Recent Ruling Regarding the Economic Loss Doctrine
The Court of Appeals issued a decision, which has been recommended for publication, on the economic loss doctrine’s applicability as to claims between subcontractors who are not in privity of contract (or phrased another way, parties to the same contract). In Mechanical, Inc. v. Venture Electrical Contractors, Inc., the Court of Appeals held that the economic loss doctrine barred negligence claims by one subcontractor against another for damages resulting from delays on a construction job.
The economic loss doctrine holds that a party to a contract is not entitled to pursue tort remedies for purely economic losses resulting from the performance or nonperformance of the contract. The doctrine does not, however, bar tort claims for damage to other property or for physical injuries. Instead, it only bars tort claims for damages to the product or work that was contracted for.
The economic loss doctrine, as adopted in 1989 by Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., was first applied to parties in a direct contractual relationship. The doctrine was later extended to claims involving interrelated contracts without a direct two-party contractual relationship in Linden v. Cascade Strone Co., Inc. In Linden, a homeowner contracted with the general contractor, who contracted with subcontractors, and the court held that the economic loss doctrine applied to bar the homeowner’s claims against the subcontractor. In applying the economic loss doctrine to the homeowner’s claims against the subcontractor, the Court noted that the homeowner’s claim was that they did not receive the product that they had contracted for. Although the homeowner and subcontractor were not parties to the same contract, the Court held that there was vertical privity of contract (namely, homeowner contracted with general contractor, who contracted with subcontractor) which precluded the tort claims between the homeowner and subcontractor.
The Court of Appeals in Mechanical, Inc. relied in part on the ruling in Linden to conclude that the underlying principles of the economic loss doctrine – namely, to keep tort and contract law separate and distinct – warranted application in this case, despite the fact that the subcontractors were not parties to the same contract. The Court held that each party involved in the construction project should have undertaken an evaluation of the risks associated with the construction project and included any terms within the subcontractor agreement as necessary to protect their interests. Despite the fact that none of the subcontractors had contractual agreements with each other, the Court noted that the parties were commercially sophisticated, that the parties knew other subcontractors were involved in the project, and that the parties could have included delay protections in their contracts with the general contractor. Additionally, the subcontractor agreements noted that work was to be performed in a timely manner, that delays were to be rectified by the subcontractor bearing costs to complete the work in a timely manner, and that a subcontractor was to advise the general contractor of any delays or interference with work by another subcontractor. As such, each contractor knew that it was contractually bound by the duties and remedies associated with delays in work, and that potential delays by other subcontractors were interrelated. Because of the contractual duties, the Court felt that the economic loss doctrine precluded tort claims between the subcontractors.
The holding, in this case, creates new concerns for subcontractors who may seek recovery of costs and labor resulting from another subcontractor’s work on a job. Given that most construction projects could be classified as a “single comprehensive scheme,” the case arguably could be extended to smaller commercial or residential construction project contracts. Contractors should consult with an attorney to determine whether their current or prospective contracts provide a contractual remedy against another subcontractor.