The Lawletter Vol 38 No 10
Does the economic loss doctrine preclude recovery for negligent misrepresentation? The supreme courts in Kansas and Nevada recently addressed this issue and reached opposite conclusions.
In its original form, the economic loss doctrine prohibited a commercial buyer of defective goods from suing in negligence or strict liability when the only injury consisted of damage to the goods themselves. The doctrine reflected courts' concern that the rise of implied warranties and strict liability for dangerous products would allow tort law to consume contract law. Over the years, many courts extended the doctrine's application beyond the commercial product sphere as a means of preserving distinctions between contract and tort law.
In the Kansas and Nevada Supreme Court cases, the issue was whether the doctrine applied in actions for negligent misrepresentation arising from construction contracts. In Rinehart v. Morton Buildings, Inc., 305 P.3d 622 (Kan. 2013), property owners who had contracted with a builder for a preengineered building sued the builder. They alleged claims for breach of contract and warranty, as well as a claim under the state's Consumer Protection Act. As part of their statutory claim, the owners alleged that the builder had negligently misrepresented that the building would be completed in a timely matter, accommodate the owners' need to relocate its operations, and meet or exceed all industry standards. After difficulties arose during construction over the structure's quality, the owners sued for damages to compensate for shop rent at an alternate facility, lost production, relocation costs, and interest expenses on a line of credit. The builder argued that the economic loss doctrine barred the negligent misrepresentation claim.
The Rinehart court disagreed, concluding that the scope of a negligent misrepresentation claim is narrow enough that it is unnecessary to limit recovery by applying the economic loss doctrine. The court reasoned as follows:
The elements of the negligence misrepresentation tort sets the bounds on the scope of liability by imposing the duty in the limited circumstances when a defendant supplies information to guide others in business transactions in the course of the defendant's business. The tort also limits the universe of those who may pursue such claims to those for whose benefit the defendant supplied the information and whom the defendant intends to influence or knows will be influenced in the transaction. Therefore, the doctrine's second purpose of restricting potential extensive liability to a commercial user "downstream" from the manufacturer does not apply here.
. . . .
We hold negligent misrepresentation claims are not subject to the economic loss doctrine because the duty at issue arises by operation of law and the doctrine's purposes are not furthered by its application under these circumstances. We leave for another day whether the doctrine should extend elsewhere.
Id. at 632-33 (citation omitted).
Conversely, in Halcrow, Inc. v. Eighth Judicial District Court, 302 P.3d 1148 (Nev. 2013), the court ruled that the economic loss doctrine barred a claim for negligent misrepresentation brought by a general contractor against a developer. The case arose out of construction of the Harmon Tower, a mixed-use urban development that was owned by MGM Mirage Design Group ("MGM"). MGM retained an architectural firm and a general contractor ("Perini") to assist with the project. The architectural firm hired Halcrow to design the Harmon Tower and perform other services, while Perini hired Century Steel to install steel for the project. (Century Steel later assigned its contract to Pacific Coast Steel ("PCS").)
Although Halcrow had no contract with PCS, Century Steel, or Perini, PCS and Century Steel were required to follow Halcrow's design and specifications for installing reinforcing steel in the Harmon Tower. Problems arose with the steel installation, which forced the tower to be limited to 26 floors instead of over 40 floors. After construction had been stopped and a flurry of complaints and counterclaims filed and dismissed, PCS and Century Steel sought leave to amend their complaints to include a cause of action for negligent misrepresentation against Halcrow, alleging that Halcrow had owed them a duty to act with reasonable care in communicating information to them about the steel installation. They alleged that Halcrow had failed to conduct timely inspections in accordance with its representations that inspections would take place and that it had erroneously stated that on‑site adjustments would alleviate errors in its plans. Century Steel and PCS therefore contended that as a result of their foreseeable reliance on Halcrow's false representations, Halcrow could be held liable for negligent misrepresentation.
Clarifying the scope of its prior holding in Terracon Consultants Western, Inc. v. Mandalay Resort Group, 206 P.3d 81 (Nev. 2009), the Halcrow court concluded that the economic loss doctrine should be applied in order to protect parties from unlimited economic liability that could result from negligent actions taken in commercial settings. The court stated:
Determining that design professionals have a separate and distinct duty to any subcontractor that must rely on their plans would essentially allow any party to recast their barred negligence claim into a negligent misrepresentation claim. In the context of commercial construction projects, the evidence that would need to be presented in order to prove a negligent misrepresentation claim is almost identical to that which would be necessary in proving a claim for negligence. Allowing 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.
302 P.3d at 1154 (citation omitted).
As the Rinehart and Halcrow cases illustrate, the proper scope of the economic loss doctrine is debatable, and courts may draw different conclusions as to its application to negligent misrepresentation claims. Courts in other states may continue to grapple with this issue as future cases arise.