When You Can’t Recover from a Third-Party (The Economic Loss Doctrine)

Suppose that you (the Contractor) had extra costs and want payment for those extra costs from the designer.  But,

  • No property was damaged,
  • Nobody got hurt (thankfully), and
  • There is no contract between you and the designer.

Likely Result: You cannot recover from the designer because of the economic loss doctrine, which usually applies when the facts listed above are true.

Possible Solutions:

  1. Carefully negotiate your scope of risk under the contract;
  2. Trust but verify (consider using an independent design reviewer pre- or post-bid and pre-construction);
  3. Manage, coordinate, and communicate; and/or
  4. Apply an exception to the rule (depending on which State you’re in and the unique facts of the scenario).

 

Here’s a recent example from the highest court of Maryland where the contractor (unfortunately) lost:

Under a contract with the City of Baltimore, the Contractor agreed to construct improvements to a wastewater treatment plant including construction of giant concrete tubs to hold untreated wastewater.  The Contractor constructed the tubs per the third-party engineer’s design, but the tubs leaked.  The Contractor sued the engineer for money damages, no persons were injured and no property was damaged from the leaking tubs.

The highest court in the State of Maryland denied the Contractor’s recovery from the engineer.  The court denied the contractor’s request for two main reasons.  First, the City, Contractor, and engineer had carefully limited their risk by the complex construction contracts, so there was no need for the court after-the-fact to adjust the limits of that risk.  Second, adjusting the limits of the agreed-upon risk could result in higher costs for future public construction projects and, since public projects are often funded with taxpayers’ dollars, then taxpayers would be funding the potentially higher costs.  [Editorial note: I generally agree with the court’s first reason, but find the second reason flimsy.]

Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, 451 Md. 600 (2017)

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