In many cases the Economic Loss Doctrine (“ELD”) can be utilized to restrict the types of claims that can be asserted against a design professional. Traditionally, the ELD prohibits a cause of action in tort for purely economic losses in the absence of contractual privity, physical injury to person or property, or the risk of physical injury to person or property. For design professionals, in cases where only economic losses are claimed, the ELD can potentially be used to defeat tort claims brought by parties with whom they do not have a contract.
The rationale for the ELD is that where the parties have entered into contracts to allocate liability and risk, the Courts should not permit claims that circumvent this allocation in cases where only economic losses are claimed.
The Potential types of Damages Facing a Design Professional
- Physical Injury to Person– injury to the natural body of a person, including emotional distress.
- Physical Injury to Property – injury to real or personal property. The cost of replacing the damaged product or the defective work usually is not considered property damage for purposes of the application of the ELD.
- Economic Loss – injury that is not physical injury to person or property. It includes damages such as delay costs, costs of repairing a defective product, price escalations, and loss of profits.
For example, in a claim against a design professional for defective design, the alleged damages could include physical injury to person or property (the alleged design defect resulted in a collapse that caused injury a person or to neighboring property) and for economic losses (the cost to rebuild, lost profits and delay damages).
How is the Economic Loss Doctrine Applied
In its traditional form, the ELD has been applied to prevent parties not in contractual privity with design professionals, such as property owners, contractors, or subcontractors from suing design professionals in tort for negligence when only economic losses are claimed.
It is important to note, however, that the ELD is applied differently depending on the jurisdiction and its application is continually evolving. Some jurisdictions still strictly apply the ELD to preclude tort claims for purely economic losses; others have rejected it completely and rely on traditional tort principals to decide whether a design professional owes a duty in tort to a third-party in absence of contractual privity, and others have modified it to only apply in certain situations. The traditional tort principals utilized by some jurisdictions include whether it was foreseeable by the design professional that a particular party would rely on its work and/or whether there was a “special relationship” between the design professional and the third party.
In those jurisdictions that have modified the ELD, some of the recognized exceptions include (1) claims by contractors for defects in design plans and/or specifications, (2) claims where there is a substantial risk of personal injury and (3) claims for professional negligence. In addition, a recent decision by Maryland’s highest Court suggested the possibility that the ELD may only apply to design professionals on government construction projects, and would not apply in other contexts, including in private construction projects.
Consequently, it is impossible to state a general rule regarding the application of the ELD and how the ELD will apply in a particular case is dependent on the jurisdiction at issue. In fact, one legal scholar recently commented:
It is in the context of construction design professional services that the application of the economic loss rule is most difficult to reconcile. No analytical theme predominates. It is almost as if someone had written the words ‘privity,’ ‘special relationship,’ ‘foreseeability,’ ‘supervising architect,’ ‘no duty,’ and ‘covered by another contract’ on the six sides of a die, and then passed the die to appellate judiciaries of various states to roll. The only constant is that economic damages are the subject of the claim.
Holt Gwyn, The Economic Loss Rule in Construction, Construction Damages and Remedies 267, 293 (2013), quoted in Balfour Beatty Infrastructure, Inc. v. Rummel, Klepper & Kahl, LLP, 155 A.3d 445, 457, n.15 (Md. 2017).
- Design professionals should be aware of the applicable law in the project locality when negotiating a contract.
- In those cases that recognize the ELD, it is particularly important to understand how the design professional’s contract allocates liability and risk.
- Understanding the types of legal claims that may be brought and those parties that potentially may bring them, will allow design professionals to weigh the risks involved and limit potential liability.