Nevada – Commercial design professionals protected from professional negligence claims by economic loss doctrine
Terracon Consultants Western, Inc. v. Mandalay Resort Group, 206 P.3d 81 (2009) that, “in a commercial property construction defect action in which the plaintiffs seek to recover purely economic losses through negligence-based claims, the economic loss doctrine applies to bar such claims against design professionals who have provided professional services in the commercial property development or improvement process.” This holding arises out of a question certified under NRAP 5 from the United States District Court for the District of Nevada.
The underlying case pending in Federal District Court
To complete the Mandalay Resort and Casino, Mandalay hired Terracon Consultants Western, Inc. and a related entity to provide geotechnical engineering advice about subsurface soil conditions and to recommend a foundation design. It also hired Lochsa, LLC and Klai-Juba Architects, Ltd. to provide engineering and architectural services to design the resort’s structure. Mandalay had a written contract with Terracon and oral agreements with Lochsa and Klai-Juba. None of these design professional played a role in the resort’s physical construction.
Mandalay alleged that Terracon’s soil settling analysis was wrong and that the amount of settling which actually occurred exceeded Terracon’s projections. Clark County required Mandalay to repair and reinforce the foundation before it could complete construction. Mandalay sued Terracon for damages, alleging that the deficient engineering advice cause the foundation problems and that Terracon was liable for breach of contract, breach of the covenant of good faith and fair dealing, and professional negligence. Terracon filed a third-party complaint against Lochsa and Klai-Juba for negligence, contribution, and equitable indemnity.
Terracon moved for partial summary judgment arguing that the economic loss doctrine barred Mandalay’s professional negligence claim. Lochsa and Klai-Juba also moved to dismiss Terracon’s negligence claims against them on the same basis. The U.S. district court denied the motions without prejudice and certified the economic loss question to the Nevada Supreme Court.
The question addressed by the Nevada Supreme Court
The Nevada Supreme Court answered the following question: “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 Court answered, “Yes.”
Generally, a plaintiff may not recover on a negligence claim for “purely economic losses”
The Court delved into the history of the economic loss doctrine. In short, the doctrine marks the boundary between contract law and tort law, and it ultimately “bars unintentional tort actions when the plaintiff seeks to recover ‘purely economic losses.’” See Calloway v. City of Reno, 116 Nev. 250, 256, 993 P.2d 1259, 1263 (2000), overruled on other grounds by Olson v. Richard, 120 Nev. 240, 241-44, 89 P.3d 31, 31-33 (2004); Local Joint Exec. Bd. v. Stern, 98 Nev. 409, 411, 651 P.2d 637, 638 (1982). The Court reiterated that “unless there is personal injury or property damage, a plaintiff may not recover in negligence for economic losses.” In general, purely economic losses are those that result from loses related to the parties’ agreement and not from personal injury or property damage.
The policies behind application of the economic loss doctrine are to ensure that useful economic activity is not deterred by fear of unlimited liability beyond contract-based recovery. It also reduces the cost of tort actions by providing potential tort victims with a less-expensive alternative such as insurance.
Some exceptions
The Court noted that countervailing policy considerations have led to exceptions to the bar created by the economic loss doctrine. For example, negligent misrepresentation and professional negligence actions against attorneys, accountants, real estate professionals, and insurance brokers still are viable claims.
For negligent misrepresentation claims, it is necessary to create sufficient financial pressure to avoid such negligence, which isn’t created by simply allowing a breach of contract claim. Additionally, for claims against attorneys, accountants, etc., those professionals tend to owe duties, such as fiduciary duties, whether statutory based or common-law based, that extend beyond their contracts with their principals. Accordingly, there is an incentive to impose on those professionals additional liability beyond contract claims when they breach their professional obligations.
Additionally, the Court was careful to acknowledge the continued rule from Olson that allows residential property owners to assert negligence claims in construction defect actions brought under NRS Chapter 40, even when purely economic losses are at stake.
The economic loss doctrine bars Mandalay’s negligence claim against Terracon
None of the exceptions applied to Terracon, Lochsa, or Klai-Juba. The Court concluded that the duties of such design professionals are governed by their contracts and any breach of duty results in only a breach of the contract. If Mandalay’s allegations are true, it suffered purely economic loss as a result of Terracon’s breach of its duties arising under the contract between it and Mandalay. Therefore, the Court concluded that the economic loss doctrine bars Mandalay’s negligence-based claims against Terracon. It is also important to note that the economic loss doctrine also continues to bar recovery on negligence claims for purely economic losses against contractors and subcontractors in non-Chapter 40 cases.
Posted by Anthony Golden at 5:01 PM |
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Categories: Construction | Design Professional | Economic Loss Doctrine