CONSTRUCTION LAW
The Economic
Loss Doctrine
An enigma in a relatively standardized legal regime
By Michael McKeeman and Anthony J. LaPlaca, Seyfarth Shaw LLP
Seyfarth Shaw has been providing legal services to construction contractors, property
owners, engineers, designers and tradesmen for the last 50 years. During that
tenure, we have explored the deepest fathoms of the industry – from financing for
major projects to the litigation of complex claims – and have encountered just about every
construction law issue imaginable. In many ways, the state of the construction industry is
“same story, different day.” The industry values consistency, predictability and efficiency;
thus, construction law has trended toward standard form contracts and relatively uniform
statutory procedures for mechanic’s liens, prompt payment and the like. With some
exceptions, construction law has remained stable and consistent across jurisdictions over
the last quarter century.
The economic loss doctrine is one area of construction law that diverges significantly
from state to state and seems to be forever evolving. The economic loss doctrine originated
in products liability law but has become quite relevant in construction cases involving
design or construction defects. The purpose of the economic loss doctrine is to ensure
that litigation over construction defects remains within the bounds of contractual terms
and protections negotiated by the parties, by pre-empting claims for negligence and other
torts. This doctrine is significant because, without it, plaintiffs may be able to circumvent
contractual limitations on damages and other contractual terms by asserting claims for
negligence. The doctrine stands for the principle that purely “economic” loss – such as lost
profits and damages for loss of use – are more properly the subject of contract law, not
claims for negligence.
Because the economic loss doctrine was created by judges, it differs in application
depending on where the construction project is located. In states that strictly construe
the economic loss doctrine, negligence claims may be absolutely barred against engineers,
designers and builders whose obligations are subject to a contract. Even in these states,
however, judges have a difficult time understanding and correctly applying the underlying
principles of the economic loss doctrine to a complex set of facts. To compound the
issue, certain states have created exceptions to the economic loss doctrine over the last 25
years. These exceptions may include claims for professional negligence; claims for defective
work that creates a risk of death or bodily injury; and claims for damage to property
other than the project itself. These state-specific exceptions to the rule have only complicated
the application of the economic loss doctrine, making litigation less predictable and
consistent than most in the industry would like.
In the absence of legislation barring tort claims or tort damages in construction
defects cases (which some states have enacted), judges will likely spend the next 25 years
questioning when and how to apply the economic loss doctrine to the facts of a particular
case. All we as lawyers can do in the meantime is follow judicial developments and do
our best to remain faithful to the economic loss principles articulated in the jurisdiction
of your project. In a sense, we relish the inconsistent application of the economic loss
doctrine, as the search for answers to tough questions is what makes our jobs challenging
and fun. We look forward to finding out what the future brings in this nuanced area
of construction law. t
Michael McKeeman is a partner in Seyfarth Shaw LLP’s construction group and is based in San
Francisco, Calif. Anthony J. LaPlaca is an associate at Seyfarth Shaw LLP in Washington, D.C.
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