The Economic Loss Rule and Tort Claims by Owners against Design Professionals

This blog post looks at the question of when a project owner, who has a contract with the design professional, may assert an action against a design professional in negligence for purely economic losses. Actions against design professional can arise under a number of legal theories, but the two most common are contract and tort. Tort claims focus on duties imposed by law, while contract claims center on obligations agreed upon by the parties. The distinction often determines whether a plaintiff can recover purely economic losses and whether privity of contract is required.

The distinction between contract and tort is significant due to the availability of different remedies, limitations periods, and burdens of proof. It is normally to a plaintiff's advantage to get both tort and contract claims before the trier of fact when the same facts will sustain either cause of action, because access to multiple theories of recovery may permit a plaintiff to avoid legal or remedial pitfalls which may apply to one cause of action but not another. Niagara Mohawk Power Corp. v. Stone & Webster Eng'g Corp., 725 F. Supp. 656 (N.D.N.Y. 1989).

Economic Loss Rule

In some jurisdictions the ability to recover purely economic losses in tort is limited or precluded by the economic loss rule. “The economic loss rule holds that when the bargained-for level of quality in a contract is not met, the law of contracts provides the sole remedy. Tort recovery is not available because the contract defines the breach and the damages.” McConnell v. Servinsky Eng'g, PLLC, 22 F. Supp. 3d 610 (W.D. Va. 2014).

Jurisdictions That Apply the Economic Loss Rule to Tort Claims against Design Professionals 

As the Hawaiian Supreme Court has noted: “In the context of construction litigation involving design professionals, sound policy reasons counsel against providing open-ended tort recovery to parties who have negotiated a contractual relationship.”  The court went on to state that if tort and contract remedies were allowed to overlap, certainty in allocating risk would decrease and the construction industry would suffer, because it is the industry in which we see most clearly the importance of the precise allocation of risk as secured by contract. City Exp., Inc. v. Express Partners, 959 P.2d 836 (Haw. 1998).

The Arizona Supreme Court, following the same logic, held that the economic loss rule precluded an owner’s claims against an architect whose designs for an apartment complex did not comply with HUD regulations, and which required the owner to incur substantial costs to come into compliance with those regulations. The court went on to state that in the construction defect context, involving only pecuniary losses, there were no strong policy reasons to impose tort liability in addition to contractual remedies. “The economic loss doctrine appropriately applies in this context because construction contracts typically are negotiated on a project-specific basis and the parties should be encouraged to prospectively allocate risk and identify remedies within their agreements.” Flagstaff Affordable Hous. Ltd. P'ship v. Design All., Inc., 223 P.3d 664 (Ariz. 2010).

Jurisdictions That Do Not Apply the Economic Loss Rule to Tort Claims against Design Professionals 

Nonetheless, some jurisdictions, even those that apply the economic loss rule in other contexts, allow tort actions against design professionals by project owners. In Florida, which applies the economic loss rule in products liability cases, the Florida Supreme Court has held that the economic loss rule did not bar a cause of action against a design professional for negligence, even where purely economic damages resulted. Moransais v. Heathman, 744 So.2d 973 (Fla. 1999).

Similarly, the Fifth Circuit, applying Mississippi law, has held that the economic loss rule did not preclude negligence claims against an engineer, because Mississippi law did not apply the rule outside the context of products liability. Lyndon Property Ins. Co. v. Duke Levy and Assoc., 475 F.3d 268 (5th Cir. 2007).

Alaskan courts have created an exception to the economic loss rule for matters involving design professionals and have held that “a project owner may sue a design professional in tort for economic losses arising from the professional’s malpractice, despite the existence of a contractual relationship between the parties.” State, Dep't of Nat. Res. v. Transamerica Premier Ins. Co., 856 P.2d 766 (Alaska 1993).

Nebraska, which generally limits the economic loss rule to products liability and breaches of contractual duties where no independent tort duty exists, allows tort claims by owners against design professionals, even in the absence of personal injury or damage to other property. Getzschman v. Miller Chem. Co., 443 N.W.2d 260 (Neb. 1989).

Louisiana also appears to recognize the right of a project owner to pursue tort claims against a design professional. However, a tort claim versus a contract claim may be something of a distinction without a difference, as Louisiana does not broadly apply the economic loss rule and the limitations period is likely the same regardless of whether the claim against the design professional is in tort or contract. See City of Shreveport v. CDM Smith, Inc., 2025 WL 1947593.

