Applying the Economic Loss Doctrine to Construction Projects: What’s the “Product”? Applying the Economic Loss Doctrine to Construction Projects: What’s the “Product”?

Applying the Economic Loss Doctrine to Construction Projects: What’s the “Product”?

The economic loss doctrine, first used in the field of products liability, bars the use of negligence or strict liability theories for recovery of economic losses arising out of commercial transactions. The general rule is where a negligence claim is based upon the failure of a product to perform as expected and the plaintiff suffers only economic damages, no recovery may be had in negligence; instead, the buyer's remedy lies in contract. Prairie Production, Inc. v. Agchem Division–Pennwalt Corp. 514 N.E.2d 1299, 1304 (Ind.Ct.App.1987). However, an exception exists; a defendant may be liable under a tort theory for a plaintiff's loss if a defective product or service causes personal injury or damage to property other than the product or service itself. Miller v. U.S. Steel Corp., 902 F.2d 573, 574 (7th Cir.1990).
 
In construction cases, plaintiffs often attempt to circumvent contracts by asserting tort claims against both the party with whom they contracted and other project participants with whom they do not have any sort of contractual relationship. Whether plaintiffs may sustain such claims frequently hinges on how broadly the product or service is defined, which bears on whether there was "damage to property other than the product or service itself."
 
The Economic Loss Doctrine in Construction Cases
 
The Indiana Supreme Court has rendered two opinions that illustrate the applicability of the economic loss doctrine to construction disputes. In Gunkel v. Renovations, Inc. 822 N.E.2d 150 (Ind. 2005), the Supreme Court held that separate contracts for the construction of a home and a stone façade clearly identified two separate products. Under Indiana law, the economic loss doctrine would preclude liability in tort of the façade contractor for damages to the façade, but would not preclude liability for damages that the defective installation caused to other property—namely, drywall in the house damaged by the water infiltration caused by the defective installation of the facade.
 
In Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010), the Supreme Court applied the economic loss doctrine to bar a tort claim asserted by an owner against a structural engineering firm who provided services related to the design of a new facility. At the outset, the Court rejected the argument that the economic loss doctrine should not be applied to design professionals like architects and structural engineers. Moving on, the Court held that the product or service purchased by the Library was the renovation and expansion of the facility. The Court found that the product or service purchased from the defendants was an integral part of the entire library construction project—not independent from it—and that any damages alleged to have resulted from the defendant’s negligence was to the “product” the Library purchased not to “other property.” In reaching its decision, the Court explained the rationale for applying the economic loss doctrine in the context of a construction project, citing a law review article, which states:
 
Perhaps more than any other industry, the construction industry is vitally enmeshed in our economy and dependent on settled expectations. The parties in-volved in a construction project rely on intricate, highly sophisticated contracts to define the relative rights and responsibilities of the many persons whose efforts are required–owner, architect, engineer, general contractor, subcontractor, mate-rials supplier–and to allocate among them the risk of problems, delays, extra costs, unforeseen site conditions, and defects. Imposition of tort duties that cut across those contractual lines disrupts and frustrates the parties’ contractual allo-cation of risk and permits the circumvention of a carefully negotiated contractual balance among owner, builder, and design professional.
 
Id. citing Sidney R. Barrett, Jr., Recovery of Economic Loss in Tort for Construction Defects: A Critical Analysis, 40 S.C. L. Rev. 891, 941 (1989)
 
New Case Illustrates Scope of Economic Loss Doctrine
 
A recent decision from the Northern District of Indiana highlights how courts define the product or services contracted for in a construction project for purposes of applying the economic loss doctrine. In City of Whiting v. Whitney, Bailey, Cox, & Magnani, LLC, No. 2:14-CV-440 (N.D. Ind. Mar. 20, 2018), the city of Whiting, Indiana (the “City”) undertook a lakefront development project along Lake Michigan. It hired an engineering firm to be the consultant for the project. The consultant subcontracted with the defendant for marine engineering services. The project agreement broke the project into several uniquely numbered projects. The defendant designed a rock revetment on the lakefront to protect the shoreline as part of Project No. 1. The City alleged that the revetment failed on at least three occasions and that these failures damaged a walking path, landscaping, existing trees, a gazebo, and an existing building.
 
The engineering firm assigned their subcontract with the defendant to the City, and the City subsequently filed a six-count complaint, alleging, in part, that the defendant’s negligent design of the revetment caused the damage to the property. The defendant moved for summary judgment on all claims, specifically arguing that the economic loss doctrine precluded liability for negligence.
 
In analyzing whether or not the economic loss doctrine would apply in this instance, the City and the defendant offered conflicting interpretations of what constituted the contracted product and what was considered other property in the context of the lakefront development project. The City insisted that the development was a collection of several subprojects, each contracted for independently by the consultant. Therefore, the City maintained that the rock revetment was the product contracted for and that damage to any other part of the lakefront development project should not be subject to the economic loss doctrine. On the other hand, the defendant contended that the entire development project was the product contracted for and that liability for damage to any part of the lakefront should therefore be precluded by the economic loss doctrine.
 
Relying on the Indiana Supreme Court’s case law discussed above, the district court articulated that the economic loss rule applies to the product or service purchased by the owner, rather than what is being furnished by the contractor. The Court agreed with the defendant’s interpretation of what was contracted for, and thus, concluded that the City made a single purchase of an entire development project, not a series of separate purchases for each component of the project. Accordingly, a defective component of the project damaging a separate component does not constitute damage to “other property.” Specifically, the revetment, purchased pursuant to the City’s contract with the consultant, was part of the product for which it contracted. As such, the defendant was entitled to summary judgment to the extent that damages were caused to any other property acquired as part of the City’s development project. The district court also held that the City’s claimed damages to existing property, namely the trees and existing building, were not barred by the economic loss doctrine, because they predated the project; therefore, this property was not considered to be a part of the “product contracted for,” and summary judgment was not appropriate.
 
Conclusion
 
The economic loss doctrine is a significant barrier to pursuing non-contractual claims against fellow project participants. Courts are inclined to define the work performed and “product” delivered by a project participant broadly in order to bring non-contractual claims within the scope of the doctrine. When assessing its rights and risks at the outset of a project, a project participant should not count on being able to pursue non-contractual claims and should instead focus on making sure the terms of its contract provide adequate protections.
 
Nate Uhl is an attorney with Ice Miller LLP. Ice Miller's Construction Practice is ranked as a National Tier 1 Practice in U.S. News & World Reports' Best Law Firms. Uhl practices construction law with a focus on assisting clients in preparing and negotiating construction and design contracts as well as handling construction disputes. Uhl can be reached at nate.uhl@icemiller.com or (317) 236-2383. Special thanks to Summer Associate Megan Hedrick for her assistance with this article.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
 
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