As we have written before, an ancient legal principle known as the Economic Loss Doctrine is often trotted out by defendants in Construction Defect cases as a way of avoiding responsibility for their actions. The rule is used differently in different states. In some states, you cannot make a negligence (tort) claim for anything other than personal injury or damage to personal property. Tort claims for damage to real property are out. In other states, like New Jersey, the Economic Loss Doctrine is interpreted to says that you cannot make a negligence (tort) claim for damage to a product, when the product only harms itself. See DiIorio v. Structural Stone and Brick Company, Inc., 368 N.J. Super.134 (App. Div. 2004).
Two recent cases in Oregon involved the Economic Loss Doctrine as well. First, Harris v. Suniga, et. al., 209 Or.App.410, 149 P.3d 224 (Ct. App. 2006) the owners of an apartment complex sued the builder over defects in the buildings. The owners had bought the complex from the original owner, but they had no dealings with the original builder, and did not have a contractual relationship with the builder that would have given rise to a breach of contract claim. Id. at 413. The complex was built in 2002, then sold by the original owner to the plaintiffs. Soon after the sale, the plaintiffs discovered that the builder had failed to install the required flashing on the decks, concrete walkways, landings, gutters, laminates and bellybands. They also claimed that the builder had improperly installed certain wall caps, and trim around the windows. As a result of these defects, the plaintiffs alleged that the buildings suffered significant dry rot, which would cost $376,000 to repair. Id. Defendants answered, then claimed that the negligence claim was barred by the Economic Loss Doctrine.
The Court began its analysis with the general rule of negligence: All persons are liable in negligence if their conduct unreasonably creates a foreseeable risk of harm to others. Id at 415. The Court then traced the history of the Economic Loss Doctrine, discussing cases that held that a plaintiff could not recover in tort for injuries to a third person, and where the alleged beneficiary of a will could not sue an attorney who failed to draft the will to include a gift to the plaintiff. The general rule is that one seeking recovery for only “economic losses” in negligence can only do so if there has been a breach of duty beyond the ordinary tort duty to exercise reasonable care to avoid foreseeable harm. Id. at 417. “Economic Loss” under Oregon law refers to “financial losses such as indebtedness incurred, or financial losses to intangibles, as distinguished from damages for injury to person or property. Relying on an earlier case where negligence claims by subsequent purchasers were allowed against a builder, the court held “we know of no reason why the ambit of liability for negligence in the transfer of real property should be limited by privity of contract.” The court concluded that damage to real property was not “economic loss”, even where the property was an apartment complex, and the purchasers clearly did not intend to live in the property. This analysis undercuts the flawed reasoning in an often-cited case Easling v. Glen-Gery Corp., 804 F.Supp. 585 (D.N.J. 1992), where the court barred tort claims against the builder as asserted by the subsequent purchaser of an apartment complex.
In another opinion issued just 11 days later, the Oregon Court of Appeals again refused to dismiss a homeowner’s claim against the builder on Economic Loss grounds. In Bunnell v. Dalton Construction, Inc., 210 Or.App. 138, 149 P.3d 1240 (Ct. App. 2006), the Court held that subsequent purchasers of a single family home (not the original owners) could sue the builder in negligence for defects in the home, even when they knew of the defects when they purchased the home. Citing the Harris case above, the Court stated “[D]eterioration to the physical structure of a building because of defective construction is property damage and not economic loss.” Id. at 142. The trial court’s dismissal of the homeowner’s negligence claim was reversed.
The Bunnell case goes a long way toward protecting consumers and encouraging responsible builders to take appropriate steps when building homes and to stand behind their work if defects are discovered later. The fact that Oregon’s Court of Appeals has not seen fit to delve into the murky issues of the UCC and product liability law as they relate to construction defects makes these two decisions much easier to understand and better law. New Jersey’s case law on this subject is over complicated by discussions of alternate remedies, the existence of UCC or contract claims, and a perverse desire to define a “product”. As these Oregon opinions show, the New Jersey courts have gone down a road that results in much less clarity and predictability in the law. Local courts would do well to review these Oregon opinions and to adopt the Court of Appeals’ reasoning.