THE INDIANA SUPREME COURT S DECISION IN INDIANAPOLIS-MARION COUNTY PUBLIC LIBRARY V. CHARLIER CLARK & LINARD, P.C. THE ECONOMIC LOSS RULE APPLIES TO CLAIMS AGAINST DESIGN PROFESSIONALS Geoffrey L. Blazi * Valerie L. Hughs * I. INTRODUCTION The economic loss rule provides that when the damages sought by a claimant are for injuries to the subject of a contract with the allegedly liable party, no recovery may be had in tort the claimant is limited to the claimant s contractual remedies. Stated another way, where the damages are not to a claimant s person or property, but rather are the commercial losses sustained as a result of the negligent performance of contractual duties, no recovery in tort is permitted. Tort recovery remains available for harm to other property (i.e. property that is not the subject of the contract) caused by defective performance of a contractual duty. The primary theory underlying the rule is that frustrated commercial expectations in contractual performance are properly and exclusively the subject of the law of contracts. Tort law, in contrast, implicates public safety concerns that are inapplicable to contract law s concern with fulfilling the reasonable commercial expectations of the parties. A second important policy consideration underlying the economic loss rule is rooted in principles of freedom of contract, and the benefits, in terms of certainty and predictability in commercial relationships, that courts enforcement of freely bargained-for contractual terms provides. These interests are circumvented when tort law is used to impose different or additional duties on the contracting parties. The economic loss rule can have important implications in construction cases, where the duties of the parties are often spelled out in a series of detailed and interrelated contracts, and where the claimed damages more often than not relate to some alleged defect in the building or structure itself, i.e., some alleged defect in the finished product. Based on such considerations, the Indiana Supreme Court recently held, in the case of Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C., 1 that the economic loss rule applies in claims against design professionals. This article will discuss the Indiana Supreme Court s opinion in the Library case, and the implications of the ruling on the law of design professional liability law in Indiana. II. THE LIBRARY CASE The Indianapolis Marion County Public Library ( Library ) hired an architect for the renovation and expansion of structures contained in the Library s downtown Indianapolis facility, including its parking garage. 2 The architect then subcontracted with two engineering * Mr. Blazi is a partner in the law firm of Stuart & Branigin LLP who practices in the areas of design and construction, railroad and trucking, administrative law and general civil litigation. Ms. Hughs is a partner in the law firm of Lewis Wagner LLP whose practice covers all aspects of insurance defense litigation, with an emphasis on construction defects and accidents, products liability, automobile, premises liability, and coverage. Both are members of the Defense Trial Counsel of Indiana. 1 929 N.E.2d 722 (Ind. 2010). 2 Id. at 725.
firms to provide structural engineering and inspection services on the project. 3 The Library never contracted directly with either engineering firm. 4 The Library claimed that during construction it became concerned about the structural integrity of the parking garage, which served as the foundation for the rest of the Library structure. 5 The Library brought in an expert who examined the structure and purportedly found several construction and design defects in the parking garage. 6 According to the Library s expert, the garage was at serious risk of structural failure if construction continued. 7 The Library halted construction and took steps to mitigate the effects of the allegedly negligent design. 8 In its claim against the design professionals, the Library contended that it sustained $40 to $50 million in damages. 9 The Library brought suit against the architect and engineers, among other parties. 10 It ultimately settled with the architect and general contractor, with whom it had contractual relationships. 11 The remaining engineer firm defendants moved for summary judgment claiming that the Library s claim against them was barred by the economic loss rule. 12 The trial court granted the engineers motion. 13 The Indiana Supreme Court granted transfer, on the issue of whether the economic loss rule barred the Library s claims against the engineers. 14 A. HISTORY OF THE ECONOMIC LOSS RULE IN INDIANA The Court began its analysis of the issue by reviewing the history of the economic loss rule in Indiana. It noted that since 1984, Indiana courts have recognized the economic loss rule in a series of decisions involving defective products. 