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Where construction defects caused significant repair costs, a condominum association at Stratton Mountain (along with the project developer) sued and settled with the construction contractor for the defects for over $7 million but then incurred more than that in conducting the repairs.  The condo association then filed suit against a professional consultant that had been under contract to the developer to provide value engineering and construction feasibility reviews and consultation on a selection of materials and equipment, along with zoning and permits. The trial court (which was affirmed on appeal) granted dismissal of that case because (1) the economic loss doctrine barred the negligence claim and (2) the association did not have a contract with the consultant and therefore lacked any implied warranty from the consultant.  Long Trail House Condo Association v. Engelberth Construction, Inc., 2012 WL 4465561 (VT 2012).

The repair costs were alleged to have been caused by defects in the construction, including water penetrating exterior walls, improperly supported trusses, water damage to balconies, unsupported load bearing walls, and improperly braced gables and end walls – all of which they argued could cause collapse.

In holding there to be no third party rights by the association, the court quoted from the contract, which provided that the contract documents “shall not be construed to create a contractual relationship of any kind between anyone other than the owner and contractor.”  The association argued that implied warranties were included as part of the contract between consultant and developer and that the association was entitled to bring this cause of action because the warranties “pass from a developer to a subsequent purchaser.”

The court was not impressed and explained, “We reject this argument.  Our case law plainly contemplates the existence of contractual privity before a breach of implied warranty claim can be raised.”   The plaintiff tried to assert uniform commercial code (UCC) principles to support its argument.  In matter-of-factly rejecting that theory, the court said, “we do not find it useful to discuss provisions of the UCC …, as we are not here dealing with the sale of movable goods or indeed, with any sale at all between [association and consultant].”

 In applying the economic loss doctrine as a legitimate basis for dismissing the negligence count of the complaint, the court rejected the plaintiff’s assertion that the consultant owed it a duty to use “professional care” in performing its services.  It also rejected the association’s argument that the consultant would have foreseen with reasonable certainty that the association would be injured by its failure to exercise professional care.

The costs claimed amounted almost entirely to the cost of repair that stemmed the alleged fault construction and “represented the difference in market value between the units as built and as they should have been built.”  Under Vermont law, the court stated that the remedy for such purely economic losses resulting from “the reduced value or costs of repairs of … construction defects sound[s] in contract rather than tort.”

The Condo Association argued that applying the economic loss doctrine where it lacked a contract and had no contractual basis for a suit against the consultant would be unfair.  Specifically, the plaintiff Association argued that the economic loss rule should be applied to “strip a plaintiff of its tort remedies if the plaintiff has no other recourse and the defendant owed the plaintiff a duty.”

The Association contrasted this current case with economic loss decisions by other courts that have addressed the situation where a plaintiff had a contract and therefore an opportunity to negotiate the terms and conditions with the defendant.  But the court here concluded that the economic loss doctrine applies to bar the suit regardless of whether there was a contract between the plaintiff and defendant.

 

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. 2 (Feb 2013).

Copyright 2013, ConstructionRisk, LLC