In late March, I blogged on an important new case from the Tenth Circuit reaffirming the economic loss rule. Last week, the Indiana Supreme Court handed down a major decision in a construction case, reaffirming this important principle of business law.
According to the economic loss rule, where a plaintiff has suffered merely economic loss – frustrated commercial expectations – the plaintiff is limited to suing in contract. Tort suits are barred. Once a plaintiff is restricted to contract remedies, limitations on liability provided in the contract will generally be enforced, and punitive damages are unlikely to be available. The economic loss rule is an important (and controversial) tool in business litigation, particularly in the construction industry — so much so that, as I reported in May, the American Law Institute will shortly be resuming its work on the Restatement (Third) of Torts: Economic Torts and Related Wrongs, collecting the law of the economic loss rule from across the country.
Indianapolis-Marion County Public Library v. Charlier Clark & Linard, [pdf] arose from the construction of a new library and parking garage in downtown Indianapolis. The Library contracted with an architectural firm, which, in turn, subcontracted with various architectural and engineering firms. The Library also contracted directly with the general contractor for the project. A number of construction and design defects were found in the parking garage, and the Library sued the architects, the general contractor, and the subcontractors in tort. The defendants successfully moved to dismiss, arguing that the economic loss rule barred the Library’s tort claims.
The Supreme Court affirmed. The Court noted several policy justifications for the economic loss rule.
First, liability for purely economic loss is more appropriately determined by commercial rather than tort law.
Second, tort law should not be permitted to impose liability on commercial actors which is so uncertain in time, class or amount that the defendant has no way of allocating risk before acting.
The Library argued that a range of exceptions to the economic loss rule applied. The Library claimed that because it purchased discrete products from each defendant — blueprints, materials, inspection services, and so on — it had suffered damage to property other than the subject of its contracts, making the economic loss rule inapplicable. The Court disagreed, holding that each of the defendants’ products was integral to a whole: the "product" for purposes of applying the "damage to property other than the product" exception to the economic loss rule was a renovated and expanded library facility, not any individual defendant’s contribution to the project.
The Library also claimed that the Court should not apply the economic loss rule where the alleged flaws in the product or service created an imminent danger of physical harm to members of the public. The Court declined to carve out such an exception to the rule.
The Library next argued that the economic loss rule should not be applied to design professionals, but the Court followed a decision from the Arizona Supreme Court earlier this year, holding that the economic loss rule applied equally in construction defect cases to contractors and design professionals. The Court emphasized the importance, as a matter of policy, of applying the economic loss rule to all participants in a major construction project:
When parties are connected through a chain of contracts, as in the construction context, courts should defer to the language of the contracts governing their relationship . . . Such a rule promotes private ordering by respecting a commonly understood allocation of risk even though the relevant term may or may not be in the contract.
Finally, the Library argued that the economic loss rule should not apply where the defendants allegedly provided false information to the plaintiff, or where the defendants provided a service, rather than a product. The Supreme Court refused to create a new exception to the economic loss rule to govern either case.
Every few years, articles appear predicting the death of the economic loss rule. But with new decisions from two state Supreme Courts in only four months, reports of its death are once again exaggerated.