Under Construction - September 2013: California’s Economic Loss Doctrine – Limits on Tort Recovery

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In California, the economic loss rule addresses the distinction between suits in contract and tort. A contract claim can typically be pursued to recover all damages proximately caused by breach of contract, unless expressly excluded in the contract (such as a waiver of consequential damages). By contrast, an aggrieved party typically has lesser rights when bringing suit based upon a tort. In summary, the economic loss rule bars a plaintiff from suing in negligence or strict liability if the plaintiff only suffered economic loss not accompanied by personal injury or property damage.

The seminal California case on the economic loss rule is Aas v. Superior Court (2000) 24 Cal. 4th 627. In that case, a lawsuit was brought by a group of homeowners against the developer, contractor and subcontractors who built their dwellings. The homeowners alleged their homes were not built in accordance with applicable building codes and industry standards, but acknowledged that many of the defects had caused no bodily injury or property damage. The California Supreme Court discussed the distinction between contract and tort remedies, and noted that a contractual warranty is the vehicle to recover for deficient performance by a builder or contractor, whereas tort law requires resulting property damage or personal injury. Applying the economic loss rule, the Court held that the plaintiffs could not recover in negligence for the alleged defects.

In Jimenez v. Superior Court (2002) 29 Cal. 4th 473, the California Supreme Court further analyzed the reach of the economic loss rule in a construction defect case. A group of homeowners filed an action against manufactures of windows installed in their homes alleging the windows were defective and caused damage to other part of the homes. The defendants argued the product was the entire house in which the windows were installed, and that damage caused to other parts of the house by the allegedly defective windows was damage to the product itself and therefore barred by the economic loss rule. The Court rejected this argument, holding that while a tort claim could not be pursued for defects in the windows themselves, the defendants could be sued in tort for harm to other portions of the homes caused by the defective windows. 

In the context of residential construction, the Aas ruling was largely overruled by the California Legislature with the adoption of California Civil Code sections 895 et seq. This legislation established claim and repair procedures for residential construction defects, and permits defect claims to be pursued without personal injury or property damage. However, the economic loss rule is still well and alive in the context of commercial construction projects in California.

In addition, California courts have added another important limitation to the pursuit of a tort claim. In Weseloh Family Ltd Partnership v. K.L. Wessel Construction Co. (2004) 125 Cal.App.4th 152, the California Court of Appeal held that a design engineer hired by a subcontractor did not owe a duty of care to the general contractor or the property owner. In that case, the owner contracted with a general contractor to construct an automobile dealership. The general contractor hired a subcontractor to build retaining walls, and the subcontractor in turn hired a design engineer to perform design work. Neither the owner nor general contractor had privity of contract with the design engineer. After the retaining walls failed, the owner and general contractor sued the design engineer for negligence. The trial court granted the design engineer’s motion for summary judgment on the ground that the design engineer did not owe a duty of care to the owner or general contractor. The Court of Appeal affirmed. The Court held that whether a duty will be found between a defendant not in contractual privity with the plaintiff involves balancing various factors, including (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing future harm.” Based upon a balancing of these factors, the Court held that no duty existed. Of course, these six factors are fairly subjective, and whether or not a duty exists in other contexts will be dependent upon the particular facts.

In conclusion, construction participants in California need to be aware of the limitations on tort claims. Notably, tort claims may be barred based upon the economic loss rule and/or the duty rule articulated in Weseloh.