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Thelen Reid Brown Raysman & Steiner LLP
The
Appellate Division of the New York Supreme Court recently
handed down two highly important and controversial rulings
that represent a clear departure from the economic loss
rule, which, generally speaking, bars tort claims for all
types of economic damages when no personal injury or property
damage is sustained.
In
Fifth Avenue Chocolatiere, Ltd. v. 540 Acquisition Co.,
2000 N.Y. App. Div. LEXIS 7573 (1st Dept. July 6, 2000)
and a companion case, 532 Madison Ave. Gourmet Foods,
Inc. v. Finlandia Center, Inc., 2000 N.Y. App. Div.
LEXIS 7571 (1st Dept. July 6, 2000), the Appellate Division
ruled 3 to 2 that commercial and retail tenants were entitled
to business losses for the time during which their street
was closed to shoppers after a nearby office building, which
was in the midst of being renovated, partially collapsed.
These
cases have enormous and far-reaching consequences for building
owners, construction companies, and commercial and retail
tenants.
Background
On
December 7, 1997, during the Christmas shopping season,
the southern facade of 540 Madison Avenue, a 39-story office
building in New York City, partially collapsed and fell
onto the street while being renovated. As a consequence,
city officials ordered a 15-block section of Madison Avenue
-- one of New York City's busiest shopping streets -- closed
to vehicular and pedestrian traffic. Although the closure
lasted for about two weeks, stores and businesses close
to 540 Madison Avenue were closed for even longer periods,
in part because the building's owners could not decide whether
to dismantle the building's entire south wall or to make
a more limited repair.
Plaintiffs,
consisting of business entities located within the area
of Madison Avenue closed by the city, sued and asserted
negligence claims against the owner, ground lessee and managing
agent of the building. In support of their negligence claims,
plaintiffs alleged that defendants knew or should have known,
either from reviewing public documents or inspecting the
building, of long-standing problems and deficiencies in
the south exterior wall.
The
plaintiffs only relationship to defendants was their geographic
proximity (between one and two blocks away) to defendants'
building. Although none of the plaintiffs sustained any
direct physical damage to their property, they incurred
lost profits for the period during which the street was
closed and shoppers were unable to gain access to the stores.
The defendants brought a motion to dismiss the plaintiffs'
complaint. The trial court dismissed the negligence causes
of action on grounds that the building owner did not owe
plaintiffs a duty of care, the connection between defendants'
alleged negligence in renovating their premises and plaintiffs'
damages for economic losses without accompanying property
damage was too tenuous and remote to permit recovery, and
the facts did not present the type of special circumstances
warranting an exception to the economic loss rule. Plaintiffs
appealed.
The Ruling of the Appellate Division
The
Appellate Division overruled the lower court and reinstated
the negligence claims. The appeals court held that the merchants
had "a right to carry on their businesses free from
the wrongful conduct of nearby property owners" but
"were subjected to the consequences of defendants'
failure to maintain their building in a reasonably safe
manner despite obvious notice of the overt risks and potentially
deleterious consequences of their misconduct."
The
appeals court explicitly refused to apply the economic loss
rule in this case and went on to criticize what it considered
to be the arbitrariness of a rule that predicates recovery
of economic losses on some type of accompanying property
damage:
The
general purposes of tort law, to hold responsible those
who cause socially unreasonable injuries and to deter
similar conduct, as well as to compensate wronged persons,
are undermined by an arbitrary formula that has the effect
of holding to a lower standard those whose negligence
causes only non-physical damage, which, as in the instant
case, is more ruinous than physical property damage.
In
rejecting an arbitrary limit on tort liability simply because
the plaintiffs failed to suffer some physical damage along
with their economic losses, the court relied on the approach
taken in People Express Airlines v. Consolidated Rail
Corp., 100 N.J. 246, 495 A.2d 107 (1985). There, in
an effort to address the potential problem of excessive
and limitless tort liability, the New Jersey Supreme Court
adapted the traditional common law approach to negligence
causes of action by increasing the required level of foreseeability
to "particularly foreseeable."
In
adopting this approach, the appeals court stated that it
was "possible to limit liability for economic losses
to governable levels while still holding negligent actors
liable for the most predictable results of their wrongful
conduct." The appeals court concluded that plaintiffs'
allegations stated a negligence cause of action because
they were "particularly foreseeable victims" of
the type of harm caused by the building collapse.
The Dissent
The
dissent asserted that the majority's decision was a clear
departure from established doctrine. According to the dissent,
the majority decision would have the effect of extending
and increasing tort liability to a point totally disproportionate
to the fault found.
The
dissent sharply criticized the majority's reliance on People
Express, which had never been cited or followed by a
New York court and which departed from the longstanding
body of American and British cases that have adopted the
economic loss rule. In addition, the dissent asserted that
People Express and other similar cases relied upon
by plaintiffs were factually distinguishable and, for the
most part, limited to instances when economic losses are
accompanied by some type of property damage that results
from the foreseeable effect of a defendant's negligence.
The Future
Fifth
Avenue Chocolatiere and 532 Madison Ave. demonstrate
the appeals court's struggle with drawing the appropriate
line between the competing policy concerns of providing
a remedy to all who are injured and of providing for an
arbitrary cutoff of liability in order to prevent opening
the floodgates of uncontrolled litigation. In the end, New
York's highest court, the Court of Appeals, may have the
final word on this issue, given the likelihood of an appeal
of the Appellate Division's 3-to-2 decision.
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For more information about the issues covered in this report, please contact Richard P. Dyer in our New York office at 212-895-2117 or at rpdyer@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2000
Thelen Reid Brown Raysman & Steiner LLP
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