Tort law―the rules governing liability when one’s negligent or intentional conduct harms another―and contract law―the rules governing liability for broken promises―provide remedies for two different types of damages. In general, tort law compensates victims for personal injury and property damage, while contract law compensates for loss of the benefit of a bargain―a commercial or “economic” loss. Under tort law, “persons must refrain from causing personal injury and property damage to third parties, but no corresponding tort duty exists with respect to economic loss.” Ellis v. Robert C. Morris, Inc., 128 N.H. 358, 364 (1986). Under contract law, the economic loss rule “preclude[s] contracting parties from pursuing tort recovery for purely economic or commercial losses associated with the contract relationship,” Plourde Sand & Gravel Co. v. JGI Eastern, Inc., 154 N.H. 791, 794 (2007).
Notice that the statement I just quoted from the Plourde case follows automatically from the rule announced in Ellis, which would preclude everyone, not just contracting parties, from pursuing tort recovery for purely economic or commercial losses, whether associated with a contractual relationship or not. Plourde itself made clear that the lack of a contract relationship with the offending party doesn't change this. The plaintiff, a gravel supplier on a road project, was required by the site work subcontractor to replace gravel that the Town engineer’s testing company claimed was off-spec. The plaintiff sued the testing company for negligence in testing the material, thereby costing the plaintiff needless expense―an economic loss. It argued unsuccessfully that the Court should “decline to apply the economic loss rule because the plaintiff is not in privity with the defendant and therefore cannot recover its economic loss in an action for breach of contract. We have never applied this principle before and decline to do so here.” Id. at 795.
The message seems to be that you can only recover economic losses from parties you have a contract with (or, in legalese, are “in privity” with). The economic loss rule, however, is not quite so ironclad. New Hampshire recognizes two exceptions, also discussed in Plourde: (1) where there is a “special relationship” between the parties giving rise to a duty of care despite the absence of a contract between them; and (2) where there was a negligent misrepresentation relied upon by the plaintiff.
The “special relationship” exception, sometimes referred to as the "professional negligence" exception, applies when the negligent party has contracted with a third party to provide services that he knows are intended to benefit or influence the plaintiff. (Example: insurance investigators “owe a duty to the insured as well as to the insurer” to perform their services properly; Morvay v. Hanover Ins. Cos., 127 N.H. 723, 726 (1986)).
The negligent misrepresentation exception applies where “the defendant has some special reason to anticipate the reliance of the plaintiff” on the defendant’s statements. Spherex, Inc. v. Alexander Grant & Co., 122 N.H. 898, 903 (1982) (imposing tort liability on an accounting firm for economic loss suffered by a third party creditor who relied upon unaudited financial statements prepared by the firm).
In the construction setting, a contractor’s or subcontractor’s reliance on a design professional’s negligent drawings, specifications, opinions or instructions could allow recovery of economic losses under either one of these exceptions. But don’t count on it. Neither exception helped the plaintiff in Plourde, even though the defendant testing company must have known that its test results would be relied upon by everyone down the chain and ultimately require the plaintiff to replace its gravel. Until our Supreme Court weighs in on particular fact patterns, the best an attorney can do here is make an educated guess.
The bottom line is that the economic loss rule is actually two rules. If you don’t have a contract with the negligent party, recovery of economic losses flowing from that negligence requires proof of a “special relationship” or of negligent misrepresentation. And if you do have a contract with the offending party, you cannot look beyond your contract to tort law for recovery of economic loss unless that party breached a duty to you independent of the contractual promises. What constitutes an "independent" duty here will be the subject of a future blog.
Notice that the statement I just quoted from the Plourde case follows automatically from the rule announced in Ellis, which would preclude everyone, not just contracting parties, from pursuing tort recovery for purely economic or commercial losses, whether associated with a contractual relationship or not. Plourde itself made clear that the lack of a contract relationship with the offending party doesn't change this. The plaintiff, a gravel supplier on a road project, was required by the site work subcontractor to replace gravel that the Town engineer’s testing company claimed was off-spec. The plaintiff sued the testing company for negligence in testing the material, thereby costing the plaintiff needless expense―an economic loss. It argued unsuccessfully that the Court should “decline to apply the economic loss rule because the plaintiff is not in privity with the defendant and therefore cannot recover its economic loss in an action for breach of contract. We have never applied this principle before and decline to do so here.” Id. at 795.
The message seems to be that you can only recover economic losses from parties you have a contract with (or, in legalese, are “in privity” with). The economic loss rule, however, is not quite so ironclad. New Hampshire recognizes two exceptions, also discussed in Plourde: (1) where there is a “special relationship” between the parties giving rise to a duty of care despite the absence of a contract between them; and (2) where there was a negligent misrepresentation relied upon by the plaintiff.
The “special relationship” exception, sometimes referred to as the "professional negligence" exception, applies when the negligent party has contracted with a third party to provide services that he knows are intended to benefit or influence the plaintiff. (Example: insurance investigators “owe a duty to the insured as well as to the insurer” to perform their services properly; Morvay v. Hanover Ins. Cos., 127 N.H. 723, 726 (1986)).
The negligent misrepresentation exception applies where “the defendant has some special reason to anticipate the reliance of the plaintiff” on the defendant’s statements. Spherex, Inc. v. Alexander Grant & Co., 122 N.H. 898, 903 (1982) (imposing tort liability on an accounting firm for economic loss suffered by a third party creditor who relied upon unaudited financial statements prepared by the firm).
In the construction setting, a contractor’s or subcontractor’s reliance on a design professional’s negligent drawings, specifications, opinions or instructions could allow recovery of economic losses under either one of these exceptions. But don’t count on it. Neither exception helped the plaintiff in Plourde, even though the defendant testing company must have known that its test results would be relied upon by everyone down the chain and ultimately require the plaintiff to replace its gravel. Until our Supreme Court weighs in on particular fact patterns, the best an attorney can do here is make an educated guess.
The bottom line is that the economic loss rule is actually two rules. If you don’t have a contract with the negligent party, recovery of economic losses flowing from that negligence requires proof of a “special relationship” or of negligent misrepresentation. And if you do have a contract with the offending party, you cannot look beyond your contract to tort law for recovery of economic loss unless that party breached a duty to you independent of the contractual promises. What constitutes an "independent" duty here will be the subject of a future blog.
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