15 In each, recovery in tort was denied 3 Id. 4 Id. 5 Id. 6 Id. 7 Id. 8 Id. 9 Id. Specifically, the Library sought damages for (1) costs for materials and equipment related to repair work; (2) costs of labor for construction repairs; (3) sums dedicated to the settlement of numerous delay claims caused by the sixteen month suspension of construction; (4) architect and engineering fees incurred as a result of the repair process; (5) fees incurred as a result of expert analysis; (6) imposition of additional general conditions; (7) increased insurance premiums; (8) cost of utilities; (9) protracted rental fees for the interim Central Library; and (10) costs associated with obtaining additional public funding. Id. at 725-26. 10 Id. at 726. 11 Id. 12 Id. 13 See Indianapolis Marion County Public Library v. Charlier Clark & Linard, P.C., 900 N.E.2d 801 (Ind. Ct. App. 2009). 14 929 N.E.2d at 726. 15 Id.; see Sanco, Inc. v. Ford Motor Co., 579 F.Supp. 893 (S.D. Ind. 1984), aff d, 771 F.2d 1081 (7th Cir. 1985) (lost profits caused by defective trucks); Prairie Production, Inc. v. Agchem Division Pennwalt Corp., 514 N.E.2d 2
where the claim was for commercial losses arising out of the failure of a product to perform as expected. These cases stand for the proposition that: [w]here a negligence claim is based upon the failure of a product to perform as expected and plaintiff suffers only economic damages, no recovery may be had in negligence; instead, the buyer s remedy lies in contract. 16 Of particular importance to the Court was its 2005 decision in Gunkel v. Renovations, Inc. 17 In that case, the Court, in a first for it, applied the economic loss rule to a claim for construction-related damages, holding that: [D]amages recoverable in tort for a defective product or service are governed by the economic loss doctrine whether or the not the product or service is supplied in a transaction subject to either the Products Liability Act or the Uniform Commercial Code, or both. 18 B. JUSTIFICATIONS FOR THE ECONOMIC LOSS RULE The Court next turned to the justifications for the economic loss rule. The first is the principle that resolution of liability for purely economic loss caused by negligence is more appropriately determined by commercial rather than tort law. 19 The rationale evolved from defective products cases, where courts have held that permitting plaintiffs a tort remedy was inappropriate because of the specialized body of commercial law that had developed for resolving disputes relating to a product s failure to perform as expected. 20 Requiring a dissatisfied buyer to resort to its statutory remedies under the Uniform Commercial Code was preferable to permitting recovery in tort, because permitting tort recovery would circumvent the seller s effective limitation or exclusion of warranties under the UCC..., 21 i.e., it would defeat the division of rights and liabilities to which the parties agreed in their contract. The Court noted that this justification for the rule was particularly appropriate in the case before it: This justification for the economic loss rule is clearly implicated by the case before us. From the outset of the project, the Library looked to a series of contracts to establish the relative expectations of the parties. And reliance on contract law in this 1299 (Ind. Ct. App. 1987) (lost profits caused by a defective pesticide); Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078 (Ind. 1993) (lost profits resulting from infected seeds that failed to perform as expected); Reed v. Central Soya Co. Inc., 621 N.E.2d 1069 (Ind. 1993) (damages caused by contaminated feed fed to plaintiff s dairy cattle). 16 Id. at 728, quoting Martin Rispins & Son v. Hall Farms, Inc., 621 N.E.2d 1078 (Ind. 1993). 17 822 N.E.2d 150 (Ind. 2005). 18 Id. at 150. The Gunkel decision was critical in establishing the theoretical underpinnings for the Court s decision in the Library case, as is discussed in more detail in Part II(C) of this article. 19 929 N.E.2d at 729. 20 Id. at 729. 21 Id. at 729, quoting Reed v. Central Soya Co., Inc., 621 N.E.2d 1069, 1075 (Ind. 1993). 3
regard is perhaps greater in construction projects than any other industry. 22 The second justification for the economic loss rule examined by the Court was the concept that permitting tort recovery for economic loss where an accident causing physical harm has far reaching economic consequences is inappropriate, the rationale being that tort law is not intended to expose a defendant guilty of mere negligence to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. 23 While the Court noted that this second justification was not directly implicated by the Library s claims, its analysis of the history of the economic loss rule in Indiana showed that the economic loss rule is well established in Indiana and there are sound legal and economic justifications for it. 24 The Court emphasized, however, that the economic loss rule is a general rule, subject to limitations. The first limitation on the rule is that, for the economic loss rule to apply, the loss must be purely economic in nature. 