Two recent decisions regarding North Carolina’s Economic Loss Doctrine serve as a timely reminder to carefully consider the scope of contractual remedies in the negotiation of construction agreements – lest a later remedy for breach of contract emerge. is insufficient and further recovery is prevented by the economic loss. doctrine. In some states, the doctrine prohibits the recovery of a purely economic loss (damages for delay, for example) when there is a contractual relationship in the chain of alleged wrongdoers. The rule is obscure at best, but it may come as a surprise to you and your lawyers.
In December 2020, the North Carolina Supreme Court released its decision in Crescent University City Venture, LLC v Trussway Manufacturing, Inc., 376 NC 54 (2020), clarifying the application of the North Carolina Economic Loss Rule in the context of commercial construction. The decision underlines the need for owners negotiating commercial construction contracts to explicitly attribute all possible risk of loss in contract documents, even losses linked to the performance of subcontractors.
the Crescent the case involved a series of lawsuits by a real estate owner / developer, Crescent University City Venture LLC (“Crescent”), against its general contractor, AP Atlantic, Inc. (“AP Atlantic”) and its parent company, related to wooden chess farms in a series of student apartments. AP Atlantic was hired to construct the apartment buildings, subcontracting to Madison Construction Group, Inc. (“Madison”) for the structural work. Madison then placed a purchase order with Trussway Manufacturing, Inc. (“Trussway”) to manufacture and supply the subject wood trusses.
As a result of the student occupancy of the apartments and in particular a party where a large number of people gathered in an upstairs apartment, the ceiling of the lower unit began to crack and sag. sag. Crescent hired an engineering firm, which said the Trussway floor trusses were faulty and the flaws were systemic and pervasive in all apartment buildings.
Litigation ensued and Crescent (in addition to filing a breach of contract action against AP Atlantic) ultimately filed a negligence claim against Trussway, alleging that Trussway was negligent in the manufacture and manufacture of the trusses. Trussway sought summary judgment, arguing that North Carolina’s economic loss rule precluded Crescent’s claim because Crescent had failed to prove breach of an obligation other than Trussway’s contractual obligations to Madison. The North Carolina Business Court agreed and granted summary judgment in Trussway’s favor.
The North Carolina Supreme Court upheld the business court ruling and clarified that the correct question in determining whether the economic loss rule applies is whether “the subject matter of a contract has, in its operation or its mere existence, caused harm to itself or did not fulfill the conditions laid down “, thus resulting in damage. The Supreme Court found the rule of economic loss applicable, even though Crescent had no relation contract with Trussway (and therefore the only avenue of recovery against Trussway was a negligence claim.) The Supreme Court noted that Crescent had fully negotiated its risk of farm failures through its contract with AP Atlantic.
In doing so, the Supreme Court clarified previous decisions regarding the economic loss doctrine in North Carolina, noting that 1) the application of the economic loss rule does not depend on the existence of a contract between the plaintiff and the defendant and 2) public policy considerations may exist in the homeowner’s market and require different outcomes.
Following the Crescent Opinion, a separate opinion issued by the Eastern District of North Carolina further clarified and restricted the application of the Economic Loss Doctrine. In New Dunn Hotel, LLC v K2M Design, Inc., the court allowed a claim for economic loss brought against an architectural firm by an owner of a commercial construction project to subsist, considering that it was not excluded by the existence of a contractual remedy. the New Dunn Hotel The case involved a design dispute between the owner of a hotel building (New Dunn Hotel, LLC), its operator / tenant (510 Spring Branch, LLC) and the architectural firm engaged with the operator / tenant. The architectural firm failed to live up to its contractual obligations, causing significant losses to both owner New Dunn and operator 510, who together sued the architectural firm. The Eastern District Court found that owner New Dunn’s negligence claims against the architectural firm were not excluded by the economic loss rule because New Dunn and the architectural firm had not contract and “never attributed the risk of loss by contract”. The Eastern District Court emphasized the limitations of the Crescent Notice, limiting it so that it only applies when the “alleged injury relates only to the subject of a valid contract between the developer and the general contractor “.
These recent views from North Carolina underscore the importance of careful negotiation of risks and remedies in construction agreements between owners and contractors. For homeowners, it is especially critical to understand the scope of potential contractual remedies for design or construction defect, including consideration of warranty provisions and insurance coverage. For contractors, ensuring appropriately negotiated limitations of liability and consequential damages waivers are essential in every agreement. As the courts in North Carolina have recently demonstrated, in many states it is far from a safe bet – and indeed an extremely risky bet – to depend on or allege a tort recovery for economic loss. .