Florida's Products Liability Economic Loss Rule Bars Claims Where Only Damage Sustained is to the Building Itself

Can a products liability claim survive the economic loss rule (“ELR”) where the only claimed damage to “other property” is to the finished building itself? If your state takes an “integrated” approach to the ELR, the answer to this question should be “no.”

In 2711 Hollywood Beach Condominium Association, Inc. v. TRG Holliday, Ltd., Florida’s Third District Court of Appeal provided clarity on the issue of whether the ELR bars a products liability claim where the only damages sought are repairs and replacement to a building system in which the product is a component part.  307 So.3d 869 (Fla. 3d DCA 2020). 2711 Hollywood was decided against the backdrop of the Florida Supreme Court’s decision in Tiara Condo. Ass'n, Inc. v. Marsh & McLennan Companies, Inc., where the Court limited the ELR to products liability cases. 110 So. 3d 399, 400 (Fla. 2013). The Tiara court reviewed and seemingly cited with approval its prior 1993 decision in Casa Clara Condominium Ass’n., Inc. v. Charley Toppino and Sons, Inc., 620 So.2d 1244 (Fla. 1993) in reaching this decision. Id., 401, 405-406. There, the Court held that the ELR barred a homeowner’s claims against a supplier of allegedly defective concrete, where the only alleged damages were rusting and spalling to the structure of the completed condominium units. Casa Clara Condominium Ass’n., Inc., 620 So.2d at 1245. Despite Tiara’s apparent reliance on Casa Clara, Westlaw’s “KeyCite” system continues to apply a “red flag” warning to the Casa Clara decision.

The 2711 Hollywood decision makes clear that Casa Clara’s holding still applies to product manufacturers and suppliers in Florida. In 2711 Hollywood, the condominium association sued the maker of the component fittings of the condominium’s fire suppression system (“FSS”), claiming that these fittings caused the fire suppression system to leak. 307 So.3d at 870. The association sought damages for future repairs and replacement of the FSS under negligent and strict products liability theories against the fittings maker. Id.

On appeal, the Court affirmed summary judgment entered in favor of the manufacturer based upon Casa Clara. Id. In doing so, it recognized that when a products liability claim arises in the context of real estate, courts are to apply the “object of the bargain” rule. Id. The focus of this rule is on “the product purchased by plaintiff,” rather than “the product sold by the defendant.” Id. Where a product is an “integral part of the finished product,” (i.e., the building), and the only alleged damages are to the building itself, such damage is not considered injury to “other property.” Id. The FSS fittings were an integral part of the FSS, and the completed building. As such, the ELR applied to bar the Association’s products liability claims, because the only alleged damages were the cost to replace the FSS and resulting repair damages to the building. Id.

The 2711 Hollywood decision also reinforces the applicability of the ELR in circumstances where a purchaser or installer attempts to bring a tort-based products liability claim against a downstream manufacturer or supplier. In 1995, the United States Court of Appeals for the Eleventh Circuit applied the ELR to a homebuilder’s claim against the manufacturer of chemicals applied by the homebuilder to its roof sheathing, which allegedly caused the roofs to deteriorate. Pulte Home Corp. v. Osmose Wood Preserving, Inc., 60 F.3d 734, 736 (11th Cir. 1995). It reasoned that while the homebuilder was required to remove roof components (shingles and untreated plywood) due to defective treated plywood, these components were not “damaged,” but rather, removed “as a consequence of replacing” damaged, treated plywood.  Id. at 742 (citing Casa Clara Condominium Ass’n., Inc., 620 So.2d at 1246).

2711 Hollywood provides needed clarification on the scope of cognizable tort-based products liability claims against building products manufacturers and suppliers in the Florida. Absent a showing of personal injury, or damage to property wholly unconnected with the completed building, such claims should be barred. The 2711 Hollywood decision ensures that products liability claims involving only “economic losses” will be dealt with in the manner which best suits them: “[c]ontract law, and the law of warranty in particular.” See Tiara Condo. Ass'n, Inc., 110 So. 3d at 404.

