Architect with blueprint in the office. Plans of a house are processed
A federal district court in New Jersey recently held that the economic loss rule does not apply to bar a contractor’s negligence claim against the design professional for a project if there is no contract between the contractor and the design professional. Based on the holding in SRC Construction Corp. of Monroe v. Atlantic City Housing Authority, any participant on a construction project in New Jersey may have a remedy in tort.
By its classic definition, the economic loss rule operates to limit a Plaintiff to a recovery of the economic damages that flow from a breach of contractual expectations. Its effect is to prevent contract based actions from being converted into tort claims with more subjective and, often times, higher damages calculations. While there are different permutations of this rule, the concept is generally the same from state to state.
In SRC, the Atlantic City Housing Authority entered into a contract with the contractor to build a senior living center. The Housing Authority also entered into a separate contract with a design professional to design and administer the project. The contractor alleged that the architect increased the contractor’s performance costs by delaying the acquisition of building permits, submitting drawings that did not meet the building codes, failing to timely respond to the contractor’s request for information, and verbally ordering changes that were not honored by the Housing Authority. Because the contractor did not have a contract with the architect, it made allegations of negligence to claim its losses. The architectural firm defending the case maintained that the economic loss rule precluded the contractor’s claims and, in the alternative, that the contractor’s claims were barred because it had the same causes of action in contract against the owner.
The court undertook a review of New Jersey state law on the economic loss rule and affirmed the long held belief that the concept was designed to maintain the distinction between contract and tort claims. The only exception – which did not apply here – is if the Plaintiff can establish an independent duty of care separate from the contract between the parties. Plaintiffs should not otherwise be permitted to enhance the benefits of the bargain they struck in the contract by bringing an action in tort. The SRC court illustrated the distinction using two cases analyzed in the New Jersey Supreme Court opinion in Salvatel v. GSI Consultants.
The court held in New Mea Construction v. Harper that a claim against a builder that installed lesser grade materials was effectively a breach of contract action; and attempts by the Plaintiff to cast it as negligence were improper under the economic loss rule. Conversely, homeowners were permitted to pursue the subcontractor in negligence for faulty workmanship since they had no contract with that subcontractor in Juliano v. Gaston.
Based on this analysis, the SRC court determined that a claim for negligence was not barred by the economic loss rule because there was no contract between the contractor and the architect. Because there was no contract, the tort claim cannot be a “contract claim in tort clothing” and the negligence claim was an independent and valid cause of action. Similarly, the assertion that the existence of a similar claim against the owner affords the architect protection is without merit.
This decision is reminiscent of a similar case in Pennsylvania: Bilt Rite Contractors, Inc. v. The Architectural Studio. Both carry some level of common sense with them. The lack of a contract between a design professional and the contractor does not mean that the design professional has no impact on the contractor’s performance. While design professionals have long tried to insulate themselves from these types of claims, courts are increasingly holding design professionals accountable for mistakes they make in design or contract administration.
