Negligent Misrepresentation: Chipping Away at the Design Professional's
Protection under the Economic Loss Doctrine
March 2001
The merits and failings of the economic loss
doctrine as applied to the design professions have been continually debated.
Learn how relatively recent court opinions have signaled further erosion of
the protection that the doctrine provides.
by Kenneth
A. Slavens
Brown & James,
P.C.
The merits and failings of the economic loss doctrine, as applied to the
design professions, have been continually debated with the protection provided
ebbing and flowing with the debates. Some relatively recent court opinions have
signaled further erosion of the protection that the doctrine provides. In this
article, we will look briefly at what the doctrine is and exceptions that have
recently carved away some of that protection.
What Is the Economic Loss Doctrine
In general terms, the economic loss doctrine provides that the design professional
has no liability to entities with whom the design professional has no contractual
privity for losses or damages that are of a purely economic nature. As we have
all heard hundreds of times, the statement of what the doctrine is can be relatively
simple; however, the application is difficult. The idea behind the doctrine
is that if the dispute involves economic losses, the parties should resolve
that conflict based on the contracts to which all agreed and not by resorting
to societally imposed tort duties.
The first question is often: What are economic damages? These losses could
include a contractor's extended overhead or a developer's lost profits. The
Supreme Court of Illinois gave one of the more workable definitions of "economic
losses" as follows:
"Economic loss" has been defined as "damages for inadequate value, costs
of repair and replacement of the defective product, or consequent loss of
profits-without any claim of personal injury or damage to other property
* * * " [citation] as well as "the diminution in the value of the product
because it is inferior in quality and does not work for the general purpose
for which it was manufactured and sold." [Citation.] These definitions are
consistent with the policy of warranty law to protect expectations of suitability
and quality. [2314 Lincoln Park West Condominium
Association v Mann, Gin, Ebel & Frazier, Ltd., 555 NE2d 346, 348
(Ill 1990).]
In this Illinois Supreme Court case, the court concluded that the economic
loss doctrine did bar the plaintiff's negligence action, a tort duty, seeking
an award of damages for the cost of making certain repairs to the building in
which the association members' condominium units were located. In denying the
recovery sought on the basis of the economic loss doctrine, the court held:
The gravamen of plaintiff's claim for negligence against Mann [the project
architect] is dissatisfaction with the way in which the building was designed
and constructed, and the failure of the building to meet the owners' expectations.
It may be noted the unit owners received express warranties from the developer
at the time they purchased their units, and the plaintiffs are currently
seeking recovery from their seller on that basis. The present claim, however,
is limited to the plaintiff's theory that the defendant architectural firm
was negligent in its design of the structure. As our prior decisions concerning
the construction industry fully illustrate, such a claim concerns quality,
rather than the safety of the building and thus is a matter more appropriately
resolved under contract law. (Citations omitted.) We decline to impose on
Mann a duty in tort to protect the unit owners from the sort of loss asserted.
The architect's responsibility originated in its contract with the original
owner, and in these circumstances its duties should be measured accordingly.
Recovery of the nature requested here essentially seeks damages for a difference
in quality. "There is room in the market for goods of varying quality, and
if the purchaser buys goods which turn out to be below its expectations,
its remedy should be against the person from whom it bought the goods, based
upon the contract with that person." [Id.
at 352–53.]
Adoption of the Doctrine
Where the economic loss doctrine applies is a question of state law, which
means that you must look at each state separately to determine if the doctrine
has been adopted by that state. As noted above, the economic loss doctrine falls
in and out of favor with the courts. For example, for years Florida had a very
solid economic loss doctrine. Florida followed the economic loss doctrine in
matters related to the construction industry following Spancrete v Ronald E. Frazier & Assoc., P.A.,
630 S2d 1197 (Fla App 1994). In mid-1999, the Florida Supreme Court handed down
the holding in Moransais v Heathman, 744 S2d
973 (Fla 1999).
Moransais arose from a suit filed by a home
purchaser against the engineers he had retained before purchasing the home to
inspect the home and advise of any deficiencies. The allegations of the lawsuit
were that there was no bodily injury or property damage. The damages alleged
suffered were the cost of repair or diminution in value of the undisclosed and
undetected defects in the home. After a detailed review of the Florida history
of the economic loss rule, the Florida Supreme Court observed as follows:
Unfortunately, however, our ... holdings have appeared to expand the
application of the rule beyond its principled origins and have contributed
to applications of the rule by trial and appellate courts to situations
well beyond our original intent.