The Special Relationship Exclusion to the Economic Loss Rule

Finally, even in jurisdictions that do not allow tort claims by owners against design professionals because of the economic loss rule, there may nonetheless be a cause of action in tort if there is a special relationship which creates a duty of care. See, e.g., Niagara Mohawk Power Corp. v. Stone & Webster Eng'g Corp., and Blahd v. Richard B. Smith, Inc., 108 P.3d 996 (Idaho 2005).

Conclusion 

In conclusion, while negligence actions by project owners against design professionals may be precluded by the economic loss rule in some jurisdictions that apply the rule broadly, other jurisdictions either do not apply the economic loss rule in the context of design professional negligence or have created exceptions that allow such claim. In some jurisdictions that do not allow tort claims by an owner against design professionals because of the economic loss rule, there may still be a cause of action in tort when there is a special relationship that creates a duty independent of the contractual relationship.

Author and Editor Stu Richeson is an attorney with Riess LeMieux in New Orleans, primarily focusing on commercial litigation with an emphasis on construction matters.

Muhammad Ali, a Chocolate Chip Milk Shake, and a $100 Dollar Bill

In 1982, I was 16 years old and was attending a tiny Jewish high school in the basement of Temple Beth El on Crescent Heights. Upon my daily release from the dungeon, I would walk up to Sunset Boulevard to go to Schwab’s Pharmacy where I could grab something to eat. Schwab’s closed later that year, and I didn’t know it would be one of the last times for me to hang out at the favorite place of James Dean, Marilyn Monroe and Elvis Presley. On my way there, I would walk pass Coconut Teaszers, a punk rock venue, and Baskin Robbins Ice Cream Shop.

When I needed a job to buy a car, the manager at the Baskin Robbins (who was a friend of mine) hired me. Every day after high school, I scooped and restocked ice cream, mopped the floors, cleaned the bathrooms, and wore a silly uniform that invited my friends to come by to tease me. The job wasn't glamorous, but I was happy to earn some spending cash to buy the much-desired parachute pants and moon boots so I could dress the part for the upcoming Duran Duran concert at the Forum.

One day, a Rolls Royce drove into the parking lot and out came a tall, well-dressed man. He walked up to the counter to place an order. Looking at him, it took me a few seconds to register it was Muhammad Ali. “Muhammad Ali!” I blurted out. He responded, “Yes, that’s my name. Now here is what I want you to make me.” He continued, “I want a milk shake with chocolate chip ice cream and vanilla syrup.”  “Yes sir”, I said, and off I went to make a milk shake for the Champ. My co-worker was as stunned as I was; we worked in tandem making the best chocolate chip, vanilla syrup milkshake in the world. We blended the frozen concoction and proudly served it up in a large paper cup. “Would you like whipped cream Mr. Ali?” I asked. “No thank you,” he replied. As I handed him the milkshake, he popped a $100 dollar bill onto the counter and said, “keep the change.” And just like that he was gone.

At 16 years old working for $3.35 an hour I don’t know if I was more shocked by meeting the Champ or by realizing my cut of the $100 was $50. We didn’t even ring up the sale, we simply put the $100 dollar bill in the register, and each took out $50. When we told the store owner what had happened, he smiled and said “yep, Ali comes in here all the time, usually on a Thursday afternoon.” Guess who was on the schedule every Thursday?

I only saw the Champ two more times. But it was the same routine: chocolate chip shake, vanilla syrup, and a $100 dollar bill. The only difference was, once we saw that Rolls Royce drive in, we raced to work making sure that shake was ready for Mr. Ali the second he walked in the door. He smiled with pleasure knowing that we respected that the Champ should not be kept waiting a second for his treasure. We proudly presented his order before he needed to ask for it. “Mr. Ali, your chocolate chip shake with vanilla syrup.” Each time, he would smile and place a $100 dollar bill on the counter before leaving.

There wasn’t anyone there to see Mr. Ali's graciousness. But what he did made a difference in the life of a young punk. Was he even there for a chocolate chip shake or did he just love the idea of treating us to his presence and generosity?

