What's this Thing Called Economic Loss?

In a recent Pennsylvania Supreme Court case, the court held that a contractor could sue an architect for negligent misrepresentations allegedly contained in design documents. The contractor claimed that documents prepared by the architect resulted in additional construction costs for the contractor (Bilt-Rite Contractors, Inc.


In a recent Pennsylvania Supreme Court case, the court held that a contractor could sue an architect for negligent misrepresentations allegedly contained in design documents. The contractor claimed that documents prepared by the architect resulted in additional construction costs for the contractor ( Bilt-Rite Contractors, Inc. v. The Architectural Studio, 2005 Pa. LEXIS 99, Jan. 19, 2005). This case provides a good opportunity for discussing "economic loss doctrine," which restricts the conditions under which a contractor can sue a design professional.

In this case, the architect had been retained to design a new school. The design documents provided for the construction of aluminum curtain wall with a sloped glazing system and metal support systems. The contractor claimed that the architect had "expressly represented" that these systems could be installed through "normal and reasonable construction means and methods, using standard construction design tables."

During construction, however, the contractor discovered that the curtain-wall systems could not be installed "using reasonable construction methods and design tables, resulting in substantially increased construction costs." As a result, the contractor sued the architect for negligent misrepresentation, seeking recovery of its additional construction costs.

The architect objected to the complaint by arguing that the contractor's suit was barred by economic loss doctrine. Furthermore, the architect's attorneys argued that their client owed no duty of care to the contractor because they had no contract with each other. The trial court dismissed the suit, and the Pennsylvania Superior Court affirmed its ruling. The Pennsylvania Supreme Court, however, granted the contractor the right to appeal the suit's dismissal.

Under economic loss doctrine, a contractor or other person may not sue a design professional for damages caused by the designer's negligence unless: 1) the contractor or other party has a contract with designer; or 2) the contractor or other person has sustained a catastrophic loss, such as bodily injury or property damage. Thus, a contractor who has no contractual relationship with the designer may not sue the designer for extra construction costs it incurs due to the alleged negligent design. Under such circumstances, however, the contractor may sue the owner for its failure to provide adequate design documents.

The doctrine bars one who is not a party to a contract from enforcing it by suing for negligence, and prevents contractors from suing to enforce an agreement between the owner and the designer.

Courts that have rejected the applicability of economic loss doctrine recognize that contractors rely on designers' drawings and specifications more than the owner and that contractors' costs may be affected by negligent design. Those courts implicitly reason that it may not be fair to insist that a contractor who has sustained additional construction costs due to negligent design sue the owner for inadequate design documents when the owner did not prepare them.

Some states, such as Illinois, have adopted economic loss doctrine and specifically bar suits filed by contractors to recover economic loss from architects and engineers for alleged negligent design or construction contract administration. However, the majority of states that do consider the issue allow a contractor to sue a designer for negligent design, even though there is no contractual relationship between them.

In Bilt-Rite, the Pennsylvania Supreme Court framed the question as whether a designer "who prepares and develops design drawings and specifications, owes a duty to the contractors who apply those specifications in the situation where no contractual relationship exists." The contractor obviously argued that the court should answer the question affirmatively, noting that it had relied upon the alleged misrepresentations and that the architect should have foreseen that the contractor would rely upon the design documents.

After consideration of earlier court opinions and the law of other states, the court adopted the rule contained in Section 552 of the Restatement (Second) of Torts. Under Section 552, a professional who for monetary gain "supplies false information for the guidance of others in their business transactions" can be held liable if the injured party justifiably relied upon the information and the professional had been negligent "in obtaining or communicating the information."

The court reasoned that the rule is justified because: 1) the architect was aware that the contractor would use its design; 2) it would encourage designers to be careful; 3) the class of persons who could sue the architect under this rule is limited; 4) other professionals were subjected to the same rule; and 5) the public interest is served by discouraging negligence."

Two justices dissented, asserting that the opinion ran counter to the traditional contractual relationship for construction and could negatively impact contractual allocation of risk.

Obviously, this case will affect designers who face a class of potential plaintiffs. It's another reason for design professionals to follow good practice standards and implement strong quality control.

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