The question in Moransais became whether the
homeowner could hold the individuals employed by the engineering firm, a corporation,
liable for the negligent acts. The argument was that there was no contractual
relationship between the individuals and the homeowner. The homeowner's contract
was with the firm.
The court went on to hold:
... Today, we again emphasize that by recognizing that the economic loss
rule may have some genuine, but limited, value in our damage law, we never
intended to bar well-established common law causes of action, such as those
for neglect in providing professional services. Rather, the rule was primarily
intended to limit actions in the product liability context [footnote omitted]
and its application should be limited to those contexts or situations where
the policy considerations are substantially identical to those underlying
the product liability-type analysis. We hesitate to speculate further on
situations not actually before us. The rule, in any case, should not be
invoked to bar well-established causes of action in tort, such as professional
malpractice.
* * *
Accordingly, we hold that the economic loss rule does not bar a cause
of action against a professional for his or her negligence even though the
damages are purely economic in nature and the aggrieved party has entered
into a contract with the professional's employer.
A More Limited Erosion
As opposed to Florida, some states have taken different approach to the limitations
they believe exist in the application of the economic loss doctrine. Two recent
court decisions illustrate the approach and the recognition of an exception
to the doctrine's protection for the tort of negligent misrepresentation. Both
Missouri and Illinois, which have recognized the economic loss doctrine, recently
expressed the belief that the doctrine does not insulate a design professional
from the tort of negligent misrepresentation.
Missouri's Court of Appeals for the Eastern District faced the question of
whether the lack of contractual privity insulated an engineer from the claims
of a disgruntled home owner in Miller v Big River Concrete,
14 SW2d 129 (Mo App 2000). In Miller, during
construction, the homeowner observed signs he thought might indicate problems
with the concrete foundation of his home. The homeowner contacted the concrete
supplier. To allay the homeowner's concerns, the supplier of the concrete retained
an engineering firm to render an opinion about the concrete foundation. The
opinion was based on erroneous and inaccurate information.
The homeowner subsequently found the concrete was not of the quality represented.
The homeowner's claim was to recover for damages which resulted from the concrete's
"diminution in the value ... because it is inferior in quality." The damages
appeared to be clearly economic, i.e.: damages for inadequate value, costs of
repair and replacement, or consequent loss of profits, without any claim of
personal injury or damage to other property.
While acknowledging the economic loss doctrine, the Missouri Court of Appeals
held that the trial court should have looked at foreseeability to the engineer
at the time of rendering the services of the possible injury to the homeowner.
The court indicated that when deciding whether the engineer could be sued, the
focus should have been on foreseeability, and not on whether there was privity
of contract between the homeowner and the engineer. This holding seems to be
contrary other Missouri holdings which have held that absent the privity of
contract, such damages are not recoverable.
Illinois has strongly adhered to the economic loss doctrine for a number
of years. However, even the Illinois Supreme Court decision that recognized
the doctrine found two exceptions:
- Where there is fraud or intentional misrepresentation
- Where the defendant who is in the business of supplying information
for the guidance of others makes a negligent misrepresentation
Yet, the negligent misrepresentation exception has generally not applied
to the design professional. The application to design professional has traditionally
focused on the fact that the design generally results in a tangible product,
whether a building or a product, and any information furnished in the process
by the design professional is merely incidental to the finished product. As
a result, the negligent misrepresentation exception has generally not been found
to be applicable to the design professional.
Now Illinois has clarified the law on this issue, holding that when an architect
or engineer is hired solely to provide information, he or she can fall within
the negligent misrepresentation exception. [Tolan and
Son, Inc. v KLLM Architects, Inc., 719 NE2d 288 (Ill App 1st Dist 1999).]
The plaintiff in the Tolan case was a residential contractor building a townhouse
complex. KLLM was an architectural firm retained to prepare plans and designs
for the complex.
What Does It All Mean?
When trying to assess your risk and potential exposure, the question is crystal
clear, yet the answer is not. First, you need to determine whether the law governing
your work on any given project includes the recognition of the economic loss
doctrine. If not, you have potential exposure not only to your direct client,
but also to all who could have adverse economic impacts visited on them if your
performance fails to meet the accepted standard of care.
Second, if the governing law does recognize the economic loss doctrine, you
are far more insulated. However, be sure to ask about exceptions. If the recent
cases teach us anything, the lesson must be that if the assigned task is to
provide information—apart from design—on which others will rely, you may well
find that the protections of the economic loss doctrine are gone.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.