Design Professionals and the Economic-Loss Doctrine: The State of the Law in Ohio, Pennsylvania, and West Virginia
The economic-loss doctrine (ELD) is a court-developed doctrine that has been adopted by a majority of U.S. states and jurisdictions. The ELD has two intertwined functions: (1) it precludes contracting parties from asserting tort causes of action (such as negligence) as a means to recover for damages or losses that arise out of their contract; and (2) it prevents plaintiffs from recovering on tort theories for damages that are solely economic. A classic example of the ELD in action would be a situation where a defect in a purchased product results in “injury” only to product itself. For example, a plaintiff buys a tractor from a dealership, but an faulty relay causes an electrical short that leads to a fire that totals the vehicle. The only damage, however, is to the tractor itself-no one is injured and no other property is damaged. The plaintiff would be barred by the ELD from suing the dealership or manufacturer using tort causes of action, such as negligence. Rather, the owner would be limited to causes of action sounding in contract, such as breach of contract or breach of warranty.
The two functions of the ELD are grounded on two well-accepted legal doctrines. The first function is grounded on the distinction between contract causes of action, which arise from the contractual obligations the parties set, and tort causes of action, which are based on the duties that people owe to each other and to society at large. Contract law protects parties in the enforcement of their bargained-for promises, and it awards damages based on the loss of what they expected to give or receive under their contracts. Tort law protects interests independent of any bargained-for agreement, and it generally awards damages designed to restore the plaintiff to the position he or she was in had the tort not occurred. This first function of the ELD preserves the distinction between the two areas of law.
The second function is based on the longstanding legal rule that members of society owe each other a duty not to damage anyone else’s property or cause personal injury to anyone else. But courts have never recognized a legal duty to behave in such a way as to ensure that no one else ever loses money. The second function of the ELD preserves this rule.
As simple as the ELD may sound, its application has created a mountain of litigation, and cases involving design professionals have often been at the forefront of disputes over the scope of the doctrine. Some states have created exceptions to the ELD specifically applicable to design professionals. And as the design industry evolves, it creates new problems for application of the ELD to new methods of project delivery. The purpose of this article is to examine the ELD as it applies to design professionals in the states of West Virginia, Pennsylvania, and Ohio.
1. West Virginia.
The ELD as an accepted legal doctrine has a fairly recent history in West Virginia, which dates to the 2000 case of Aikens v. Debow. In that case, a motel operator attempted to sue a truck driver for loss of income due to the closure of a bridge; the bridge had to be closed for extensive repairs after the truck driver crashed into it. The West Virginia Supreme Court of Appeals noted that the majority of states had already adopted the ELD, and it adopted the doctrine as West Virginia law. The court then held that the motel owner could not sue in tort for the monetary losses resulting from the interruption in commerce caused by the truck driver’s negligence. In doing so, the court announced that a party who sustains purely economic loss caused by another party may not recover damages in the absence of: (1) physical harm to that individual’s person or property; (2) a direct contractual relationship with the alleged tortfeasor; or (3) a “special relationship” between the alleged tortfeasor and the individual who sustains purely economic damages sufficient to compel the conclusion that the tortfeasor had a duty to the particular plaintiff and that the injury complained of was clearly foreseeable to the tortfeasor.
While the court adopted the ELD, it left the door wide open to exceptions by announcing that a “special relationship” between the parties could nonetheless lead to tort liability. While the court in Aikens declined to create a blanket rule for what constitutes a “special relationship,” it explained that it requires “an intimate nexus between the parties” that is equivalent to contractual privity. As explained by the court: “the common thread which permeates the analysis of potential economic recovery in the absence of physical harm is the recognition of the underlying concept of duty. Absent some special relationship, the confines of which will differ depending upon the facts of each relationship, there simply is no duty.” The court cautioned that the “special relationships” that will satisfy that exception to the ELD are “special and narrowly defined.” As one could expect from the Supreme Court’s creation of the “special relationship” exception, post-Aikens ELD litigation in West Virginia has dealt with whether the parties are in a “special relationship,” and plaintiffs who suffered purely economic damages can be expected to assert that they fall under that exception.
A “special relationship” can exist between design professionals and other parties, and in fact the next major case on the ELD in West Virginia dealt with design professionals. In Eastern Steel Constructors v. City of Salem, the City of Salem hired Kanakanui Associates to provide engineering and architectural designs for a sewer project. Eastern Steel was the winning bidder for the construction contract, and Eastern used Kanakanui’s designs for the project. After Eastern encountered sub-surface rock conditions and existing utility service lines that had not been disclosed in the documents prepared by Kanakanui, it sued Kanakanui in tort for professional negligence and sought recovery for its purely economic losses. The parties in Eastern Steel had the following relationships:
The Supreme Court held that Eastern Steel’s tort claims were not barred by the ELD. The court held that when a contractor is employed by the same project owner as the design professional, and the contractor relies upon the design professional’s work product in carrying out his or her obligations to the owner, then the design professional stands in “special relationship” to that contractor. Eastern Steel thus held that a contractor could sue a design professional in tort if the design professional was hired by the same project owner.
