Published on:

The Walls Come Tumbling Down: The Economic Loss Doctrine Uncovered

The economic loss doctrine prevents a plaintiff from recovering purely economic losses via a tort action (i.e., a negligence claim) in the absence of personal injury or damage to “other property.”  One court has described the economic loss doctrine as “prohibit[ing] plaintiffs from recovering in tort economic losses to which their entitlement flows only from a contract.”  Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 618 (3d Cir. 1995).  In other words, a plaintiff should be limited to a contract claim “when loss of the benefit of a bargain is the plaintiff’s sole loss.”  Id.

To illustrate, if a property owner hires a contractor to build a wall, which subsequently collapses due to the contractor’s negligence in constructing the wall, the property owner cannot sue the contractor for negligence.  The property owner’s redress is confined to the terms of the contract.  Given that the wall collapsed, it is likely that the contractor breached the contract with the property owner, who presumably bargained for a wall that should not collapse.  Since nothing other than the wall was damaged, and no one was injured, however, the property owner’s relief is restricted to what was specifically bargained for – the wall.  Thus, the property owner will only be able to recover the cost of the wall, or the cost of repairing the wall (i.e., he should only get what he bargained for: a wall).

If, however, property other than the wall (i.e., “other property”) was damaged, or physical injury resulted from the wall’s collapse, the property owner could seek redress under a negligence claim.  Thus, if the wall collapsed on a customer who sustained injuries, the contractor could be sued for negligence.  Likewise, if the wall collapsed and damaged a nearby truck – i.e., property other than what was bargained for under the contract – the contractor could be sued for negligence.

Exceptions to the Economic Loss Doctrine

There are certain exceptions to the economic loss doctrine that allow a plaintiff to pursue a negligence claim against a defendant.  First, as discussed, damage to “other property” permits a plaintiff to sue a defendant for negligence, even though the plaintiff has only suffered economic damages.  See 2J Corp. v. Tice, 126 F.3d 539 (3d Cir. 1997) (holding that plaintiff was permitted to recover damages for the contents of the collapsed warehouse, where the construction of the warehouse was the subject of the contract).  Second, a plaintiff can also pursue a negligence action against a defendant if the property damage results in physical injury.

Third, the economic loss doctrine will not bar a claim for negligent misrepresentation by design professionals.  In Bilt-Rite, a school district contracted with an architecture firm (“TAS”) to prepare plans and specifications (“Design Documents”) for the construction of a new school, which TAS submitted to various contractors for the purpose of preparing bids for general construction of the school.  Bilt-Rite Contractors, Inc., v. The Architectural Studio, 866 A.2d 270 (Pa. 2005).  The project was awarded to Bilt-Rite based on its bid, which relied on the Design Documents.  Further, the contract between Bilt-Rite and the school district referred to and incorporated the Design Documents.

TAS had represented in the Design Documents that normal and reasonable construction means and methods could be used to complete certain aspects of the project.  Once construction commenced, however, the work could not be constructed using normal and reasonable construction methods, and instead required Bilt-Rite to employ special means, methods, and design tables, resulting in substantially increased construction costs.

Bilt-Rite sued TAS under a theory of negligent misrepresentation for recovery of the increased construction costs, citing Section 552 of the Restatement (Second) of Torts, which says that a party in the business of supplying information that it intends or knows will be relied upon by others owes a duty to those parties who use that information in their business activities.  The trial court dismissed the action, and the appellate court affirmed, based on the economic loss doctrine because Bilt-Rite’s losses were purely economic and because Bilt-Rite and TAS were not in privity of contract.

On appeal, the Pennsylvania Supreme Court reversed, holding that Bilt-Rite had a viable cause of action against TAS for negligent misrepresentation, and in doing so, adopted Section 552.  As a result, design professionals can be liable for negligently providing information when it is foreseeable that the information will be relied upon by third parties, even if the third parties have no direct contractual relationship with the design professional.  Because Section 552 does not have a privity requirement, the Court found that the absence of privity will not defeat a Section 552 claim.

In 2009, the Pennsylvania Supreme Court declined to extend the Bilt-Rite theory of liability to include negligent misrepresentation by non-professionals.  Excavation Technologies, Inc. v. Columbia Gas Co. of Pennsylvania, 985 A.2d 840 (Pa. 2009).  In Excavation Technologies, Inc., a contractor sustained purely economic loss as result of a utility’s failure to properly mark the location of underground gas lines.  The Court affirmed the appellate and trial court holdings that the contractor did not have a viable negligent misrepresentation claim against the utility because the contractor suffered purely economic loss and was not in privity of contract with the utility.  In other words, the Court rejected extending Section 552 claims to non-professionals such as utilities, reasoning that Bilt-Rite only carved out a narrow exception to the economic loss doctrine for design professionals.

Contact Information