25 The second limitation is that courts have recognized certain exceptions to the rule s application. 26 The Library based its arguments on these limitations. C. PURE ECONOMIC LOSS WHAT IS OTHER PROPERTY? The economic loss rule only applies where a plaintiff has suffered pure economic loss, defined as pecuniary loss unaccompanied by any property damage or personal injury (other than damage to the product or service itself). 27 The necessary corollary to the rule is therefore the other property rule damage to property other than the product or service itself is 22 Id. at 730. 23 Id., quoting Ultramares Corp. v. Touche, 225 N.Y.170, 174 N.E.441, 444 (1931) (Cardozo, C.J.). The Court noted that Judge Cordozo s statement in this regard has been relied upon by the Indiana Court of Appeals on numerous occasions. See, e.g., Thomas v. Lewis, Eng g, Inc., 848 N.E.2d 758, 761 (Ind. Ct. App. 2006) (absent privity of contract with plaintiff, no claim for negligent misrepresentation against surveyor); Essex v. Ryan, 446 N.E.2d 368, 373 (Ind. Ct. App. 1983) (absent privity of contract with plaintiff, no claim for negligence against surveyor). 24 Id. at 730. 25 Id. 26 The Court (at a later point in its opinion) provided an illustrative list of such exceptions: lawyer malpractice, breach of a duty of care owed to a plaintiff by a fiduciary, breach of a duty to settle owed by a liability insurer to the insured, and negligent misstatement. Id. at 736. The Court apparently based its list of exceptions on a list prepared by Mark P. Gergen of the University of Texas School of Law for the American Law Institute for consideration as part of a restatement of the law concerning economic torts and the economic loss rule. Mr. Gergen listed as exceptions to the economic loss rule: (1) professional malpractice; (2) breach of a duty of care owed to the claimant by an agent, fiduciary, bailee, or common carrier in supplying information or rendering a service; (3) breach of the duty to settle owed by a liability insurer to the insured; and (4) negligent misstatement. See Id. at 736, n. 18, quoting Restatement (Third) of Economic Torts and Related Wrongs 12 (Council Draft No. 2, 2007). Note that the Gergen formulation uses the term professional malpractice, but the court limits its sample exceptions to lawyer malpractice, obviously in light of its ultimate decision that claims for economic loss against design professionals are not exempted from application of the economic loss rule. 27 Id. at 727. 4
compensable in tort. The Court first addressed what constitutes other property for purposes of the economic loss rule in the construction context in its decision in Gunkel, a decision that would prove central to its ruling in the Library case. In Gunkel, homeowners contracted with a builder to construct a three-story residence. 28 The homeowner also hired a masonry contractor to install a stone and masonry façade on the home. 29 Shortly after installation of the façade, water problems developed, causing damage to the walls, ceilings, floors, drywall, and carpets. 30 The homeowners claimed that the water infiltration required replacing the masonry, repainting of the interior of the home, clearing and recoating the roof, replacing exterior doors and windows, reframing some of the exterior door and window openings, removing mold, and replacing exterior electrical outlets. 31 The homeowners brought suit against the builder and later added the masonry company as a defendant. 32 The trial court entered summary judgment in the masonry company s favor on any claim by the homeowners against the masonry company on a contract theory. 33 The homeowners did not appeal this ruling. 34 The masonry company also moved for summary judgment on the remaining negligence claim on grounds that it was barred by the economic loss rule. 35 The trial court granted the motion and the Court of Appeals affirmed. 36 The Indiana Supreme Court granted transfer, addressing only the issue of whether summary judgment was properly entered on the negligence claim. 37 To decide the issue, the Court first noted that it was necessary to determine what constituted the product at issue, damages to which would be barred by the economic loss rule, and what constituted other property, damages to which would be compensable in tort. 38 The Court held that property acquired by the plaintiff separately from the defective goods or services is other property whose damage is recoverable in tort. 39 Emphasizing that the masonry company installed the façade in an arrangement with the homeowners that was independent of the contract with the builder, the Court held that the product or service 28 822 N.E.2d at 151. 29 Id. 30 Id. 31 Id. 32 Id. 33 Id. 34 See Gunkel v. Renovations, Inc., 797 N.E.2d 841, 843 (Ind. Ct. App. 2003). 35 822 N.E.2d at 152. 36 Id. 37 Id. 38 Id. at 154 ( Because the economic loss doctrine permits tort recovery only for personal injury or damage to other property, if property is damaged it is necessary to identify the product at issue which [in turn] defines other property. ). 39 Id. at 156. 5