The question of whether a tort claim could be brought pursuant to a more remote relationship was before the Supreme Court in Parkette, Inc. v. Micro Outdoors Advertising. Parkette leased space next to its restaurant to Micro Advertising for the construction of a billboard. Micro Advertising ordered the billboard from Trinity Products, who in turn contracted with engineering company Cornerstone for design services. After the billboard was erected, the soil under Parkette’s restaurant settled and damaged the building’s foundations. Parkette filed suit against multiple parties including Cornerstone, and it sought damages for Cornerstone’s negligent design. Plaintiff Parkette and Defendant Cornerstone were at the opposite ends of a chain of contracts:
Cornerstone moved for summary judgment on the basis of the ELD, and it argued that it could not be in a “special relationship” with Parkette. Distinguishing the facts in Parkette as “very different from the factual circumstances in Eastern,” the Supreme Court held there was no “special relationship” because “this case does not involve a suit between two parties who were both hired by the same property owner” and “there are several layers of contracts before you get to Cornerstone.” The court further noted that Parkette played no role in selecting or hiring Cornerstone, and the court specifically emphasized that there had been a “separate transaction” between Trinity Products and Cornerstone for the procurement of Cornerstone’s engineering services.
Eastern Steel represents a common and traditional relationship between an owner, general contractor, and design professional-namely, the owner hires both separately and the design professional does not contract with the general contractor. Under Eastern Steel, a design professional in West Virginia may be liable in tort to a general contractor hired by the same owner when the general contractor uses and relies upon the design professional’s designs. But a design professional may not be liable in other circumstances. Parkette says that a design professional who is separated from an owner by “several layers of contracts” cannot be liable in tort under the ELD, but it is not clear how many intervening contracts is necessary in order to negate the existence of a “special relationship.” Specifically, the engineer in Parkette was three contracts away from the owner, while the designer in a typical design-build project is only two contracts away from the owner:
Houston Harbaugh has seen cases in West Virginia where an owner has raised tort claims directly against the design professional and argued that the design professional stands in a “special relationship” with the project owner even though the owner played no role in the selection of the designer. To date, the West Virginia Supreme Court has not addressed whether those claims would be barred by the ELD or whether they would qualify under the “special relationship” exception. It will take additional guidance from the court to flesh out the boundaries of the “special relationship” exception.
Pennsylvania’s approach to the ELD is similar to West Virginia’s approach. Pennsylvania has applied the ELD for decades, but it has created exceptions specifically applicable to design professionals. In Bilt-Rite Contractors v. The Architectural Studio, the East Penn School District contracted with The Architectural Studio for the designs for a new school. Bilt-Rite Contractors was the low bidder for the project and used Studio’s drawings and plans. Once construction commenced, however, Bilt-Rite discovered that the specified work could not be constructed using normal and reasonable construction methods, and it incurred substantially increased construction costs. Bilt-Rite sued Studio in tort for negligent misrepresentation, but Studio moved to dismiss the suit on the basis of the ELD. The relationship of the parties was functionally identical to the Eastern Steel case in West Virginia:
Just like the court in Eastern Steel, the Pennsylvania Supreme Court held that the ELD did not bar Bilt-Rite’s claims against Studio. The court held that when “one supplies information to others, for one’s own pecuniary gain, where one intends or knows that the information will be used by others in the course of their own business activities,” then the party that relies upon the information to its detriment may sue the supplier of the information in tort. The court further said that the liability of the design professional is limited to those parties “for whose benefit and guidance the information is supplied” and also “those whose use of the information is reasonably foreseeable.”
As one might expect from the Pennsylvania Supreme Court creating an exception to the ELD, the Bilt-Rite case in Pennsylvania has been followed by plaintiffs asserting that they are among the class of parties for whom information is supplied. Plaintiffs will likely also argue every potential design error is a “misrepresentation” that fits into the Bilt-Rite “reasonably foreseeable” exception.
The Bilt-Rite exception can extend to a plaintiff who has not contracted with the same owner as the design professional. In Gongloff Contracting v. L. Robert Kimball & Associates, Architects and Engineers, California University of Pennsylvania engaged Kimball to design a new convocation center and contracted with Whiting-Turner Contracting Company as the general contractor. Whiting-Turner subcontracted with Kinsley Construction for the structural steel fabrication and erection, and Kinsley in turn subcontracted with Gongloff Contracting for the steel erection:
All of the contractors used the architectural drawings and specifications prepared by Kimball. Once construction was under way, the parties realized that the roof trusses were dramatically undersized, and Gongloff incurred significant extra costs. Gongloff filed suit against Kimball for negligent misrepresentation and asserted that it fell under the Bilt‑Rite “reasonably foreseeable” exception to the ELD. The Pennsylvania Superior Court agreed and held that Gongloff could sue Kimball in tort for misrepresentation because Kimball was in the business of providing information, and it was reasonably foreseeable that Gongloff would rely upon the information provided by Kimball. Thus, we know at a minimum that the Bilt-Rite “reasonably foreseeable” exception extends not only to the general contractor, but also to parties further down a chain of subcontracts from the general contractor who use the designer’s plans and specifications.
