramatic increase in suits, awards, professional malpractice insurance premiums and a corresponding rise in the cost of delivering professional services by A-E's.
 
Contractors may now assert the right, in Ohio, to recover construction losses arising from errors in a design professional’s construction documents, even though the contractor and the Architect or Engineer may have had no contractual relationship.

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Author:  J. NORMAN STARK is an Attorney-at-Law, a Registered Architect, (AIA, NCARB) Registered Landscape Architect, Interior Designer, Planner and Senior Appraiser (ASA), admitted to practice law before the Bar of Ohio, the US District Courts, Ohio and Illinois (Central Dist.), the US Court of Appeals, and the United States Supreme Court. He has had experience in business, Construction, Real Property, Litigation and Construction-Legal Project and Crisis Management.

 


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