Under Construction - September 2013: Summary of Nevada Law on the Economic Loss Doctrine in the Context of Commercial Construction Disputes

by Snell & Wilmer
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The Nevada Supreme Court has addressed the economic loss doctrine in the context of commercial construction disputes in a number of cases over the past several years. Nevada’s general rule, as detailed below, is that the economic loss doctrine bars recovery in tort for negligence claims asserting purely economic loss. The overarching rationale is that parties in contractual privity with one another, or part of an interrelated network of contracts, should rely exclusively upon those contracts for all remedies because the intentions and provisions set forth therein can best determine a party’s “disappointed economic expectations.” Halcrow, Inc. v. Eighth Judicial District Court, 129 Nev. Adv. Op. 42, 302 P.3d 1148, 1153 (2013).   

The Nevada Supreme Court first addressed the economic loss doctrine in the commercial construction context in Calloway v. City of Reno, 116 Nev. 250, 993 P.2d 1259 (2000). In Calloway, the plaintiffs, owners of townhomes, filed suit against various subcontractors alleging negligence, among other contractual claims for alleged faulty construction (asserted prior to the enactment of Nevada’s construction defect statutory scheme codified as Nevada Revised Statute, Chapter 40). The Supreme Court concluded that because plaintiffs failed to allege any personal injury damage or any damages to property other than the defective entity itself (the townhomes), the plaintiffs suffered purely economic loss, which is not properly addressed by tort law.  Id. at 1269. The Court held that “[c]ontract law is designed to enforce the expectancy interests created by agreement between the parties and seeks to enforce standards of quality.... In contrast, tort law is designed to secure the protection of all citizens from the danger of physical harm to their persons or to their property and seeks to enforce standards of conduct. These standards are imposed by society, without regard to any agreement. Tort law has not traditionally protected strictly economic interests related to product quality—in other words, courts have generally refused to create a duty in tort to prevent such economic losses.”  Id. at 1265-66. Accordingly, the Supreme Court rejected plaintiffs’ negligence claims against the subcontractors, setting the general standard in Nevada that the economic loss doctrine bars negligence claims against contractors and subcontractors in the commercial construction context.  Id. at 1270.

While Calloway did leave open the possibility for exceptions to this general bar, it did foreclose the “foreseeability exception,” holding that purely economic loss, even if foreseeable, falls outside the purview of tort recovery.  Id. at 1270.  And in this vein, after Calloway, the Supreme Court did uphold a bright-line exception to the general bar in the context of construction defect litigation, finding that negligence claims are not prohibited in construction defect actions arising under Nevada Revised Statute, Chapter 40. “[A] negligence claim can be alleged in a construction defects cause of action initiated under Chapter 40.” Olson v. Richard, 120 Nev. 240, 89 P.3d 31, 33 (2004). The Supreme Court concluded that because “NRS 40.640 states that a contractor is liable for any construction defects resulting from his acts or omissions or the acts or omissions of his agents, employees, or subcontractors. This language in no way limits a homeowner’s recovery to construction defects covered by a contract or warranty. Thus, we presume that the Legislature envisioned that Chapter 40 would provide more than just contractual remedies.”  Id. at 33.

The Supreme Court has more recently considered the economic loss doctrine as it applies specifically to design professionals within a commercial construction context. Terracon Consultants Western, Inc. v. Mandalay Resorts, 125 Nev. 66, 206 P.3d 81 (2009). In Terracon the Court determined whether the doctrine applies to preclude “negligence-based” claims against design professionals who provide services in the development, construction, or improvement of commercial properties. Id. at 83. The Court concluded, yes, such negligence based claims are precluded by the doctrine when the alleged damages are purely financial. Id. at 83, 89. The Supreme Court held that “[i]n the context of engineers and architects, the bar created by the economic loss doctrine applies to commercial activity for which contract law is better suited to resolve professional negligence claims. This 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. Further, as in this case, contracting parties often address the issue of economic losses in contract provisions.” Id. at 89. The Court determined that “the work provided by construction contractors or the services rendered by design professionals in the commercial building process are both integral to the building process and impact the quality of building projects. Therefore, when the quality is deemed defective, resulting in economic loss, remedies are properly addressed through contract law.”  Id. at 90.

Very recently, the Supreme Court in Halcrow, Inc. v. Eighth Judicial District Court clarified its holding in Terracon. The Court was presented with the question of whether the more specific “negligent misrepresentation” claim qualifies as an exception to the general economic loss doctrine bar.  Halcrow, Inc. v. Eighth Judicial District Court, 129 Nev. Adv. Op. 42, 302 P.3d 1148, 1150, 1152 (2013). The Court declined to acknowledge a negligent misrepresentation claim as an exception to the general bar, and concluded that a negligent misrepresentation claim is an unintentional tort which cannot form the basis of liability solely for economic damages in claims against design professionals in commercial construction disputes. Id. at 1154. The Court found no material distinction between a professional negligence claim (asserted in Terracon) and the negligent misrepresentation claim at issue in Halcrow, noting that the evidence necessary for each claim in the commercial construction context is almost identical.  Id. at 1154. The Supreme Court stated that “[a]llowing one and not the other would create a loophole in Terracon’s objective of foreclosing professional negligence claims against commercial construction design professionals and would, essentially, cause the economic loss doctrine to be nullified by negligent misrepresentation claims.” Id. at 1154.

Therefore, Nevada continues to uphold and further solidify its generally recognized prohibition on negligent tort claims asserted for purely economic losses arising in the commercial construction context.

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