purchased from the masonry company was the façade added to the exterior of the home. 40 Thus, the economic loss rule precluded a tort remedy with respect to damages to the façade, but did not bar a tort claim against the masonry company for damage to the home itself that was caused by the alleged negligent installation of the façade. 41 In the Library case, the Court, relying upon Gunkel, held that the product or service at issue in the case before it was the renovated library structure that the Library purchased from multiple parties through a series of interrelated contracts: Here the Library purchased a complete refurbishing of its library facility from multiple parties. The Library did not purchase a blueprint from the Defendants, concrete from the materials supplier, and inspection services to ensure the safety of the construction of the project in isolation; it purchased a complete renovation and expansion of all the components of its facility as part of a single, highly-integrated transaction. Thus, irrespective of whether Defendants negligence was the proximate cause of defects in the design of the library facility, for purposes of the other property rule, the product or service that the Library purchased was the renovated and expanded library facility itself. 42 The Court distinguished Gunkel on grounds that the product or service purchased from the engineers was an integral part of the entire library construction project, not independent from it. 43 Thus, the library repair, reconstruction and related costs were damage to the product or service itself, and thus not compensable in tort. 44 The Court s ruling on the other property issue disposed of the Library s argument that, because the Library was required to repair and reconstruct a substantial portion of the project as a result of the alleged design errors, it had suffered damage to other property: [A]lthough the repairs have a component of physical destruction, the repair and reconstruction of the garage and other portions of the project are economic losses that arose from the Library s complaint that it did not receive the benefit of its bargain. 45 The Library case therefore stands for the proposition that when an owner contracts with multiple parties in an integrated transaction to provide products and services necessary to complete a project, damages to any aspect of the project that are caused by a defective service 40 Id. 41 Id. at 156-57. 42 929 N.E.2d at 731. 43 Id. at 732. 44 Id. 45 Id. at 732, quoting Indianapolis Marion County Pub. Library, 900 N.E.2d at 812. The Court also cited to a series of decisions in other jurisdictions that likewise held that the economic loss rule precludes recovery in tort for physical damage to the subject of the construction itself. See id. at n. 9. 6
component necessary for the completion of the project are economic loss for which there is no tort remedy. D. IMMINENT RISK OF DANGER CREATED BY DESIGN DEFECT PROVIDES NO EXCEPTION TO THE ECONOMIC LOSS RULE The Library next argued that because the allegedly negligent design resulted in an unsound and unsafe structure, an exception to the economic loss rule should be recognized due to the imminent risk of danger that the project as designed presented to the public.. 46 According to the Library, such safety concerns are properly the province of tort rather than contract law, and the proper redress for negligent design that creates an imminent risk of danger is a tort remedy. 47 Rejecting the argument, the Court adhered to the precedent set by its earlier decision in Progressive Insurance v. General Motors Corp., 48 a case involving the scope of Indiana s Product Liability Act. In that case, the Court declined the plaintiff s request to allow a claim where the absence of personal injury is merely fortuitous, such as when an object explodes but does not inflict personal injuries on anyone. 49 Thus, the Court held that [o]n the facts of this case the economic loss rule applies notwithstanding the presence of imminent risk of danger. 50 E. THE ECONOMIC LOSS RULE CONTAINS NO EXCEPTION FOR CLAIMS AGAINST DESIGN PROFESSIONALS Having rejected the Library s arguments that its damages were to other property and thus not barred by the economic loss rule, the Court turned to the Library s argument that the economic loss rule should not apply to design professionals on policy grounds. 