To date, Pennsylvania’s appellate courts have not addressed the Bilt-Rite exception in the content of a design-build project. Just like West Virginia, it will take additional litigation to resolve the boundaries of the Bilt-Rite exception to the ELD.
Ohio has recognized and applied the ELD for decades and applies the doctrine more expansively than West Virginia or Pennsylvania. In Floor Craft Floor Covering, Inc. v. Parma Community General Hospital Association, Parma Hospital hired architectural firm Braun & Spice to prepare plans and specifications for a renovation project that included the installation of vinyl flooring. The hospital contracted with Floor Craft to install the flooring, but the floor bubbled and had to be repaired at additional expense. Floor Craft sued Braun & Spice for professional negligence and argued that Braun & Spice had specified flooring that was “incompatible with the construction methods utilized in the project.” The parties were in the same relationship as the parties in Eastern Steel and Bilt-Rite:
Unlike the supreme courts of Pennsylvania and West Virginia, however, the Supreme Court of Ohio refused to create any ELD exception for design professionals. To the contrary, the court held that “recovery for economic loss is strictly a subject for contract negotiation and assignment,” and therefore “no cause of action exists in tort to recover economic damages against design professionals involved in drafting plans and specifications. According to the Ohio Supreme Court, “Protection against economic losses caused by another’s failure properly to perform is but one provision the contractor may require in striking his bargain,” and therefore the burden is on contractors to address liability for potential design defects as they negotiate their construction contracts.
The Ohio Supreme Court would likely reach the same holding in design-build contracts. In Corporex Development & Construction Management v. Shook, owner DSI contracted with general contractor Corporex for the construction of a hotel. Corporex, in turn, subcontracted with Shook for the hotel’s concrete work. Owner DSI had no contract and no other interaction with subcontractor Shook. Following the completion of construction, DSI sued Shook for negligence and sought purely economic damages for Shook’s alleged failure to perform in a workmanlike manner under Schook’s subcontract with Corporex. The relationships among the parties were:
On appeal to the Ohio Supreme Court, the court held that the ELD barred DSI’s tort claims against Shook. First, the court said that Shook’s duties were created by its subcontract with Corporex (a contract to which DSI was not a party), and the relationship between DSI and Corporex was further a creation of contract law. The court recognized that permitting DSI to directly sue Shook would potentially eviscerate the terms of those contracts or even permit DSI to thwart the intentions of the parties by seeking damages that had been expressly negated by contract. Second, the court said that DSI was functionally trying to enforce the terms of Corporex’s subcontract with Shook, but because DSI was not a party to that contract, it had no ability to do so. As explained by the Ohio Supreme Court, the proper course of action was for DSI to bring suit for breach of contract against the party it contracted with-namely, Corporex-and Corporex could in turn bring suit for breach of contract against Shook. While Corporex did not involve design professionals, it indicates that the court would likely reject tort claims by owners against design professionals in a design-build contract.
Although Ohio has held that the ELD bars tort suits against design professionals for negligent designs in the absence of a contract, it does not bar suits related to other activities. For example, in Foster Wheeler Enviresponse v. Franklin County Convention Facilities Authority, Foster Wheeler had been hired to remove coal-tar waste from the construction site of the Franklin County Convention Center. Engineering firm Lawhon & Associates had been hired by the Authority to oversee the remediation project. Foster Wheeler found far more waste than was expected, but it was not paid for the extra work, so it brought claims that included a claim for negligent misrepresentation against Lawhon. The trial court dismissed the claim, but the Tenth District Court of Appeals reversed and held that the ELD did not necessarily bar that tort claim because the misrepresentations related to the services Lawhon provided in “supervising the work” and not in drafting plans and specifications.
Hence, while Ohio applies a robust ELD that bars tort claims against design professionals for negligent design, it may not bar tort claims related to negligent supervision or the negligent performance of other tasks.
While the ELD seems simple in concept, its execution has created a raft of litigation, which is largely due to the willingness of state supreme courts to craft exceptions to the rule. Both West Virginia and Pennsylvania Supreme Courts have done so, and the boundaries of the Aikens “special relationship” exceptions and the Bilt-Rite “reasonably foreseeable” exception will no doubt be litigated for years. In contrast, the ELD in Ohio is more certain. The Ohio Supreme Court has rejected creating any ELD exceptions for design professionals at all, and it is unlikely that the court would create an exception specifically for design-build projects when it has refused to create a general exception for design professionals.
If you have any questions about the above please contact Sam H. Simon, Esq. or Matthew J. Lautman Esq.