Masonry Magazine July 2003 Page. 40
Legal Advice
Understanding the
Economic Loss Rule
Timothy R. Hughes, Esq.
Hughes & Associates, P.L.L.C.
A recent opinion issued by Supreme Court of Virginia emphasizes the need for construction firms to understand the economic loss rule. The application of this doctrine depends on your particular state. The doctrine could have a significant impact on your liability exposure. Additionally, the doctrine could affect your ability to pass liability downstream to suppliers and manufacturers.
Contracts and Torts
First, we need to discuss the differences between the law of "torts" and the law of "contracts" Contracts deal with bargained expectations of the parties. Where one party fails to perform its obligations under the contract, the other party suffers disappointed economic expectations under the contract. Many states find that these types of damages are "economic losses" whose remedy is in contract, not tort.
In contrast, the law of torts deals with legally imposed duties. For example, we all have a duty imposed by law to drive reasonably. Where we fail to exercise reasonable and ordinary care driving and it leads to an accident, we may be liable for negligence. The claim for personal injuries arising out of the accident would sound in tort rather than contract.
It must be noted that the distinction between tort and contract has been deeply eroded in some states. Other states, such as Virginia, tend to strictly adhere to this distinction. The result is that some states present excellent possibilities for defenses to claims based on the specific facts of a case and that state's applicable law.
The Economic Loss Rule
The economic loss rule is very simple in concept. The economic loss rule provides that where a party sues for purely economic losses, the party that is suing needs to have a contract with the defendant. Some states, such as Virginia, strictly adhere to this rule. In Maryland, the doctrine generally holds true, but the Maryland courts do permit a party without a contract to bring suit for economic losses where the alleged breach presents an unreasonable risk of serious physical injury or death. Other states apply the concept with varying degrees of severity.
The complexity comes in the application. In states where the economic loss rule holds sway, plaintiffs continually attack application of the rule. For example, many states hold that professionals who commit malpractice may be sued in both tort and contract. If the suit is in tort against a professional, is a contract required? Some states require a contract. Other states permit a suit without a contract where the plaintiff could be reasonably expected by the professional to rely upon the professional's information. The ability to sue professionals without a contract has an obvious potential impact on construction projects where information is often provided by architects, civil engineers, geotechnical engineers, land surveyors and other licensed professionals.
Further complexity comes into the picture when one considers "property damage" claims. Claims for property damage are generally viewed as claims in tort rather than contract. In construction projects, however, people are usually fighting about the work of one subcontractor damaging the work of another. Virginia law would generally tend to view such claims as economic loss claims rather than property damages, but these types of issues can become very complicated depending on the facts of a specific case. The question of where economic loss begins and ends depends on the law of your particular state.
Case in Point -
EIFS, Pulte v. Parex
In a recent case, I represented a manufacturer of exterior insulation and finishing systems, also known as "EIFS" or synthetic stucco. Pulte Homes Corporation v. Parex, Inc. 256 Va.518, 579 S.E.2d 188