51 First, the Library argued that because the law has recognized a duty of due care owed by certain professionals in the performance of their work, the economic loss rule should not bar recovery in tort for a breach of that duty. 52 In support of its argument, the Library relied on two cases, Peters v. Forster 53 and Strauss Veal Feeds, Inc. v. Mead & Hunt, Inc. 54 Peters, a case decided by the Indiana Supreme Court, involved homeowners who hired a contractor to install a ramp at the entrance to their home. 55 Some time after the ramp s installation, a third party delivering a meal to the residence slipped and fell on the ramp 46 Id. at 733. 47 Id. 48 749 N.E.2d 484 (Ind. 2001). 49 Id. at 733, quoting Progressive Insurance Co. v. General Motors Corp., 749 N.E.2d 484 (Ind. 2001). 50 Id. at 734. 51 Id. at 734. 52 Id. 53 804 N.E.2d 736 (Ind. 2004). 54 538 N.E.2d 299 (Ind. Ct. App. 1989). 55 804 N.E.2d at 737. 7
sustaining serious injury. 56 The injured party sued the homeowners and the contractor who had installed the ramp. 57 In its defense, the contractor asserted that the third party s claim was barred by the acceptance rule, which held that contractors owed no duty of care to third parties after the owner has accepted the work. 58 The Court in Peters rejected the defense, and held that contractors owe a duty of care to reasonably foreseeable third parties who might be injured by such work due to the contractor s negligence. 59 Although the case before it did not involve a design professional, in reaching its ruling the Court quoted authority suggesting that the rule applied to design professionals as well: It is now the almost universal rule that the contractor is liable to all those who may foreseeably be injured by the structure, not only when he fails to disclose dangerous conditions known to him, but also when the work is negligently done. This applies not only to contractors doing original work, but also to those who make repairs, or install parts, as well as supervising architects and engineers. There may be liability for negligent design, as well as for negligent construction. 60 In Strauss, the Indiana Court of Appeals addressed an architect s liability to an owner. The plaintiff argued that the architect he had retained to design a veal processing plant had a duty to independently investigate and warn the owner of potential waste disposal problems even though such services were not called for in the contract. 61 According to the owner, the duty to investigate and warn was independent of any contractual provision to that effect, but arose as a result of the architect s status as a fiduciary. 62 The court rejected the owner s arguments, and held that an architect only has a duty of reasonable care to perform the obligations for which it contracted: An architect does not owe a fiduciary duty to its employer; rather, the architect s duties to its employer depends upon the agreement it has entered into with the employer. An architect is bound to perform with reasonable care the obligations for which it contracted and is liable for failing to exercise professional skill and reasonable care in preparing plans and specifications according to its contract. 63 56 Id. at 738. 57 Id. 58 Id. at 738. 59 Id. at 742. 60 Id., quoting W. Page Keeton, et al., Prosser & Keeton on the Law of Torts 104A, at 723 (5th ed. 1984). 61 538 N.E.2d at 303. 62 Id. 63 Id. at 303 (internal citations omitted). 8
The Court found neither case supportive of the Library s position. 64 Peters was distinguished because it involved a case of serious personal injury and did not implicate the economic loss rule in any fashion. 65 And Strauss, the court held, was simply contrary to the Library s position. 66 The Court next addressed a series of cases from other jurisdictions in which negligence claims were permitted to proceed alongside contract claims. 67 In those cases, the respective courts view [was] that the gravamen of the complaint is as much malpractice as it is breach and that tort is regularly deployed to remedy malpractice. 68 The Court disagreed, noting that Indiana law has long recognized the application of the economic loss rule to claims involving defective products or services supplied pursuant to contract and emphasizing that the policy reasons set forth in this opinion amply justify application of these precedents to engineers and design professionals. 69 The Court next turned to a second line of cases in which there was a lack of privity between the claimant and the design professional. In those cases, the Court noted, the courts held that the requirement of privity must yield to protect innocent third parties that suffer economic loss. 70 The Court suggested that in certain circumstances it might recognize an exception to its general economic loss rule: We recognize that there are situations where it would be unjust not to allow plaintiff to proceed in tort against an engineer or design professional for purely economic loss where no contract exists nor could exist between the parties. 