LEGALLY SPEAKING The Economic Loss Rule E ngineers and other design professionals have long been subject to suit where their negligence causes personal injuries and property damage. Historically, however, courts have been reluctant to allow contractors and subcontractors to successfully sue these professionals for purely economic losses in the absence of a contract with the professional. This limitation, commonly referred to as the “economic loss rule,” prevents contractors from pursuing “third parties,” such as architects, engineers and inspectors, for delays or other impact costs resulting from their negligence. Because of this rule, contractors are limited to suing owners — and subcontractors to suing contractors — for cost and time impacts caused by engineering and design professionals. While prime contractors can often recover from owners for defects in designs or engineering by architects and engineers working on the owne r ' s beha l f , subcontractors cannot. They have no contract with the owner and are often barred by subcontract terms from recovering from the prime contractor for delays, changes and impacts caused by third parties. Thus, application of the economic loss rule has frequently left subcontractors without a remedy. Relevant Decisions Recent court decisions have substantially narrowed and eroded the force and effect of the economic loss rule in several states, calling into question the long-term viability of the rule. For example, in Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc., 110 So. 3d 399 (Fla. 2013), the Florida Supreme Court stated unequivocally that the economic loss rule applies only to products liability cases. This decision reinforced prior decisions by Florida courts allowing contractor negli- gence suits against design professionals for economic losses. In July 2015, a Pennsyl- vania court indicated that a contractor could satisfy an exception to the economic loss rule — for negligent misrepre- sentation — if defects or false information in the design “increases the contractor's costs beyond those anticipated,” in Gongloff Contracting, LLC v. L. Robert Kimball & Associates, Architects and Engineers, Inc., 119 A.3d 1070, 1078 (Pa. Super. Ct. 2015). More recently, a federal court in California held that a contractor could pursue financial/economic impact claims against a city's geotechnical engineer for alleged misrepresentations contained in a geotechnical report it prepared in Apex Directional Drilling, LLC v. SHN Consulting Engineers & Geologists, Inc., 2015 WL 4749004 (N.D. Cal. August 11, 2015). The court indicated that there is a trend under California law toward expansion of the duty of design professionals “to manage business affairs so as to prevent purely economic loss to third parties.” Since 2010, courts in Arizona, Kansas, Kentucky, Minnesota, Nebraska, New Jersey, Ohio, Oregon, South Dakota, Utah and Washington have reached similar conclusions, allowing and/or recognizing economic loss negligence claims in cases not involving defective products. States previously limiting the application of, or creating exceptions to, the economic loss rule include Alabama, Massachusetts, Mississippi, North Carolina, North Dakota and Oklahoma. A common element in contractor economic loss actions allowed by courts is misrepresentat ion by engineering/design professionals. Despite the apparent trend toward erosion of the economic loss rule, some states remain reluctant to allow negligence actions between construction participants. In 2014, the Supreme Court of Texas held that the economic loss rule bars negligence claims by contractors and subcontractors Brian Wood Attorney Of Counsel Smith, Currie and Hancock against architects and engineers for economic losses in LAN/STV v. Martin K. Eby Const. Co., Inc., 435 S.W.3d 234, 246 (Tex. 2014). The court also explained its rationale for limiting actions between subcontractors, noting: “If the roofing subcontractor could recover from the foundation subcontractor damages for extra costs incurred or business lost due to the latter's negligent delay of construction, the risk of liability to everyone on the project would be magni- fied and indeterminate.” Industry Effect What does this all mean for DFI members? For contractors and subcontractors, it means that, despite prime contract and subcontract limitations and the lack of a contract with engineering/design profes- sionals, there may be recourse directly against these professionals for defective designs and/or misrepresented geotech- nical information, depending upon the applicable state law. It means that, in many states, geotechnical engineers can no longer defeat a contractor/subcontractor's negligence action merely by invoking the economic loss rule and claiming that it owed no duty to the contractor or subcontractor. Accordingly, an engineering professional would need to look elsewhere for protections previously provided by law, such as by obtaining from owner and design-builder clients indemnification against contractor and subcontractor economic impact claims. For equipment and tooling manufacturers, little has changed, as the courts have largely left the economic loss rule intact for products liability actions. 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