My job at Baskin Robbins ended in infamy when I instigated an ice cream food fight and was subsequently fired, but my memory of serving “The Greatest” will forever be frozen in my mind.

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Author Joel Bertet provides mediation services focused on resolving disputes in the construction and real estate sectors. With 30 years of experience, Joel is an established construction lawyer, legal advisor, licensed General Contractor, and Licensed Real Estate Broker. Joel can be contacted at joel@resolvebertet.com.

Top 10 Take-Aways from the 2025 Fall Forum Meeting in Louisville

Last week saw the first-ever meeting of the ABA Forum on Construction Law in Louisville, Kentucky. The event brought together over 500 attorneys, ADR neutrals and consultants for what was the first meeting helmed by incoming Forum Chair, Tracy James. Thanks to the hard work and dedication of countless individuals, including but not limited to Program Coordinators Colbie Campbell and Liz Kraengel, the program was an unbridled success. Focused on all things contract negotiation and project start-up, it was fitting way to kick off the 2025-26 year of programmatic excellence. As usual, the lessons learned were many and varied but read on for my top 10 take-aways.

10. The Kentucky Derby is the most-watched and most-attended horse race in the United States. The iconic Louisville race has been run every year since its inception in 1875. Traditionally held the first Saturday in May as the first leg of the Triple Crown, the Derby is referred to colloquially as the "run for the roses" and "the most exciting two minutes in sports." While the Derby event itself is brief, the Churchill Downs is a bustling city of racing-related activity for most of the year and stables over 1,400 horses annually. Travis Stone (the voice of the Kentucky Derby) and Derby bugler, Steve Buttleman (who has been playing the "call to the post" at Churchill Downs for over 30 years) opened the Fall Meeting in grand style with a live demonstration of their skills and a little bit of Derby spirit.

9. Don't settle for business as usual when it comes to arbitrator selection. When it comes to arbitrator selection in complex disputes, business as usual may no longer cut it. At the Division 1 lunch Wendy Venoit and Sean Dillon spoke of newer, more robust tools which parties can avail themselves to ensure that all of the arbitrator candidates they are presented with have the expertise and calendar availability needed to effectively resolve the dispute at hand. The AAA-ICDR offers an Enhanced Arbitrator Selection process on large, complex cases, which allows parties to receive additional information before making their selections. Gone are the days of having to stealthily suss out the predilections of your potential panel...if the parties agree, they can submit questions for candidates to answer, ask the AAA to pre-screen candidates by certain criteria, or the AAA can arrange for all parties to interview the candidates by telephone or video call. 

8. "There is no such uncertainty as a sure thing." As exemplified by this quote by Robert Burns, certainty in contractual rights and remedies can often be elusive. Owners and contractors who drive hard bargains during contract negotiations to impose overbearing, one-sided contracts on downstream parties may be surprised to eventually find out that the "ironclad" provisions they negotiated (such as aggressive forum-selection clauses, indemnity and LD provisions) may not actually be enforced when conflicts arise. Whether contrary to statute, public policy, or the intent of the parties, overly aggressive contract provisions are never a sure thing. To make matters worse, the can make their beneficiaries overly complacent and overbearing in claims negotiations. To truly avoid conflict on your projects, the better course of valor, according to panelists William Geisen, Kristine Kubes, Matthew Mendoza, and Rob Ruesch, may be to deal reasonably (and communicate openly) with project participants.

7. Customize your payment provisions. From (a) contracting the right to stop work if unprocessed change order requests exceed a certain amount to (b) requiring that the owner deposit contested sums into an escrow account, there are many ways to modify payment terms to better suit a project's needs. John Slates and Lauren Catoe reviewed payment-related contracting considerations; and, while treatment of stored materials is never the first thing on anyone's mind, they cautioned attendees not to overlook the importance of requiring a contractor to label and segregate materials procured for their project. Otherwise, if the contractor in possession of the materials declares bankruptcy, the stored materials (even ones the Owner has paid for) could become part of the debtor's estate.

6. Pick your protection when it comes to performance security. Performance security mechanisms are risk-management tools designed to ensure that contractors fulfill their contractual obligations. While retainage and payment/performance bonds are perhaps the most frequently used tools to ensure a contractor and its subs will abide by their obligations, according to Nick Brooks, Patrick Kirby, and Kristen Sherwin, there are a variety of other tools that can operate to protect owners and avoid the potentially debilitating ramifications of contractor/subcontractor default on a project. The less utilized options include parent guarantees, Subcontractor Default Insurance, and Standby Letters of Credit. Whether and which of these tools are appropriate will depend on the nature, size, and complexity of the project.

