Category Archives: Damages

Exceptions to the Economic Loss Rule

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As discussed in my last post, there are exceptions to the economic loss rule which will allow you to recover under for your damages (that is, your “injury”) under a negligence theory, even though you have a contract with the other party which may otherwise limit your recovery.

The four exceptions are:

(1) The injury is to a person or property of someone other than the promisee;

(2) The injury is to property of the promisee other than the property which was the subject of the contract, or was a personal injury to the promisee;

(3) The injury to the property is one in which the promisor is charged by law, as a matter of public policy, with the duty to use care in the safeguarding, as in the case of a common carrier, an innkeeper or other bailee.

(4) The injury was intentional on the part of the promisor, or was a conversion of the property by the promisor.

These are generally called the Ports Authority exceptions to the economic loss rule. Ports Authority v. Fry Roofing Co., 294 N.C. 73, 81, 240 S.E.2d 345 (1978), rejected in part on other grounds, Trustees of Rowan Tech. v. Hammond Assoc., Inc., 313 N.C. 230, 242, 328 S.E.2d 274, 281 (1985).

Be aware that if one of these exceptions does not apply, the economic loss rule may bar any negligence action, including an action for contribution or indemnity.

For example, where the owner sues the general contractor for construction issues, the general contractor cannot bring a contribution or indemnity action against his subcontractors, as there is a contract between them and only contractual remedies will apply. Kaleel Builders, Inc. v. Ashby, 161 N.C.App. 34, 42, 587 S.E.2d 470, 476 (2003).

What is the “Economic Loss Rule” and how does it effect me?

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You may wonder why you cannot recover for certain damages on a construction project. The answer, in all likelihood, is the Economic Loss Rule. The Economic Loss Rule is a rule of law that says, essentially, if you have a contract with another party, and the only damages you suffer are to the project which is the subject of that contract, then no negligence action can lie. Essentially, you are stuck with basic breach of contract principals and remedies.

The rationale for the economic loss rule is that where there is a contract, the parties are free to include, or exclude, provisions as to the parties’ respective rights and remedies. See, e.g., Hospira Inc. v. Alphagary Corp., __ N.C. App. __, 671 S.E.2d 7, 14 (2009), discussing the rationale behind the rule. The effect of the rule is that in those situations, parties are limited to their contractual remedies. (Another reason for a well-drafted contract!). No consequential, incidental, or other type claims can be made unless expressly provided for in the contract.

This rule does not apply if no contract exists between parties (a situation called “lack of privity”). The parties are free in that case to sue under a negligence theory.

For example, an architect may be sued by the general contractor or its subcontractors working on a construction project for economic loss foreseeably resulting from breach of architect’s common-law duty of due care in the performance of his contract with the owner. Davidson v. Jones, 41 N.C.App. 661, 255 S.E.2d 580 (1979).

Are there exceptions to the economic loss rule? Yep. Those exceptions are detailed in my next post.

 

Handling Threats of Contract Termination in the Construction Context

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The threat of a contract termination, especially one “for cause” as opposed to “for convenience” , is something that strikes terror in the heart of many contractors.  The request by an owner to terminate for cause is something that must be handled carefully by the design professional/contract administrator.  A misstep by any party can cost untoward damages relating to contract termination in the construction context.

 

Managing Changes on the Construction Project

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As sure as Santa’s arrival each year, the setting of the sun each night, and the arrival of the bowl games each December, there will be changes to a construction project.   How you manage those changes is important.  If you can properly document delays, changes in scope, or other issues, you can recoup your time and expenses.  If you fail to manage changes well, you are literally throwing money away.  And– if you are a design professional and do not have a good system in place for handling change order requests, you are almost guaranteeing a lawsuit at the end of the project.  Read more on how to handle changes in the AIA documents here.

 

Understanding the Construction Contract Before You Sign It

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Construction contracts are not all alike.  Though they may familiar AIA form, for example, they often have changes, strikethroughs, and the like which can seriously alter the controlling language.  The time to read and understand your contract is before you sign it.  Contract specifics, such as your scope of services, need to be discussed upfront, while everyone is happy and willing to negotiate in good faith.