The Economic Loss Doctrine Defense
December, 2006
The economic loss doctrine was enunciated by the Illinois court in Moorman Manufacturing Company v. National Tank Company, 91 Ill. 2d 69 (1982). The Court held that damages for economic loss may not be recovered in negligence. The Court stated that economic loss has been defined as damages for inadequate value, cost of repair and replacement of the defective product or consequent loss of profits without any claim of personal injury or damage to other property. The Court held that the relationships between suppliers and consumers of goods are more appropriately governed by contract law than by tort law.
In the context of a case against an architect, the Supreme Court of Illinois addressed the issue again in 2314 Lincoln Park West Condominium Association v. Mann, 555 N.E.2d 346 (1990). In that case the plaintiff was an association of the owners of condominium units. The plaintiff sued a number of parties including the architect. The plaintiff alleged that there were numerous defects in the design and construction of the project. According to the Complaint, windows and glass doors were loose, the roof leaked, the heating and cooling systems and other utilities were inadequate and did not function properly, and the garage was settling.
The Court held that a tort or negligence action would not lie under such circumstances. The Court observed that the plaintiff was seeking an award of damages for the cost of repairing defects in the property and there was no contention that personal injury or damage to other property resulted.
The Court observed that in a variety of circumstances tort actions have been allowed to proceed in spite of the economic loss doctrine, including: installation of asbestos containing material in buildings tantamount to contamination of other property; defects in an alarm system failed to detect warehouse fire; damage to property other than product itself was caused by sudden and dangerous conflagration; defective brakes on truck caused truck to roll over and loose load which was a sudden and calamitous occurrence.
Further, in 2314 Lincoln Park West the Court concluded that the gravamen of the plaintiff’s claim for negligence against the architect was dissatisfaction with the way in which the building was designed and constructed and the failure of the building to meet the unit owners’ expectations. Such a claim concerned the quality, rather than the safety, of the building, and thus was a matter more appropriately resolved under contract law.
The application of the economic loss doctrine was again discussed by the Supreme Court of Illinois in Fireman’s Fund Insurance Company v. SEC Donohue, 679 N.E.2d 1197 (1997). In that case, the engineer’s drawings and plans erroneously located the site for digging and boring at a spot away from the correct location. Relying on the engineer’s plans, the contractor worked at the wrong location thereby damaging the shoulder of the tollway. The Supreme Court of Illinois held that the economic loss doctrine precluded the action against the engineer. It was a five to four decision. The court articulated three exceptions to the economic loss rule. They were:
1. Where the plaintiff sustained personal injury or property damage resulting from a tortious event, i.e. a sudden or dangerous occurrence;
2. Where the plaintiff’s damages are proximately caused by defendant’s intentional, false representation, i.e. fraud;
3. Where the plaintiff’s damages are proximately cause by a negligent misrepresentation by a defendant in the business of supplying information for the guidance of others in their business transactions.
In each of these three situations the plaintiff may recover in tort against the defendant.
A design professional may also not be protected by the economic loss rule as to crossclaims for professional malpractice filed by co-defendants. In Options Center for Independent Living v. G&V Development Co., 229 F.R.D. 149 (USDC, C.D. Illinois 2005), the architect provided services for a multi-family housing structure. It was alleged that the housing did not comply with the Fair Housing Amendments Act. Co-defendants filed a crossclaim against the architect.
A motion to dismiss filed by the architect as to the crossclaim based on the economic loss rule was denied. The court observed that the claims in the original complaint were not simply economic losses and thus not barred in the crossclaim. The original complaint validly asserted claims beyond economic loss. The crossclaim did not seek separate damages in tort for economic loss, but rather was predicated on the original claim and the potential liability that the cross-plaintiffs face as a result of that claim.
Learning Point
The economic loss doctrine or rule is a viable defense in various jurisdictions. Its applicability should be considered when claims based on tort are asserted. In the absence of a contract between the parties, the claim may be barred.
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