NH Construction Law
  • Home
  • Blog
  • Links

#29:  The Economic Loss Rule

5/17/2015

0 Comments

 
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.


0 Comments



Leave a Reply.

    Author

    Frank Spinella

    Archives

    March 2023
    February 2023
    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    January 2019
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014

    Categories

    All

    RSS Feed

Powered by Create your own unique website with customizable templates.