Author Brett M. Henson is a partner with the Sarasota, FL office of Shumaker, Loop & Kendrick, LLP, and is Board Certified by the Florida Bar in Construction Law. He is experienced in representing manufacturers of building products in all phases of litigation and trial.

Western District of Virginia Confronts Several Legal Issues That Frequently Impact Multi-Party Construction Disputes – Economic Loss, Damage to Other Property, Third Party Beneficiary Status, Warranties, Subrogation, and Third-Party Joinder

Robert A. Gallagher, Associate, Pepper Hamilton LLP

Allstate Insurance Company v. Structures Design/Build, LLC, 2016 U.S. Dist. LEXIS 34349 (WD VA March 17, 2016)

This construction dispute case arises from a failed pipe connector that caused water damage to a facility and insured personal property, which Hillel at Virginia Tech, Inc. (“Hillel”) owned in Blacksburg, Virginia. Hillel contracted Structures Design/Build, LLC (“Structures”) to design and construct the facility. Structures, in turn, subcontracted PJ Little Plumbing, Inc. (“PJ”) for plumbing and mechanical installation. PJ purchased the failed pipe connector from CMC Supply, Inc. (“CMC”). Allstate Insurance Company (“Allstate”) insured Hillel for the damage to the facility and the personal property.

As Hillel’s subrogee, Allstate filed a complaint against Structures and PJ. Allstate sued Structures for various state law claims. It sued PJ for negligence and breach of express and implied warranties. PJ filed a third-party complaint to join CMC on a breach of implied warranty theory. PJ and CMC moved to dismiss the claims against them.

The court granted in part and denied in part PJ’s motion. It dismissed the negligence claim against PJ with respect to damages arising from harm to the facility, because the facility was the subject of Hillel’s construction contract. The court denied the motion with respect to damages to personal property stored within the facility, because it represented damage to other property. The court denied PJ’s motion to dismiss Allstate’s implied warranty claim because it found Hillel to be a third party beneficiary to PJ’s subcontract with Structures, and all such construction contracts in Virginia contain an implied warranty to perform services in a good, safe, and workmanlike manner, free of defects. The court dismissed Allstate’s express warranty claim because it failed to plead sufficient facts to support the existence of any express warranty between PJ and Hillel.

The court granted CMC’s motion in its entirety. The court held that PJ’s third-party complaint failed to state a claim for derivative liability under Rule 14 of the Federal Rules of Civil procedure because it alleged facts that were factually distinct from those alleged in the original complaint. PJ alleged that CMC was liable to Hillel because it manufactured a defective connector, whereas Allstate alleged that PJ was liable on the basis that it improperly installed or selected an unsuitable connector. The court noted that if Allstate succeeded in proving that PJ failed to properly install or select the connector it would do little to support PJ’s claim against CMC that the connector was defective.
The following summarizes the court’s reasoning for its conclusions:

Allstate’s Negligence Claim Against PJ

PJ argued that the economic loss doctrine barred Allstate’s negligence claim. The court considered two factors: (i) whether the alleged breach involved duties outside of those assumed under contract, and (ii) whether the property damage included property that was not subject to the agreement between the parties. The court first found that the complaint failed to allege that PJ breached any duty imposed by law, as opposed to the parties’ contract.

The court next found that damage to the facility could not be recovered in tort because it represented only economic loss. According to the court, Hillel had purchased a “package” for the construction of its facility and one component of that package – the pluming work – damaged other parts of the construction package. The court found the case of Sensenbrenner v. Rust, Orling & Neale, Architect, Inc., to be instructive. 374 S.E.2d 55 (Va. 1988). In Sensenbrenner, the owner contracted a building company to design and construct a house with a pool. When a defect in the pool caused damage to the house’s foundation, the owner sued in tort to recover for damages to the pool and the house. The Virginia Supreme Court found that the owner alleged nothing more than “disappointed economic expectations,” because the owner contracted for the purchase of a package, which was “alleged to have been defective” as “one or more of its component parts was sufficiently substandard as to cause damage to the other parts.”

