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An error was made by a surveyor in setting the level for a foundation pad for a church building.   A construction contractor then proceeded to excavate dirt from the foundation area, believing the resulting level would be higher than required by the base flood elevation set by the applicable regulations. After the church was built, it could not obtain a certificate of occupancy because the foundation was 8 inches too low. The church refused to pay the builder the outstanding balance owed under the contract, and the builder filed suit to which the church filed a counter-claim against the builder corporation as well as a third party claim against the president of the builder for negligence. A jury found in favor of the construction company against the church for breach of contract but found in favor of the church against the corporate president as an individual. The judgment against the individual was reversed on appeal, with the court holding that the economic loss rule barred the action, and that the only remedies available to the church were those available under its contract against the construction company with which it had contracted. Beaufort Builders, Inc. v. White Plains Church Ministries, Inc., 783 S.E. 2d 35 (2016).

The court cited previous court decisions for the proposition that “no negligence claim exists where all rights and remedies have been set forth in a contractual relationship.” As further cited by the court, “Generally, a breach of contract does not give rise to damages based on a negligence method of recovery even where the breach was due to negligence.” The court set out the “economic loss rule” as follows:

Simply stated, the economic loss rule prohibits recovery for purely economic loss in tort, as such claims are instead governed by contract law…. Thus, the rule encourages contracting parties to allocate risks for economic loss themselves, because the promisee has the best opportunity to bargain for coverage of that risk or of faulty workmanship by the promisor. For that reason, a tort action does not   lie against a party to a contract who simply fails to properly perform the terms of the contract, even if that failure to perform was due to the negligent or intentional conduct of that party, when the injury resulting from the breach is damage to the subject matter of the contract. It is the law of contract and not the law of negligence which defines the obligations and remedies of the parties in such a situation.

Four exceptions that courts may consider to allow a claim despite the economic loss rule were found inapplicable.   In particular, the promisee to the contract (i.e., church) and not a third-party, suffered the injury at issue. The injury was to the church building itself, the very subject of the contract. The builder was not acting in any capacity that would cause it by law to be considered a bailee or to have a due care to protect the owner’s property. And finally, there was no evidence to suggest that the injury was done willfully.

The individual’s presence at the construction site was at all times due to his company’s performance of the work and all his actions were on behalf of the company pursuant to the contract. The only injury the church suffered as a result of the individual’s acts “was the fact that it did not get the benefit of its bargain with [the builder]– namely a properly constructed church building….”

Comment: This decision very succinctly sets forth the basis for defense counsel to file a motion to dismiss a negligence count in a complaint against a contractor or design firm where the only genuine cause of action that should proceed is one for breach of contract. The fact, or argument, that negligent performance of the work is what caused the contract to be breached, does not justify allowing a separate negligence count to be litigated.

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. 18, No. 7 (December 2016).

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