The Demise of the Economic Loss Rule in Construction Defect Litigation

Construction and Procurement Newsletter Q4 2014

Client Alert


The Massachusetts Supreme Court recently held in Wyman v. Ayer Properties, LLC, that the “economic loss rule is not applicable to the damage caused to the common areas of a condominium building as a result of the builder’s negligence.” The Wyman decision is similar to the Florida Supreme Court’s decision last year in Tiara Condominium Association v. Marsh & McLennan Companies, that the economic loss rule did not preclude a condominium association from asserting a negligence claim against a contractor for defective work.

The economic loss rule has its genesis in product liability actions in which a purchaser of goods or products sought damages under negligence or other tort theories for purely “economic” harms such as costs of repair and lost profits. In most jurisdictions, the application of the economic loss rule generally affects the remedy available to a plaintiff by limiting recovery for purely economic loss to the remedies provided by, and perhaps limited by, the contract between the parties. In short, a plaintiff cannot use a negligence or other tort theory to circumvent the limitation of remedies provisions in a contract. As the economic loss rule is applied in the construction context, if a contractor/ developer has a contract with a purchaser, and the purchaser claims damage as a result of the defective work of the contractor, then the purchaser’s sole remedy against the contractor is generally a breach of contract claim (and depends entirely on the terms of the contract); the economic loss rule precludes the owner from also asserting a negligence claim against the contractor.

In Wyman, the defendant contractor/developer converted a 150-year old four-story mill building into five commercial units and 22 luxury condominiums. Shortly after construction was complete, and title to the common areas of the development had been transferred to the condominium board of trustees, the board discovered damage to window frames, exterior masonry, and the roof of the building. The board of trustees filed suit against the contractor alleging negligent design and construction of the common areas of the building.

Ayer asserted the economic loss rule as a defense to the negligence claim. In rejecting Ayer’s argument, the Massachusetts Supreme Court considered the historical development of the economic loss rule and determined that the “nature of condominium ownership supports our conclusion that claims such as those raised here do not fit into the rubric of claims intended.” Specifically, the Court noted the problem with applying the economic loss rule in the condominium context is that the entity who brought suit did not have a contractual relationship with the contractor under which it could recover contractual damages, such as repair and replacement. As is typical with condominium development, each of the unit owners – not the board of trustees - had a contract with the contractor/developer because they had purchased their units from the contractor/developer. The Court found that the purposes of the Massachusetts Condominium Act would be frustrated if each unit owner had to file a separate lawsuit against the contractor/developer.

The court also noted that the damages sought by the board of trustees were not the type of “intangible or unknown damages” that the economic loss rule sought to preclude. Rather, the damages sought by the board of trustees were “finite and tangible.” In fact, “an “eleven-day trial had established Ayer’s fault, the harm suffered . . . and the exact amount of the damages.”

The Wyman decision is another ruling in a growing line of cases where courts have limited application of the economic loss rule and have held that a contractor can be liable in tort for defective work.