Building Damages and the Economic Loss Doctrine

April 26, 2021

When an owner of a commercial building is required to repair damage to the building, the damages are considered to be solely economic in nature.  The Economic Loss Doctrine prohibits the owner from pursuing a builder or contractor responsible for the damages for anything other than money damages.  In other words, the owner who contracted with a builder is generally unable to file a lawsuit for additional tort remedies or damages such as negligence, punitive damages or attorney fees.  Building defect issues can be expensive to investigate and the attorney fees can be a deterrent to any attempt to recover damages.

The rationale for the Economic Loss Doctrine is that the parties to a building contract are free to allocate any and all risk and then include the possible remedies within the terms of the contract.  The courts contend that the parties to the contract are in the best position to assume, allocate or insure against the risk of economic damages arising from a breach of the contract.  This is an attempt to maintain the distinction between tort law and contract law.

What does this mean for the parties to the contract?  Essentially, it means that whatever damages you might want to recover had better be set forth in the contract.  This includes costs related to investigating the construction issues, attorney fees, and other costs related to litigation.  Such items must be negotiated and spelled out in the contract.   Keep in mind that the pendulum swings both ways and the other party to the contract may require similar remedies.  The parties can negotiate a fixed or “liquidated” damage amount for things like a delay in the completion of the contract.

If the contract does not include a provision for damages, there are two recognized exceptions to the Economic Loss Doctrine—the “fraud in the inducement” and “other property” exceptions—which, if successful, will allow tort claims to go forward.  The exceptions are narrowly construed.  The fraud in the inducement exception only applies to alleged fraud that is unrelated to either the quality or characteristics of the product for which the parties contracted or performance of the contract.  If the alleged fraud was related to the quality and characteristics of the product, such as the building’s features or its performance, then the alleged fraud is not extraneous to the contract and the exception will not apply.  The “other property” exception to the economic loss doctrine often does not apply because the product that failed or is defective was integrated into a more complete product (the building itself), and when that happens, the completed product ceases to be “other property” for purposes of the economic loss doctrine.  Again, this narrows the application of the exception to the economic loss doctrine.

The best bet is to have the building contract reviewed by an attorney and every attempt should be made to address a fair and complete treatment of the parties’ risks and what damages should be available if their expectations are not met.