5. Spearin may not be all that it's cracked up to be. Under the well-known Spearin doctrine, liability for defective design rests with the owner in traditional DBB projects; however, it may be explicitly contracted out by clauses that shift design verification duties to the contractor. This can be accomplished in a variety of ways such as by requiring the contractor to comply with performance specifications (rather than traditional prescriptive specifications), validate constructability or “fitness for purpose”, verify all dimensions and conditions, or assume responsibility for design adequacy. That said, panelists Laurie Choi, Kimberly Davison, and Kendall Woods offer this word to the wise for any owner attempting to divorce itself of design liability: courts require such disclaimers to be clear and specific. Ambiguous language can fail to override Spearin and may be presumptively void depending on the jurisdiction. And, if the owner drives too hard a bargain they may unwittingly draft themselves out of insurance coverage for future claims.

4. Closeout should start during pre-construction. This was the takeaway from panelists April Parrish, Sunu Pillai, and Max Taylor. Closeout should not be an afterthought as it is an important milestone in the life cycle of a project and for good reason; it signals the fulfillment of contractual obligations, enables release of final payment and retention, and provides Owner with the documentation it needs to operate and maintain the completed facility. It is a mistake to wait until the end of the project to start thinking about what will be needed for final completion. Including project closeout in a meeting focused on contract negotiation was done because “successful closeout hinges on having well-defined expectations from day one,” beginning with clear communication during scope reviews about what closeout deliverables will be required. Good documentation throughout the project, particularly in relation to change orders, will help ensure the closeout process proceeds smoothly.

3. Float like a butterfly, sting like a bee. Muhammad Ali was born as Cassius Clay in a racially segregated Louisville in 1942. He famously started to box at the age of 12 after his bicycle was stolen. From a place of powerlessness, he would eventually rise to become the greatest boxer and one of the most recognizable athletes the world has ever known. Ali had a penchant for creating rhymes (the bee/butterfly tagline being perhaps his most famous) and has been credited with being the first-ever rapper. Known equally well for his activism, Ali was a principled man of many talents. Attendees of the Forum's Fall Meeting received an insider's view into Ali's life at the Muhammad Ali Center, a museum dedicated to honoring and celebrating Ali's principles of peace, social responsibility, respect, and personal growth.

2. DEI is not dead. Despite mounting pressure and political scrutiny, not all companies are distancing themselves from their long-standing commitments to diversity, equity, and inclusion (DEI). Jimmie McMillian, the Chief Diversity Officer and Senior Corporate Counsel at the Penske Entertainment Group (which includes the Indianapolis Motor Speedway) shared what Penske is still doing to foster and promote diversity in the motorsports industry. In a compelling and inspirational Q&A with Sam Laurin, Jimmie spoke of his work for the Race for Equality & Change, an initiative to provide opportunities for underrepresented women and men in the motorsports industry and open-wheel racing. Beyond the initiative’s mentorship programs for students and bringing more diversity in racing, Jimmie hosts thousands of young people at the Speedway each year to get them excited about the sport.

1. "Building the best construction lawyers" necessitates that we address mental health. In a first-ever-of-its-kind presentation, the Forum invited Daniel Lukasik, New York State Judicial Wellness Coordinator, to present on the mental health challenges that face the legal field. Daniel shared the grim statistic that, according to a 2016 poll of 13,000 attorneys, it was discovered that 28% suffered from depression and 11.5% had experienced suicidal ideations, levels which are 4 times higher than the rates seen in the general population. According to the National Task Force on Lawyer Well-Being, poor mental health and well-being in the law are driven by a "parade of difficulties" which includes work addiction, sleep deprivation, job dissatisfaction, work-life conflict, incivility, a "narrowing of values so that profit predominates," and negative public perception. Even those lawyers (and law students) who do not develop mental illness or substance use disorders as a result of these forces still may not be thriving. One study suggested that attorneys feel depleted/exhausted, pessimistic towards their works, and ineffective about half of the time. These sentiments are precipitated by a combination of heavy workloads, long hours, demanding clients/colleagues, a feeling of lack of control, lack of recognition, toxic work environments, and fear of job loss. While there are tools each individual can use to improve their mental health (engaging in deep breathing exercises and expressions of gratitude to name a couple), legal organizations also need to acknowledge and mitigate mental health impacts to help create positive and healthy workplaces.

