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(A revised version of this article appears in The
Construction Lawyer, Volume 20, No. 3, July 2000, published
by the American Bar Association's Forum on the Construction
Industry.)
By
John W. Ralls
Thelen Reid Brown Raysman & Steiner LLP
The
owners of new townhouses brought a class action lawsuit
against the developer, the general contractor, the City
of Reno and various subcontractors. After settling with
the developer and the general contractor, the homeowners
continued to assert causes of action for negligence and
strict liability against the subcontractors, claiming that
defective framing was responsible for water damage. The
homeowners also asserted a cause of action against the city
for negligent inspection of the construction.
The
subcontractors moved for summary judgment on grounds that
the homeowners' causes of action for negligence and strict
products liability were barred by the economic loss rule.
The trial court granted the motion. The trial court concluded
that the repair and replacement costs sought by the homeowners
were purely economic losses that could not be recovered
in tort. The trial court ruled that the homeowners' negligence
and strict liability claims against the subcontractors,
as well as the homeowners' negligence claim against the
city, were barred as a matter of law. The homeowners appealed.
The Nevada Supreme Court affirmed. Calloway v. City of
Reno, 993 P.2d 1259, 2000 Nev. LEXIS 24 (Nev. 2000).
After
reviewing the evolution of the economic loss doctrine, the
court concluded that the doctrine applies to construction
defect cases. "[T]he economic loss doctrine arose,
in large part, from the development of products liability,
but its application is broader and serves to maintain a
distinction between contract and tort principles….
We conclude that damages sought in tort for economic losses
from a defective building are just as offensive to tort
law as damages sought from economic losses stemming from
a defective product."
The
homeowners contended that they did not seek to recover purely
economic losses because a defective product (the framing)
caused damage to other property (flooring and ceilings).
The homeowners relied on Oak Grove Investors v. Bell
& Gossett Co., 668 P.2d 1075 (Nev. 1983). In that
case, the Nevada Supreme Court suggested in dicta that an
apartment building's defective heating and plumbing system,
which caused substantial leakage of water throughout the
complex and damage to apartments, did not cause purely economic
losses. The court rejected this argument, based on another
of its decisions, National Union Fire Ins. v. Pratt and
Whitney, 815 P.2d 601 (Nev. 1991).
In
Pratt and Whitney, the court held that an airplane
engine that failed and caused the airplane to crash damaged
only the product (the airplane) itself and therefore the
economic loss doctrine barred recovery in tort. "Although
buildings may involve a more complicated system of 'components,'
we do not discern a meaningful analytical difference between
an airplane's engine and a building's heating and plumbing
system. Both an airplane's engine and a building's heating
and plumbing system are necessary and integrated parts of
the greater whole; additionally, both are themselves comprised
of smaller components. Consequently, when a heating and
plumbing system damages the building as a whole, the building
has injured itself and only economic losses have occurred…."
Applying
these principles to the present case, the court concluded:
"Here, the townhouses are part of larger, integrated
structures, and the framing was an integral component of
these structures. The damage caused by the allegedly defective
framing therefore constituted damage to the structure themselves
- no 'other' property damage resulted, and appellants suffered
purely economic losses."
The
court also rejected the argument that there should be a
forseeability exception to the economic loss rule. "We
now reiterate that forseeability of damages plays no role
with respect to the economic loss doctrine. Purely economic
losses fall outside the purview of tort recovery, even if
such losses are foreseeable."
The
homeowners also claimed that they should have the right
to pursue a strict liability claim against the subcontractors
because a house should be treated as a "product"
for strict liability purposes. The court held that the townhouses
were not "products" for purposes of strict products
liability. The court said that a contractor may install
certain products but is not engaged in the business of manufacturing
products. The court reasoned that unlike the manufacturing
of mass produced goods, construction depends on the cooperative
interaction of a number of parties.
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-369-7210 or at jralls@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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