71 The Court offered no specific examples of situations where it might recognize an exception to the economic loss rule as applied to claims against design professionals, except to note fairly cryptically that [w]e need not decide today whether the plaintiff in Peters would have been allowed to recover had he suffered purely economic loss. 72 One portion of the Court s opinion rejecting the Library s request for a design professional exception to the economic loss rule bears particular attention, because in it the Court nicely summarizes the foundation and scope of its holding in the case: We find that none of the Library s authority involves a major construction project owner seeking to recover in tort from engineers or design professionals with whom the project owner, 64 929 N.E.2d at 734, n. 11. 65 Id. 66 Id. 67 Id. at 734-35. 68 Id. at 735. 69 Id. 70 Id. at 735. 71 Id. at 736. 72 Id. 9
though not technically in privity of contract, is connected through a network or chain of contracts among the owner, contractors and subcontractors, engineers and design professionals, and others in which they allocate their respective risks, duties, and remedies. We believe that the reasons for applying the economic loss rule to all participants in such a network or chain of contracts in a major construction project are compelling, whatever the rationale might be for not applying the economic loss rule to design professionals in other settings or context. 73 F. NO NEGLIGENT MISREPRESENTATION EXCEPTION TO ECONOMIC LOSS RULE IN CLAIMS AGAINST DESIGN PROFESSIONALS The Library next argued that its claims against the engineers should proceed because they had been guilty of providing false information to the library. 74 Courts in other jurisdictions have recognized such an exception, relying on the Restatement (Second) of Torts 552 (1976). 75 Noting that the Court had in other cases recognized the tort of negligent misrepresentation and have found such a claim to be an exception to the general economic loss rule in at least one case, it nonetheless rejected the Library s argument. Once again, the Court found dispositive the network of contracts identifying the respective rights and liabilities of the parties that was the framework for the library construction project: [B]ecause the Library is connected with the Defendants through a network or chain of contracts, the economic loss rule precludes it from proceeding in tort in this case. 76 III. IMPLICATIONS OF THE LIBRARY CASE A. THE LIBRARY CASE ADDRESSES REMEDY, NOT THE TEST FOR LIABILITY The Library case addressed the remedies available to a claimant in the construction claim context, limiting recovery for a defective product or service to a contract remedy where the damages claimed are to the product or service purchased by the claimant and not other property. The Library case did not directly address, or change, however, the test for liability for damages caused by an allegedly defective service. That is, there is a body of law in Indiana that addresses when a design professional will be liable for an alleged breach a contract with an owner, and the test for liability in such cases turns on principles of negligence. 73 Id. 74 Id. at 740-41. 75 Id. at 741. Section 552 provides in pertinent part: (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. 76 Id. at 741. The Library also made a brief argument that despite prior holdings of the Court to the contrary, the economic loss rule should not apply where a defendant provides only services and not a tangible product. Id. The Court found no reason to depart from its previous precedent on the point. 10
The Indiana Court of Appeals recognized in the Strauss case that [a] architect is bound to perform with reasonable care the obligations for which it contracted and is liable for failing to exercise professional skill and reasonable care in preparing plans and specifications according to its contract. 77 More recently, in Mayberry Café, Inc., v. Glenmark Construction Co., Inc., 78 the Court of Appeals provided a cogent summary of Indiana law on the subject: The responsibility of an architect is similar to that of a lawyer or physician. When he possesses the requisite skill and knowledge, and in the exercise thereof has used his best judgment, he has done all the law requires. Thus, the key question in determining whether an architect has been negligent is not whether error occurred, but whether the architect breached a duty to exercise the degree of competence ordinarily exercised in like circumstances by reputable members of the profession. Absent a special agreement, an architect does not imply or guarantee a perfect plan. Furthermore, and architect is not a warrantor of his plans and specifications. The result may show a mistake or defect, although he may have exercised the reasonable skill required. 