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Author and Editor-in-Chief Marissa L. Downs is a construction attorney in Chicago, Illinois where she has been practicing law since 2009. Marissa is a partner at Laurie & Brennan, LLP and represents owners, general contractors, and subcontractors in all phases of project procurement, claim administration, litigation, and arbitration/trial. Marissa can be contacted at mdowns@lauriebrennan.com.

Making the Case for Standing Construction Mediators on Every Complex Construction Project

Construction abandonments of private projects have hit an all-time high. Private developers scrapped more projects in May 2025 than in any other month on record, according to the latest data from Cincinnati based ConstructConnect.

The Project Stress Index is a measure of construction projects that have been paused, abandoned, or have a delayed bid date. “Abandonment activity has continued to rise, reaching its highest reading in over a year,” said Devlin Bell, associate economist at ConstructConnect. For the month of May 2025, private abandonments increased 62.6% over the month and are now up 92.2% year over year. That surge has led to the highest level of abandonments since ConstructConnect began tracking data in mid-2019.

On top of that, contractors are facing increased cost pressures as prices for key materials surge under the Trump Tariffs. “The acceleration in the year-over-year rate of increase is alarming, given that most of the tariffs announced so far were not in effect when these prices were collected…It is likely that contractors will be hit with substantial additional price increases shortly, unless the tariffs are rolled back,” said Ken Simonson, Chief Economist at the Associated General Contractors of America.

This level of stress sets the stage for a coming storm of epic disputes in the construction industry. Those that prepare for the storm by taking proactive steps to prepare will fare better than those that simply wait for the post storm clean-up efforts.

The Case for Standing Construction Mediation

Construction is a technical and complex industry. The best drafted construction contracts attempt to consider the complex and shifting sands in a construction project. Common issues such as change orders, cost overruns, changes of scope, building code challenges and even tariffs are now commonly dealt with. Even so, disputes are bound to arise and are part of the process. It is a process that is traditionally full of challenges and problems. The best players in the industry understand this difficult and challenging process and tend to be experts at getting to the finish line through the mine field.

However, even the best of the best will be challenged when the industry faces this tsunami of economic challenges. Record-breaking abandonments coupled with unforeseen cost increases have set the stage for an explosion of construction disputes. Construction projects under normal economic times are fraught with challenges and disputes. We are now treading in unchartered waters where tariffs and economic indicators are putting untold pressures on the industry. The normal number of disputes and complexity of the challenges have just become multiplied by exponential levels. 

A Standing Construction Mediator contracted on your project is your construction litigation insurance policy. No one would build a construction project without insurance. Insurance coverage is a fundamental part of any construction project. Insurance coverage often times continues for years after project completion. It would be unfathomable for anyone to build without insurance coverage. 

Why would you get into a project knowing that disputes will be exponentially higher than in previous years without a mediator on hand to help navigate the guaranteed problems and disputes.

Yet we build without mediation coverage. A Standing Construction Mediator is your insurance policy against the growing risk of construction dispute in today’s economy.

The Benefits of Standing Construction Mediation

A Standing Construction Mediator becomes an integral part of the construction project from the outset. They are brought into the project by the owner early in the process at the time of selection of Architects, Engineers and General Contractors. The Standing Construction Mediator (SCM) is proficient in the technical world of construction and is familiar with the fundamental areas of construction such as finance, architectural plans, engineering plans, building process, general contracting, sub-contracted trades, suppliers and building codes. The SCM will be written into all contracts with key parties and shall be ready to serve anyone who has a dispute that arises during the project. Time is of the essence in a construction project and delays caused by disputed change orders requests, disputed cost overruns disputes and delayed performance result in enormous costs to all the parties involved.  When these disputes cannot be resolved quickly and efficiently, they morph into legal battles which often times get put onto the back burner to be resolved through litigation after completion of the project. Meanwhile, the dispute at hand will cause costly delays, mechanics lien issues, stop orders, and cash flow challenges for all affected parties.

