A construction contractor under contract to a city housing authority was not barred by the economic loss doctrine from pursuing a negligence claim against the architect that designed the project under separate contract with the owner. This is because under New Jersey law, the court concluded that the doctrine only applies if there is a contract between parties, and it is intended to prevent a party to a contract from using tort law to change the bargain they agreed to by contract. In SRC Construction v. Atlantic City Housing Authority, 2013 WL 1309450 (D. N.J. 2013), the United States District Court denied the architect’s motion for summary judgment because it found the economic loss doctrine would have only been applicable if the contractor had a contract with the architect.
Among the negligence claims by the contractor against the architect were the following: (1) failing to provide building permits; (2) submitting drawings to the Building Department that were deemed non-code compliant; (3) failing to respond in a timely manner to RFI’s; and (4) providing defective verbal approval of change orders that were later rejected by the owner. The contractor alleges that these matters caused delays that caused it to “incur additional costs.”
Economic Loss Doctrine
In reviewing whether New Jersey courts would apply the economic loss doctrine in this matter, the court noted that case precedent in the New Jersey courts that has applied the economic loss doctrine did so when the plaintiff and defendant were in a contractual relationship. Previous court decisions, “emphasized that the economic loss doctrine operates to bar tort claims where a plaintiff ‘simply [seeks] to enhance the benefit of the bargain she contracted for.’”
The court rejected the architect’s argument that even if privity of contract is generally required in order to enforce the economic loss doctrine in New Jersey, it should nevertheless be applied in this case because the contractor had a contract with the project owner and was essentially attempting to use a tort claim against the architect to improve the benefit of its contract bargain with the owner. A number of New Jersey court decisions have, in fact, held that the economic loss doctrine barred a plaintiff’s negligence claim even in the absence of a direct contractual relationship between the parties. The key to those decisions, however, was that the plaintiffs could have invoked contractual remedies in their contract with another defendant in the case. But the court cited other decisions that do not seem to hinge on whether there was a contract involved, but rather consider whether the tort (negligence) claim is really a contract claim in disguise. As put by the court, “the reason for foreclosing a tort claim is not simply because a contract claim exists, but rather, that the tort claim is not really a tort claim at all, it is a contract claim in tort claim clothing.” But here, where there was no contract there could be no contract claim, “and therefore any tort claim asserted cannot possibly be a contract claim in tort clothing.” For these reasons, the court concluded that the economic loss doctrine would not extend to bar the contractor’s negligence claim.
Comment: The reasoning of the courts applying New Jersey law in a manner to apply the economic loss doctrine to only those situations where there is also a contract claim is unfortunate. Other state jurisdictions apply the doctrine regardless of whether there is a contract involved. Of course, there are also states that will not apply the economic loss doctrine at all. This is one area where it is important to know the nuances of the applicable state law.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 15, No. 9 (Sept 2013).
Copyright 2013, ConstructionRisk, LLC