The court, however, held that Allstate could recover for damage to the personal property stored at the facility because that property was not part of Hillel’s contractual package for the construction of the facility. The court noted that PJ had appeared to concede that this part of Allstate’s claim could go forward. The court did not allow the mere existence of this other property damage to open the door for recovery for damages that related to property within the construction package. So the court permitted Allstate to proceed on its negligence claim against PJ for only damages to the personal property stored at the facility.

Allstate’s Breach of Warranty Claim Against PJ

Allstate alleged that PJ breached express and implied warranties. PJ argued that Allstate could not support its claims because neither Hillel nor Allstate had a contract with it. The court found that while PJ did not contract directly with Hillel, it was the third party beneficiary to PJ’s subcontract with Structures, because the subcontract contained several provisions whereby PJ agreed to provide indemnity to Hillel. Although the court found one of the indemnity provisions void under Virginia’s anti-indemnity laws, it believed that the remaining provisions were sufficient to show that Hillel was an intended beneficiary of the subcontract.

Notwithstanding Hillel’s status as a third party beneficiary to the subcontract, the court dismissed Allstate’s express warranty claim because Allstate failed to allege sufficient facts to support the existence of any express warranty between PJ and Hillel. The court concluded that Allstate had sufficiently stated a claim for breach of the implied warranty found in all construction contracts in Virginia, which require contractors to perform its services in a “good, safe, and workmanlike manner free from defects and in accordance with all applicable codes and standards.”

PJ’s Third-Party Complaint to Join CMC

CMC moved to dismiss the third-party complaint on the basis that it failed to state a claim for derivative liability under Rule 14 of the Federal Rules of Civil Procedure. Under Rule 14, a party may not implead a third-party merely because he may be liable to plaintiff. In other words, a third-party complaint that alleges “it’s him, not me” is improper under Rule 14. CMC argued that PJ’s third-party complaint simply contended that CMC was liable directly to Hillel because it manufactured a defective part, which if true wholly, or partly, excused PJ from liability.

According to the court, Rule 14 cannot be used to bring in matters that merely have some relationship to the original action. The court found that the original complaint’s allegations were factually distinct from those in the third-party complaint. PJ alleged that CMC was liable to Hillel for its damages because it manufactured a defective part, whereas Allstate alleged that PJ was liable for installing a connector that was not equipped to handle the high temperatures in the facility’s hot water system.

The court concluded that Allstate’s dispositive question was whether the connector was properly installed or selected, not whether it was properly manufactured. So if Allstate succeeded in proving that PJ failed to properly install the connector in the hot water system, such a claim would do little to support PJ’s claim against CMC that the connector was defective. The court also noted that PJ failed to allege that the parties were joint tortfeasors or that it had a right to indemnity or contribution from CMC if it were held liable to Allstate. The court ultimately dismissed PJ’s third-party complaint against CMC because it violated Rule 14 and because CMC’s dismissal promoted judicial economy and fairness.

Article originally posted July 14, 2016 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Federal Court in Pennsylvania Holds Design Professionals’ Negligence Claim Against Pump Supplier Barred By Economic Loss Rule

Kristopher Berr, Associate, Pepper Hamilton LLP

Elliot-Lewis Corp. v. Skanska USA Building, Inc., 2015 U.S. Dist. LEXIS 98405 (E.D. Pa. July 27, 2015)

This dispute arises out of a major renovation and expansion of the Franklin Institute in Philadelphia (the “Project”). Plaintiff Elliot-Lewis Corporation (“ELCo”) was a subcontractor hired to install the piping and controls for the Project’s heating, ventilation and air conditioning (“HVAC”) system. The Project’s schedule required that start up and testing of the HVAC system begin by February 23, 2013 and that the system be operational by April 1, 2013. But, when the HVAC was started for testing, flooding issues arose due to problems with the condenser pumps specified in the HVAC system’s specifications. Ultimately, the HVAC system was not operational by April 1 and ELCo was required to perform additional work and install temporary cooling equipment so that the Franklin Institute could open during the summer. ELCo was never paid by the prime contractor for this additional work.

