Condominium Association (HOA) was not barred by the economic loss doctrine from suing construction professionals, including the general contractor, that designed and constructed the condominium complex. The suit was for damages from cracking concrete and various defective work causing water intrusion. The defendants moved for summary judgment, asserting that the economic loss doctrine applied and they therefore couldn’t be held liable in negligence for construction defects. The trial court granted the motion but this was reversed on appeal, with the court holding it was premature to dismiss this action because numerous questions of fact must be resolved at a later stage of the proceedings. From the face of the complaint the court stated it couldn’t determine how the HOA and defendants were connected and that “the contractual relationship, or lack thereof, between the parties is the fundamental issue in any case regarding application of the economic loss doctrine.” Residences of Ivy Unit Owners Association v. Ivy Quad Development, LLC., 164 N.E. 3d 142 (2021).
The court explained the economic loss doctrine as follows: Specifically, the economic loss doctrine provides that:
“A defendant is not liable under a tort theory for any purely economic loss caused by its negligence (including, in the case of a defective product or service, damage to the product or service itself)—but that a defendant is liable under a tort theory for a plaintiff’s losses if a defective product or service causes personal injury or damage to property other than the product or service itself.”
Under this doctrine, “Indiana courts have barred negligence actions that sound exclusively in contract law”. Stated another way, the court explained:
“The rule of law is that a party to a contract or its agent may be liable in tort to the other party for damages from negligence that would be actionable if there were no contract, but not otherwise. Typically, damages recoverable in tort from negligence in carrying out the contract will be for injury to person or physical damage to property, and thus “economic loss” will usually not be recoverable.”
In order to allow this complaint to go forward beyond the summary judgment motion, the court had to demonstrate why the seminal Indiana decision in the case of Indianapolis-Marion County Public Library, 929 N.E. 2d. 722 (2010), was not applicable. That decision, which applied the economic loss doctrine to dismiss action against the designers and contractors held:
“There is no liability in tort to the owner of a major construction project for pure economic loss caused unintentionally by contractors, subcontractors, engineers, design professionals, or others engaged in the project with whom the project owner, whether or not technically in privity of contract, is connected through a network or chain of contracts.”
In the current case, the court stated that there are several problems with relying upon the Library decision – one being that the plaintiffs and defendants here were not in a contractual relationship but “there are situations where it would be unjust” to allow a plaintiff to proceed in tort “for purely economic loss where no contract exists nor could exist between the parties.” The court here stated: “We think the current situation may be one in which it would be ‘unjust’ not to allow the plaintiff to proceed….” “Unlike in the sophisticated world of commercial construction, in the residential construction context all participants are generally not in privity of contract and thus have not defined for themselves their respective risks, duties, and remedies through a ‘network or chain of contracts’ governing the project.”
As seen from the above quoted language from the decision, the court in this case expressed serious qualms about applying the economic loss doctrine in a residential matter such as this one. In its concluding paragraph the decision sates: “In light of the foregoing, we are persuaded that the reasoning behind the sweeping holding of [the Library] was meant to apply only to sophisticated parties involved on all sides of large commercial construction projects and not in the typical residential context.”
Comment: This decision appears to be a significant setback for the applicability of the economic loss doctrine in the State of Indiana.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 23, No. 4 (July 2021).
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