Suit was filed by an entity with an ownership interest in the project against two engineering firms that were subcontractors to one of the engineering firms that the general contractor (GC) contracted with to provide design services for a thermal energy system (an alternative air conditioning unit designed to make ice). Summary judgment was granted for the sub-subcontractor/engineers, and affirmed on appeal, holding that the economic loss doctrine was a complete bar to an action against the engineers for economic losses regardless of whether or not the plaintiff was in privity of contract with the designer and regardless of whether there were allegations that the designer failed to meet the standard of care in performing it services. The court found in favor of sanctity of the contract – holding that all entities on the project had the ability to negotiate contracts and the court would honor those contracts as written. The main engineering firm had a limitation of liability (LoL) clause in its subcontract with the GC limiting its liability to the amount of its fee. In this case, however, where the suit against the main engineer was not by the GC, with whom it had a contract, but was instead by a project related owner against subcontractors of the engineer with whom they had no privity of contract. The LoL clause therefore did not come into play. Affirming the application of the economic loss doctrine to bar such a suit, the court also stated that sub-engineers had no liability whatsoever because they owed no duty to anyone independent of their subcontracts. Even if the court was to find that the sub-engineers deviated from the applicable standard of care, it held that this would not constitute an exception to the economic loss doctrine. Leis Family Limited Partnership v. Silverword Engineering, 273 P.3d 1218 (Hawaii 2012).
This case pertains to the design, construction and installation of a thermal energy system in a building. The owner contracted with a general contractor (the “GC”) to provide construction services for the system. The GC subcontracted with the Dorvin Leis Company (the “Subcontractor”) to provide mechanical engineering and construction services related to the system and that firm in turn subcontracted with Silversword Engineering to design the system. The contract between the Subcontractor and Silversword Engineers contained a limitation of liability (LoL) clause providing, “To the maximum extent permitted by law, liability for [Subcontractor’s] damages will not exceed the compensation received under this Agreement.”
Silversword in turn further subcontracted down to two separate additional design firms (hereinafter “Sub-Engineers”) to provide design assistance and electrical engineering assistance respectively. An entity with an ownership interest in the project or system brought suit not against the GC or even the GC’s engineer, but rather against the sub-engineers, alleging professional negligence. The sub-engineers motion for summary judgment was granted and affirmed for numerous reasons as explained herein.
In beginning its analysis of the matter, the appellate court explained the premise of the economic loss doctrine which “bars recovery for purely economic loss,” stating that,
“It ‘marks the fundamental boundary between the law of contracts, which is designed to enforce expectations created by agreement, and the law of torts, which is designed to protect citizens and their property by imposing a duty of reasonable care on others’ [and] was designed to prevent disproportionate liability and allow parties to allocate risk by contract.’ ”
The appellant’s argument was that the economic loss doctrine does not apply to negligence claims against design firms that are not in privity of contract with the claimant. In the event, however, that the court was to determine that the doctrine applied, the plaintiff asserted an alternative argument that the doctrine should not apply to the facts of this case due to an exception to the economic loss doctrine where there has been a deviation from industry standards. Previous case law in the state had applied the doctrine in instances where there was privity of contract between the plaintiff and defendant. Now the court takes it one step further in specifically and affirmatively holding that the doctrine also applies where there is no contract between the parties to the suit.
Rejecting the appellant’s argument that because the claims against the engineers were based on allegations of negligence the economic loss doctrine would not be applied, the court concluded there was no independent duty of care owed. The court explained its position by quoting from a previous case precedent as follows:
“Under the economic loss, ‘a manufacturer in a commercial relationship has no duty under either a negligence or strict products liability theory to prevent a product from injuring itself’ [citations omitted]. Even in the absence of a privity of contract between the design professional and a project owner, the law does not impose a duty in tort if it would ‘disrupt the contractual relationships between and among the various parties.’” [citations omitted].
Because the appellant had the opportunity to negotiate contracts to its satisfaction with the GC and any of its subcontractors, “Its failure to do so, and irrespective of Appellant’s reasons for not bringing suit against those with whom it was in privity of contract, does not warrant creation of a duty in tort (negligence) on the part of the Designers.” Further, said the court,
“Allowing Appellants to recovery purely economic loss under a tort theory would allow a commercial project owner to recover product-related damages under a tort theory as a consequence of the owner’s deliberate choice not to contract with the third party (the design professional), but instead require the second party (the general contractor) to do so. There is no reason that we can perceive to make tort liability against design professionals contingent on the project owner’s election to hire a general contractor and thus ‘blur the distinction between contract and tort law.’”
In rejecting the appellant’s further argument that a “deviation-from-industry-standards” exception must be applied to the economic loss doctrine in this case, the court cited the important decision of the Nevada Supreme Court in the case of Terracon v. Mandalay Resort Group, that applied the economic loss doctrine to protect the engineer against large claims. The court in Terracon reasoned that the purpose of the doctrine was “to shield defendants from unlimited liability for all the economic consequences of a negligent act, particularly in a commercial or professional setting….” The Terracon court, as quoted by the court in this current case, stated:
“In the context of engineers and architects, the bar created by the economic loss doctrine applies to commercial activity for which contract law is better suited to resolve professional negligence claims. This legal line between contract and tort liability promotes useful commercial economic activity, while still allowing tort recovery when personal injury or property damage are present….”
“We perceive no significant policy distinction that would drive us to permit tort-based claims to recover economic losses against design professionals, such as architects and engineers, who provided their professional services in the commercial property development and improvement process, when we have concluded that such claims are barred under the economic loss doctrine if brought in physically constructing improvements to real property. The work provided by construction contractors or the services rendered by design professionals in the commercial building process are both integral to the building process and impact the quality of building projects. Therefore, when the quality is deemed defective, resulting in economic loss, remedies are properly addressed through contract law.”
In concluding that the Terracon holding is consistent with Hawaii law, the court here stated that,
“The application of the economic loss doctrine encourages parties to negotiate and state clearly the limits of their liability in a contract, and ‘preserves the right of design professionals to limit their exposure to liability through contract.’”
Perhaps most significantly, the court explained that no exceptions to the economic loss doctrine would be applied here. In its concluding paragraphs, the court’s decision states:
“[A] deviation from industry standards exception to the economic loss doctrine generally does not apply to design professionals. If work falling below industry standards was excepted from the economic loss doctrine, it would, for all practical purposes, destroy the design professional’s ability to contract for protection from liability. In virtually all suits in negligence against a design professional, the crux of the claim is that the design professional’s work product was substandard. Because a duty to conform to industry standards would run parallel to any contract, the design professional would constantly be subject to litigation, the costs of hiring a design professional would inevitably rise.”
For the reasons explained herein, the court affirmed that the economic loss doctrine was properly applied to bar the suit against the engineers.
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. 14, No. 10 (Nov 2012).
Copyright 2012, ConstructionRisk.com, LLC