ELCo filed a complaint against the prime contractor for breach of contract. In turn, the prime filed a third party claim for negligent misrepresentation against a number of design professionals who had performed design work on the Project (the “Design Defendants”), alleging that ELCo’s additional work had been caused by errors in the Project’s plans and specifications.

The Design Defendants filed a fourth-party complaint sounding in negligence against the manufacturer and supplier of the condenser pump (the “Pump Suppliers”), alleging that they had relied upon inaccurate information provided by the Pump Suppliers. The Pump Suppliers moved to dismiss, arguing that the economic loss rule barred the claims against them.

The Design Defendants argued that the economic loss rule was inapplicable. First, they argued that Section 522 of the Restatement (Second) of Torts, which was adopted by the Pennsylvania Supreme Court in Bilt-Rite Contractors v. The Architectural Studio, 581 Pa. 454 (2005), provides an exception to the economic loss rule where the defendant is in the business of supplying information. Next, they argued that this exception should apply under the circumstances because the Pump Suppliers provided information to the Design Defendants in the course of transacting the sale of condenser pumps and were aware that the Design Defendants would rely on the information in creating the Project’s design documents.

The court rejected the Design Defendants’ argument and dismissed the claims against the Pump Suppliers. The court reasoned that the Pump Suppliers “are not in the business of supplying information”, which is a “necessary predicate to be subject to liability under Section 522.” While the Pump Suppliers did in fact supply information to the Design Defendant as part of the sale of the condenser pump, the “sale of a product is fundamentally different from the sale of information, even if the seller provides information about the product to consummate the sale.” If the supply of information in those circumstances  could subject a seller to Section 522 liability, the court determined that Section 522 would  “eviscerate the economic loss doctrine.” Thus, the court held that the economic loss rule applied to bar the Design Defendants’ claim against the Pump Suppliers. 

Article originally posted November 5, 2015 on Constructlaw, an update and discussion of recent trends in construction law and construction, maintained and edited by Pepper Hamilton's Construction Law Practice Group. 

Texas Supreme Court Denies General Contractor’s Negligent-Misrepresentation Claim Against Architect for Increased Construction Costs Caused By Deficient Plans

The Texas Supreme Court recently held that the economic-loss rule bars claims of negligence and negligent misrepresentation from a general contractor against an architect because there was no contract between the parties. Instead, the contractor was limited to its claims for breach of contract against the project’s owner. LAN/STV v. Martin K. Eby Constr. Co., 435 S.W. 3d 234 (Tex. Jun. 20, 2014).

The Dallas Area Rapid Transportation Authority (the “Owner”) contracted with the architect, LAN/STV (the “Architect”), to prepare plans, drawing, and specifications for the construction of a rail line within downtown Dallas. The Architect agreed to be responsible for the professional quality, technical accuracy, and coordination of all designs, drawings, specification, and to be liable to the Owner for all damages caused by the Architect’s negligent performance of any of the services furnished. The Owner incorporated the Architect’s plans into its solicitation for competitive bids to construct the rail line. The project was awarded to Martin K. Eby Construction Company (the “Contractor”). The construction contract contained administrative procedures for the Contractor to follow if asserting disputes against the Owner, including any design problems. There was no contact or contractual privity between the Contractor and the Architect.

Just after starting construction, the Contractor discovered that the Architect’s plans were replete with errors. While the Contractor expected that only 10% of the plans would be changed, eventually 80% of the Architect’s plans had to be changed. This greatly disrupted the construction schedule and required additional labor and materials. In total, the Contractor calculated that it lost nearly $14 million on the Project.

After settling with the Owner, the Contractor filed this tort action against the Architect alleging claims for negligent misrepresentation. The jury apportioned some responsibility to the Owner and the Contractor, but found that the Architect was 45% responsible. Judgment was subsequently rendered in favor of the Contractor for about $2.25 million. The Court of Appeals affirmed the judgment.