79 As for why design professionals are not warrantors of their plans and specifications, the courts offer a clear explanation. [A] solid majority of jurisdictions have refused to hold that architects and design professionals impliedly warrant perfect plans or satisfactory results, but rather, limit the liability of architects to those situations [in] which the professional is negligent in the provision of his or her services. 80 This is because... those who hire experts for the predominant purpose of rendering services, relying on their special skills, cannot expect infallibility. Reasonable expectations, not perfect results in the face of any and all contingencies, will be ensured under a traditional negligence standard of conduct. 81 The Court in the Library case acknowledged the role of negligence principles in determining whether a design professional has breached a contract in its formulation of the economic loss rule: [T]he economic loss rule provides that a defendant in not liable under a tort theory for any purely economic loss caused by its 77 538 N.E.2d at 303 (emphasis supplied); see also Lukowski v. Vecta Educational Corp., 401 N.E.2d 781, 785 (Ind. Ct. App. 1980)(stating that an architect s duty of care is to prepare plans and specifications with the degree of competence ordinarily exercised by members of the profession. ). 78 879 N.E.2d 1162 (Ind. Ct. App. 2008). 79 Id. at 1173 (internal citations, quotation marks and related puncutation omitted). 80 SME Industries, Inc. v. Thompson, Ventulett, Stainback & Associates, Inc., 28 P.3rd 669, 678 (Utah 2001). 81 Milau Associates, Inc. v. North Avenue Development Corp., et al., 42 N.Y.2d 482, 486 (N.Y. 1977)(also emphasizing that: [w]here courts in other jurisdictions have purported to apply an implied warranty of fitness to transactions which in essence contemplated the rendition of services, what was actually imposed was no more than a warranty that the performer would not act negligently. Id. at 488 (collecting cases). 11
negligence (including, in the case of a defective product or service, damage to the product or service itself)-but that a defendant is liable under a tort theory for a plaintiff s losses if a defective product or service causes personal injury or damage to property other that the product or service itself. 82 The corollary is that a defendant may be liable to a plaintiff on a contract theory for purely economic loss caused by its negligent performance of its contractual duties. This reading is consistent with Indiana s prior law on the subject and the Court s emphasis on the suitability of contract remedies to address the defeated expectations of a party. As the foregoing authorities show, due to the professional nature of a design professional s work, the law recognizes that someone contracting with a design professional has no reasonable expectation of perfection or infallibility, but rather only that the design professional will exercise the degree of professional skill and care that a reasonable and prudent design professional would exercise in the same or similar services. In economic loss rule terms, defective service by a design professional is his failure to exercise such care, which may lead to contractual liability for pure economic loss. B. STATUTE OF LIMITATIONS For the same reasons, the Indiana courts prior precedents that established appropriate statute of limitation for claims against design professionals should be unaffected by the Court s decision in the Library case. The Indiana Court of Appeals addressed the appropriate statute of limitations to apply against design professionals in the case of Shaum v. McClure 83 Shaum involved a claim against a surveyor for a surveying error. 84 The surveyor performed a survey for the plaintiffs and inaccurately placed boundary stakes, resulting in a home being built in the wrong location and resulting in litigation between a buyer and seller of the property. 85 Plaintiffs brought suit against the surveyor arguing that the applicable statute of limitations was the six year statute of limitations for actions for injuries to property other than personal property. 86 Citing a series of its previous decisions in similar matters, the Court of Appeals held that the case was one founded on claims of professional malpractice, and consequently held that the two-year statute of limitations applicable to such claims applied. 87 The court relied on the bedrock principal that [t]he nature or substance of the cause of action, rather than the form of the action, determines the applicable statute of limitations. 88 As stated, the nature or substance of a contract claim for purely economic loss against a design professional based on the design professional s provision of defective services is in nature and substance one for professional negligence. The Library case should not change the result. C. APPLICATION OF THE COMPARATIVE FAULT ACT 82 929 N.E.2d at 729 (emphasis supplied). 83 902 N.E.2d 853 (Ind. Ct. App. 2009). 84 Id. at 854. 85 Id. 86 Id. at 856; IND. CODE 34-11-2-7. 87 Id. at 856. 88 Id. at 855, quoting King v. Terry, 805 N.E.2d 397, 400 (Ind. Ct. App. 2004). 12
