The economic loss rule required the court to dismiss a negligent suit by a commercial property owner/developer against a subcontractor. Court explained that parties generally do not owe each other a duty of care to prevent economic loss. The owner contracted with a general contractor to construct apartments for college students. After construction, the floor trusses began sagging, and allegedly caused about $8 million in damages to repair. The court determined that the owner possessed a bargained-for means of recovery against the general contractor, and is barred from seeing to recover in tort (negligence) for its economic loss from the subcontracted manufacturer of the trusses with whom it had no privity of contract. The decision does a nice job of explaining the history and purpose of the economic loss doctrine. Crescent University City Venture, LLC v. Trussway Manufacturing, Inc., 376 N.C. 54, 852 S.E. 2d 98, (2020)
At the trail court level, the judge applied the economic loss rule and granted summary judgment against the plaintiff’s negligence claim. The North Carolina Supreme Court sustained that decision for the reasons explained here. The trial judge stated, “Because [Plaintiff] has not alleged or forecast evidence showing the breach of any separate or distinct extra-contractual duty imposed by law, … [Plaintiff] may not maintain a negligence claim against [defendant].” In analyzing the issues, the appellate court stated, “Applying the economic loss rule, North Carolina courts have long refused to recognize claims for breach of contract disguise as the type of negligence claim that Crescent asserted against Trussway in the case before us.” “The economic loss rule bars recovery in tort by a plaintiff ‘against a promisor for his simple failure to perform his contract, even though such failure was due to negligence or lack of skill.’”
Citing the Supreme Court decision applying the economic loss rule in the case of East River S.S. Corp. v. Transamerica Delaval, Inc., the court stated that the Supreme Court emphasized that “the purpose of the economic loss is to prevent “contract law from drowning in a sea of tort.” The U.S. Supreme court in that case held that “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.” The state court states that “The economic loss rule has since gained near universal acceptance, and nearly all other state and federal jurisdictions have applied the rule to commercial transactions.”
To get out from the under application of the rule in this case, the plaintiff argued that the rule only applied to situations where the parties were in contract with each other. But the court found that lack of privity of contract “is immaterial to the application of the economic loss rule.” In this case, the plaintiff could look for recovery from the general contractor with whom it was under contract. As the owner/developer, it had “full knowledge of an power to control the acquisition and engagement of subcontractors for the various roles within the greater construction scheme.”
The court held that the economic loss rule prevented it from affording the plaintiff who was a “sophisticated, commercial developer”, the tort remedy it sought.
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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 23, No. 2 (April 2021).
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