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Economic Loss Rule Shields Design Professionals from Negligence Claims on Commercial Projects, Nevada Supreme Court Holds
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June 29, 2009
By Clark T. Thiel
Presented with a certified question that it recast as “Does the economic loss doctrine apply to preclude negligence-based claims against design professionals, such as engineers and architects, who provide services in the commercial property development or improvement process, when the plaintiffs seek to recover purely economic losses?”, the Nevada Supreme Court responded that the rule does apply. Terracon Consultants v. Mandalay Resort, 125 Nev.Adv.Op.No. 8 (2009).
Terracon, a geotechnical engineering firm, prepared a soils report and recommended foundation designs for the construction of a $1 billion resort hotel in Las Vegas. Based on its analysis and the anticipated weight of the building, Terracon predicted a certain amount of settling would occur. The building, however, ultimately settled considerably more than projected by Terracon, and the owner was required to undertake significant measures to repair and reinforce the foundation before proceeding with the remaining construction work. The owner sued Terracon for damages in state court, and Terracon removed the case to the U.S. District Court for the District of Nevada.
Finding Nevada law unsettled as to whether the economic loss doctrine applied to bar a claim grounded on allegations that design professionals negligently rendered services when the plaintiffs sought to recover purely economic losses, the District Court certified two questions to the Nevada Supreme Court: “Does the economic loss doctrine apply to contractors who solely provide services in construction defect cases? Does the economic loss doctrine apply in construction defect cases to design professionals, such as engineers and architects, who solely provide services, regardless of whether the services are rendered before or during construction?” Rejecting the two questions presented by the District Court, the Nevada Supreme Court restated the issue “in order to address precisely the particular negligence claim and factual scenario that led to the certification order and to avoid any overly broad conclusions about claims against ‘contractors.’ ” Moreover, in two separate footnotes, the Supreme Court stressed that it was expressing no opinion as to any claims regarding “property damage,” a term it declined to define.
After so narrowing the focus of its inquiry, the Supreme Court reiterated its prior conception of “purely economic loss” as “the loss of the benefit of the user’s bargain including pecuniary damage for inadequate value, the cost of repair and replacement of a defective product, or consequent loss of profits, without any claim of personal injury or damage to other property.”
The doctrine’s purpose, the court reasoned, is “to shield defendants from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial or professional setting, and thus to keep the risk of liability reasonably calculable,” which is accomplished by “mark[ing] the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care and thereby generally encourages citizens to avoid causing physical harm to others.” The court expressed concerns that “unbounded tort liability” could make insurance unaffordable.
Turning to the specific question before it, the Supreme Court acknowledged that “exceptions to the economic loss doctrine exist in broad categories of cases in which the policy concerns about administrative costs and a disproportionate balance between liability and fault are insignificant, or other countervailing considerations weigh in favor of liability.” It cited professionals such as lawyers, accountants, real estate professionals and insurance brokers who were not shielded by the economic loss rule. It further recognized that other jurisdictions “have made exceptions to the economic loss doctrine to permit tort-based claims against design professionals when only economic loss is at issue” for various reasons and rationale.
The Terracon court, however, declined to discuss any such “countervailing considerations” or underlying rationale. Rather, it dismissed the contrary authority succinctly: “after contemplating the competing policy reasons set forth above, we conclude that the economic loss doctrine should apply to bar the professional negligence claim at issue here.”
In justification of its conclusion, the court wrote that “contracting parties often address the issue of economic losses in contract provisions” and opined that “design professionals’ duties typically are prescribed by the parties’ contract, and therefore, any duty breached arises from the contractual relationship only.” Finding that a “legal line between contract and tort liability promotes useful commercial economic activity, while still allowing tort recovery when personal injury or property damage are present,” the court held that “contract law is better suited to resolve professional negligence claims,” citing – again without further analysis or explanation – “other jurisdictions [that] have reached the same conclusion.”
Finding that “negligence claims against design professionals do not fall within traditional exceptions” to the economic loss rule and “perceiving no significant policy distinction” between such licensed professional service providers and “contractors and subcontractors involved in physically constructing improvements to real property,” the Supreme Court held that the economic loss doctrine shields design professionals who have provided professional services in the commercial property development or improvement process from purely financial negligence claims.
The Supreme Court noted that it had received amicus curiae briefs from 11 organizations for design professionals.
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