Indiana s Comparative Fault Act 89 applies to any action based on fault that it brought to recover damages for injury or death to a person or harm to property.. 90 It requires the finder of fact to allocate fault among the parties to the litigation, 91 and permits a party to assert as a defense that the damages of the claimant were caused in full or in part by a nonparty. 92 To the extent an analysis of negligence issues is implicated by a claim sounding in contract against a design professional, the Act ought to apply to such claims. The damages recoverable by a plaintiff may be reduced by the percentage of fault attributable to a nonparty. In an action by plaintiff against a design professional with whom it is in contractual privity for pure economic loss, therefore, a nonparty defense is arguably available to the design professional with respect to others involved in the construction project against whom the plaintiff has no claim due to application of the rule. This position finds support in the case of Bulldog Battery Corporation v. PICA Investments. 93 In Bulldog Battery, the court permitted a defendant to name an architect as a nonparty who potentially caused the property damage to a landowner, even though the architect could not be held directly liable to the landowner. 94 In permitting the defense, the court noted that, given an amendment to the Comparative Fault Act changing the definition on nonparty for purposes of a nonparty defense, whether or not the nonparty may be liable to the plaintiff is no longer a consideration. 95 Although the defense may have little practical application in circumstances where the nonparty s fault is imputed to the design professional defendant by operation of law, nothing in the Court s Library decision forecloses application of the Comparative Fault Act to claims for pure economic loss in appropriate circumstances. IV. CONCLUSION In terms of recoverable damages, the economic loss rule may have little practical effect on a claimant s recovery with respect to design professionals with whom it is in contractual privity, because the damages available under a tort theory and a contract theory in such circumstances are likely to mirror each other. But the Library decision is important in such cases because its holdings and philosophical underpinnings clearly recognize the preeminence of contracts in the construction setting, particularly in commercial construction: [T]he roles of the participants in a major construction project vary with the type of construction contract, and the particular contract chosen will determine the role the design professional will play and the risks and liabilities to be assumed. In the context of larger construction projects, multiple parties typically rely on a 89 IND. CODE 34-51-2-1 et seq. 90 IND. CODE 34-51-2-1. 91 See IND. CODE 34-51-2-5 through 34-51-2-9. 92 IND. CODE 34-51-2-14. Note that the Act does not require that the nonparty be potentially liable to the claimant. 93 736 N.E.2d 333 (Ind. Ct. App. 2000). 94 Id. at 338-39. 95 Id. at 338. 13
network of contracts to allocate their risks, duties, and remedies. When parties are connected through a chain of contracts, as in the construction context, courts should defer to the language of the contracts governing their relationships. 96 It is incumbent on practitioners drafting construction contracts, and those defending design professionals in construction litigation, therefore, to give careful consideration to the terms of the various contracts involved in the project that serve to allocate the risk of loss among the parties (e.g., damages limitations, indemnity provisions, builders risk insurance requirements, flow down provisions, and provisions defining the duties of the various participants in the construction process itself), and how they relate to each other. In the Library case, the Indiana Supreme Court stated loudly and clearly that it approves of parties in construction projects taking measures to self-protect in the bargaining process, and that courts will enforce the allocation of rights and liabilities ultimately agreed to by the parties. The corollary, of course, is that the parties to such contracts will have to live with the agreements they make. That is why care must be taken in drafting the agreement. Further proof of the adage that an ounce of prevention is worth a pound of cure. 560948.1 96 929 N.E.2d at 737 (internal citations, quotation marks and related punctuation omitted). 14