With a SCM involved in the process such disputes can be resolved immediately because:

1) The SCM is familiar with the full scope of the project having reviewed all key construction documents and all key player contracts (GC, Subs, Suppliers, Architects, Engineers and related professionals). 

2) The SCM is included in all contracts along with the process for dispute resolution during the course of construction. 

3) The SCM makes themself immediately available to resolve all course of construction disputes either by in person at the construction site or via zoom.

4) The dispute is resolved immediately and before it has a change to grow from spark to fire.

5) There is a balance of power between all parties allowing for equal access to dispute resolution during the construction process.

An Example of SCM at Work

A tile subcontractor is hired by the General Contractor (“GC”) on a hotel project to supply and install tile specified according to plans. The installation schedule is moved back six months due to construction delays caused by building inspection corrections. The tile subcontractor was informed of the six-month delay and, as a result, does not purchase the tile for another 5 months to preserve cash flow. Five months later, tile subcontractor is informed by tile supplier that there is an increase of 20% on the tile due to tariffs and increased shipping costs and that the tile is now on back order and will not be available for another 4 months. The additional 20% charge in tile will cost the tile subcontractor $50,000. The tile subcontractor also loses another job where it could have made $500,000 profit which it had scheduled to start in six months. The tile subcontractor informs the GC that there will be: 1) a $50,000 change order; 2) 4 months further delay; and 3) a consequential damage claim for its lost $500,000. 

The GC refuses the change order of $50,000 stating that the tile subcontractor should have purchased the tile earlier. The GC then informs tile subcontractor that it must start in six months, and that the extra 4-month delay is not the GC’s problem. The GC sees the $500,000 lost profit claim as an insult and is now more inclined to fire the tile subcontractor, hire another sub, and hold the tile subcontractor liable for additional costs involved.

Without an SCM, this would have a classic end with the tile subcontractor walking off the job and ending the relationship with this GC. The GC would hire a substitute tile subcontractor at a higher cost resulting in his presenting the owner with a change order resulting in added friction or possible litigation between the owner and GC. The GC who played hard ball with the tile subcontractor would now find himself at the mercy of the owner who would tell the GC he was hired to manage all subs and suppliers and that he should have verified that the tile was purchased on time instead of relying on a tile subcontractor and thus was not paying for the additional cost of tile or the new tile subcontractor costs.

With an SCM, the tile subcontractor would have called the mediator and requested an immediate mediation of the matter. The SCM is on call for precisely this type of dispute and would immediately rise to the challenge. A mediation would be immediately scheduled and either through on-site visits, phone calls or zoom meetings, a successful mediated settlement would result. Solutions agreed to, delays minimized, relationships preserved, and the project continues with a reasonable settlement of the dispute. 

Why not simply bring in a traditional mediator to address such issues. Why the need for an SCM?

1) Expert construction mediators are normally booked out for 6-12 months.

2) General mediators with no construction specialization are less well equipped to deal with such technical disputes and are usually not immediately available either and can be cost prohibitive. 

3) The SCM is precisely contracted for this scenario and is already familiar with the scope of work and all contracts and is “on call” to resolve these types of disputes.

What is the Process for Hiring an SCM?

An SCM is typically brought into the project before any key contracts are signed. An initial flat fee is paid to the SCM for review of the scope of work and for involvement in contract review and SCM contract terms.

Next, the SCM process is included in all contracts between the parties with clearly defined steps for mediation of disputes arising during and after project completion. A fixed hourly rate is set for the SCM services which is split evenly among the interested parties.

The parties are introduced to the SCM early in the process and are provided all the information necessary for them to understand how they can get the SCM involved to help mediate and resolve disputes as they arise.  Should mediation not resolve the dispute, the parties are free to continue the traditional trajectory towards litigation (or arbitration).

Given the recent statistics which will give rise to enormous construction disputes, it is now more important than ever to have the insurance of a SCM on retainer to push projects through the steps of completion rather than to the steps of the courthouse.

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Author Joel Bertet provides mediation services focused on resolving disputes in the construction and real estate sectors. With 30 years of experience, Joel is an established construction lawyer, legal advisor, licensed General Contractor, and Licensed Real Estate Broker. Joel can be contacted at joel@resolvebertet.com.