The Texas Supreme Court analyzed whether the economic-loss rule barred the Contractor’s recovery for negligent misrepresentation. Under the economic-loss rule in Texas, a plaintiff suffering purely economic loss cannot recover under negligence theories against a defendant if the duties allegedly breached arose solely from the defendant’s contract with a third-party. Put another way, the economic-loss rule means that there is “no general duty to avoid the unintentional infliction of economic loss.” Restatement (Third) of Torts: Liability for Economic Harm, § 1.

The economic-loss rule does not create a bright-line standard, and has caused some confusion among courts as to its application. In the construction context, the Court recently explained that the economic-loss rule does not bar an owner’s negligence claims directly against a subcontractor for damage to the owner’s property caused by defective work. Though the owner had no contract directly with the subcontractor, the subcontractor owes all persons (including the owner) the duty to perform its work with reasonable care to avoid causing damage to other persons’ property. In that case, the property damage was to the owner’s property and fell outside the scope of work in the subcontractor’s construction contract with the general contractor. Thus, the owner’s negligence claims were permitted to proceed. Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 445 S.W. 3d  716 (Tex. 2014). The case is analyzed in further detail here.

In the LAN/STV case, in contrast, the Contractor sought to recover only for its increased costs of construction resulting from the Architect’s failure to comply with the standards of performance required under its design contract with the Owner. The Court explained that participants in construction projects typically cannot recover their economic losses from parties with whom they did not contract. A roofing subcontractor, for example, could not recover its economic losses through negligence claims against a foundation subcontractor that caused construction delays by failing to perform its work in a timely manner. Rather, the roofing subcontractor’s recovery, if any, would lie in claims for breach of contract against the general contractor, the only party with whom the roofing subcontractor had an agreement.

With respect to the Contractor’s negligent-misrepresentation claims against the Architect, the Court felt that the same reasoning barred any recovery. This is a divergence from the recent Restatement on the issue, which suggests that an architect’s duty to a contractor arises from the expectation that plans are prepared for contractors to rely upon to carry out the construction. Restatement (Third) of Torts: Liability for Economic Harm, § 6, cmt. b. While the Court agreed with this concept, it held that the contractor’s “principal reliance must be on the presentation of the plans by the owner, with whom the contract is to reach an agreement, not the architect, a contractual stranger.” The Court felt that contractors were sophisticated parties who could protect their interests adequately through allocating risk in their construction contracts with the owners.

As the Court noted, there are significant differences of opinion among various states as to whether contractors may assert negligent-misrepresentation claims against architects absent contractual privity. Indeed, prior to this case, several Texas courts of appeals permitted such claims. However, this case clarifies that, in Texas, contractors may not recover purely economic losses through negligent-misrepresentation claims against architects with whom they lack contractual privity.

Thanks to Ian Fullington at Griffith Davison& Shurtleff, P.C. for assistance with preparing this post.

Arizona Supreme Court Limits Economic Loss Rule Application

In Sullivan v. Pulte Home Corp., 306 P. 3d 1 (Ariz. 2013), the Arizona Supreme Court considered whether the economic loss rule should apply to a claim for negligent construction raised by the second purchaser of a house.  

The Sullivans purchased their home from the original purchaser three years after the house was finished and occupied. Six years later, the Sullivans discovered problems with a retaining wall in the backyard.  The Sullivans notified Pulte regarding the issue, but Pulte disclaimed any responsibility for the issue.  In response, the Sullivans sued Pulte and alleged consumer fraud, negligent nondisclosure, negligence per se, negligent misrepresentation, and breach of implied warranty.

The trial court dismissed the entire lawsuit.  According to the trial court, Arizona's eight-year statute of repose barred the warranty claim (which was asserted nine years after the original purchase). The economic loss rule barred the remaining tort claims.  The Court of Appeals reversed the trial court's decision as to certain negligence claims.  

The Arizona Supreme Court agreed with the Court of Appeals, noting that the Sullivans never entered into any contracts with Pulte directly.  Even though the Sullivans had contractual remedies available to them had they filed suit prior to the expiration of the statute of repose, the Sullivans did not have the opportunity to negotiate the scope of any warranties that might otherwise have barred the tort claims.  As a result, the Court held that the proper outcome in this case was to allow the Sullivans' tort claims to proceed to discovery and adjudication.