Economic Loss Doctrine Does Not Apply to Condo Associations Says the Massachusetts Supreme Judicial Court

The Massachusetts Supreme Judicial Court recently held that the economic loss doctrine does not apply to condo associations. In Wyman, et al. v. Ayer Properties, LLC. 469 Mass. 64, (July 10, 2014), the Plaintiffs, as trustees of a condo trust, sought damages stemming from the negligent construction of elements of a condominium building constructed by Ayer. The Plaintiffs alleged that Ayer, which had purchased and converted the building in question into condominiums, negligently constructed the window frames, the exterior brick masonry, and the roof of the building. The negligent construction allegedly led to damage to both the common areas of the building and individual residential units.

The SJC reviewed the history of the economic loss rule, noting that the rule was developed in part to prevent the progression of tort concepts from undermining contract expectations. The rationale for excluding tort recovery for economic loss is that, “when a product injures only itself,” a party should be left to its contractual remedies. The commercial user can protect himself by seeking express contractual assurances concerning the product (and thereby perhaps paying more for the product) or by obtaining insurance against losses. The rationale underlying the economic loss doctrine is that damage to a product itself means simply that the product has not met the customer's expectations, or, in other words, that the customer has received “insufficient product value.” The maintenance of product value and quality is precisely the purpose of express and implied warranties"). As a result, “when a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong.”

The SJC pointed out that the nature of condo ownership supports their conclusion that claims such as those presented here do not fit into the rubric of claims intended to be covered by the rule, as condo ownership gives both exclusive possession and ownership of the unit, and an undivided interest in the common areas. The court noted that as part of the statutory structure of condo ownership, “condominium owners cede the management and control of the common areas to the organization of unit owners, which is the only party that may bring litigation relating to the common areas of the condominium development on their behalf.”

In applying the rationale of the economic loss doctrine to the underlying case, the SJC noted a problem arises where the party exclusively responsible for bringing litigation on behalf of the unit owners for the negligent construction of common areas (here, the trustees) has no contract with the builder under which it can recover its costs of repair and replacement. Phrased differently, they cannot recover economic losses caused by defective construction. The SJC noted that the fundamental purpose of the economic loss doctrine is to confine the indeterminacy of damages, not to nullify a right and remedy for a demonstrated wrong and its harm. The court wrote that the rationale for applying the rule in this instance is made even weaker where the trustees seek damages which are finite and foreseeable, as the rule is intended to preclude recovery for intangible and unknown damages for lost contract or economic opportunity. The court reasoned that here, there was no such danger, as a lengthy trial established Ayer’s fault, the harm suffered by the trustees (as representatives of the unit owners’ rights in the common areas), and the exact amount of the damages. There were no allegations of consequential damages, but simply a reliably proven amount needed to repair or replace the negligently constructed window frames, masonry and roof. The purposes of the economic loss rule have little applicability in this circumstance.

Massachusetts Superior Court Holds Construction Manager At-Risk Responsible for Design Errors / Holds that Spearin Doctrine Does Not Apply to CM At-Risk

The Worcester Superior Court recently issued a potentially landmark decision clarifying the risk that construction managers assume when entering into CM-At Risk contracts. A copy of the Court’s decision is attached here.

In Coghlin Electrical Contractors, Inc. v. Gilbane Building Company, a subcontractor filed suit against the construction manager for additional costs resulting from the purported mismanagement of the project. The construction manager, in turn, sued the owner, asserting that the owner was legally responsible for damages caused by design changes and design errors that caused the additional subcontractor costs. The Court dismissed the construction manager’s claim against the owner, holding that the construction manager could not pass along the additional costs.

In making this ruling, the Court focused on the construction manager’s “extensive ‘Design Review’ responsibilities,” as well as the construction manager’s “broad obligation to ‘indemnify, defend and hold harmless’ [the owner]....” The Court held that this language served to “trump the long-standing Massachusetts common law principles to the effect that “where one party furnishes plans and specifications for a contractor to follow in a construction job...the party furnishing such plans impliedly warrants their sufficiency for the purpose intended’ [also known as the Spearin Doctrine].” Thus the relationship between the Owner and the Construction Manager under a CMR contract is not the same as the relationship between Owner and General Contractor under a traditional design-bid-build arrangement... Given the material changes in the roles and responsibilities voluntarily undertaken by the parties in a modern CMR contracts, the protections that Massachusetts courts historically have extended to construction contractors in the traditional design-bid-build context...simply are inapplicable to such contracts.

This decision is almost certain to be appealed and will be closely watched by industry groups.