Structural Engineer Wins Twin Malpractice Victories In Indianapolis Public Library Cases Part 2
In the last post we talked about the recent trial of the the the Indianapolis-Marion County Public Library's (the "owner") fraud claims against against New York based Thornton Tomasetti
Engineering, Inc. (the "structural engineer"). Those claims stemmed from $50 Million in cost overruns to build the underground garage foundation of an addition to the Indianapolis Central
Library.
The owner also sued the structural engineer on a litany of other claims, including negligence in providing structural design services. But the trial didn't include the owner's negligence claims because they were dismissed before the trial started. The owner appealed. In this post we'll talk about the Court of Appeals's decision because it has important effects on the liability of architects, engineers, and other design professionals.
Background
Recall from the last post that when hiring designers for the project, the owner contracted with architects Woolen Molzan and Partners, Inc. (the "architect") to be the project's prime designer. The architect then sub-contracted with the structural engineer to serve as the project's structural engineering sub-designer. The Owner never had a contract with the structural engineer.
Recall also that the only damages the owner claimed were for repair, retrofitting, and delay costs. The owner never claimed any damages for:
The Economic Loss Rule
The structural engineer noticed that the owners claims were all for what lawyers like to call economic losses. Generally, economic losses are losses or damages from:
So the structural engineer asked the judge to dismiss the owner's negligence claims because they're barred by the economic loss rule. The judge agreed and dismissed the owner's negligence claims.
The owner appealed to the Indiana Court of Appeals arguing that the economic loss rule should not bar their negligence claims against the structural engineer. But earlier this year the Indiana Court of Appeals affirmed the dismissal.
Why The Economic Loss Rule Should Not Bar The Owner's Negligence Claims
On appeal the owner argued that the economic loss rule should not bar their negligence claims against the structural engineer for 4 reasons:
"Privity" is just a law talk way of saying that two or more people or companies have a direct relationship with each other. In this case:
Next the owner suggested that the economic loss rule should have an exception for negligent design services. Adopting the Illinois Supreme Court's reasoning in 2314 Lincoln Park West Condominium Association v. Mann, Gin, Ebel, & Frazier, Ltd., the judges disagreed with the owner and decided not to carve out an exception from the economic loss rule for negligent building design claims.
Exception For Imminent Risk Of Physical Danger
Recall from the last post that a forensic engineer reported that the the design and construction defects put the foundation (and the superstructure above) "at serious risk for structural failure if construction were allowed to continue." Based on that report, the owner suggested an exception to the economic loss rule to allow negligence claims where the alleged negligence creates an imminent risk of physical danger. Essentially, the owner invoked Ben Franklin's maxim that an ounce of prevention is worth a pound of cure.
Two of the three judges weren't buying. They rejected the owner's suggestion of an economic loss rule exception of imminent risk of physical danger. They didn't spend a lot of time explaining their reasoning. They focused on the fact that the danger though allegedly imminent, had not occurred. No people had been killed or hurt and no property, other than the construction work in progress itself suffered any damage.
Courts in some states, like Maryland, have adopted an economic loss rule exception allowing negligence claims for the cost to retrofit building defects that pose an imminent risk of physical danger. But that was not enough to convince a majority of the judges in this case who responded by saying:
Then the owner suggested that the economic loss rule should not apply to bar claims for negligently providing services. Courts in some states, like Wisconsin, have held that the economic loss rule does not apply to bar claims for negligently providing services (as opposed to negligently producing goods of improvements to real property (i.e., building construction)). The judges disagreed and said that at least as far as Indiana is concerned, the economic loss rule bars claims for negligent delivery of services.
Dissent And Supreme Court Appeal
One of the three judges hearing the case dissented on two points:
Conclusions
The owner also sued the structural engineer on a litany of other claims, including negligence in providing structural design services. But the trial didn't include the owner's negligence claims because they were dismissed before the trial started. The owner appealed. In this post we'll talk about the Court of Appeals's decision because it has important effects on the liability of architects, engineers, and other design professionals.
Background
Recall from the last post that when hiring designers for the project, the owner contracted with architects Woolen Molzan and Partners, Inc. (the "architect") to be the project's prime designer. The architect then sub-contracted with the structural engineer to serve as the project's structural engineering sub-designer. The Owner never had a contract with the structural engineer.
Recall also that the only damages the owner claimed were for repair, retrofitting, and delay costs. The owner never claimed any damages for:
- Death or personal injury to anyone.
- Damage to the owner's property other than problems with the foundation and garage the structural engineer designed. They did not claim damages for things like broken computers in the existing parts of the library or broken light poles in the library parking lot.
- Damage to the property of anyone else (e.g., damage to neighboring buildings or cars of library customers).
The Economic Loss Rule
The structural engineer noticed that the owners claims were all for what lawyers like to call economic losses. Generally, economic losses are losses or damages from:
- The inadequate value of goods, property, or services.
- The cost to repair, or replace, defective goods, property, or services.
- The consequent loss of profits from defective goods, property, or services that do not perform as expected.
- The diminution in the value of goods, property, or services because they're of inferior quality.
So the structural engineer asked the judge to dismiss the owner's negligence claims because they're barred by the economic loss rule. The judge agreed and dismissed the owner's negligence claims.
The owner appealed to the Indiana Court of Appeals arguing that the economic loss rule should not bar their negligence claims against the structural engineer. But earlier this year the Indiana Court of Appeals affirmed the dismissal.
Why The Economic Loss Rule Should Not Bar The Owner's Negligence Claims
On appeal the owner argued that the economic loss rule should not bar their negligence claims against the structural engineer for 4 reasons:
- The owner and the structural engineer were not in privity with each other (privity explained below).
- There should be an exception to the economic loss rule for claims of negligent building design.
- There should be an exception to the economic loss rule when negligence creates a condition that creates an imminent risk of physical danger.
- The economic loss rule should not apply to claims for negligently providing services.
"Privity" is just a law talk way of saying that two or more people or companies have a direct relationship with each other. In this case:
- The owner was "in privity" with the architect because the owner contracted directly with the architect for design services.
- The architect was "in privity" with the structural engineer because the architect sub-contracted directly with the structural engineer for structural engineering and design services.
- The owner wasn't "in privity" with the structural engineer because the owner didn't contract directly with the structural engineer.
The claim brought by the owner against the structural engineer with whom it as not in privity is precisely the type of action that Indiana law does not support.Exception for Negligent Building Design
Next the owner suggested that the economic loss rule should have an exception for negligent design services. Adopting the Illinois Supreme Court's reasoning in 2314 Lincoln Park West Condominium Association v. Mann, Gin, Ebel, & Frazier, Ltd., the judges disagreed with the owner and decided not to carve out an exception from the economic loss rule for negligent building design claims.
Exception For Imminent Risk Of Physical Danger
Recall from the last post that a forensic engineer reported that the the design and construction defects put the foundation (and the superstructure above) "at serious risk for structural failure if construction were allowed to continue." Based on that report, the owner suggested an exception to the economic loss rule to allow negligence claims where the alleged negligence creates an imminent risk of physical danger. Essentially, the owner invoked Ben Franklin's maxim that an ounce of prevention is worth a pound of cure.
Two of the three judges weren't buying. They rejected the owner's suggestion of an economic loss rule exception of imminent risk of physical danger. They didn't spend a lot of time explaining their reasoning. They focused on the fact that the danger though allegedly imminent, had not occurred. No people had been killed or hurt and no property, other than the construction work in progress itself suffered any damage.
Courts in some states, like Maryland, have adopted an economic loss rule exception allowing negligence claims for the cost to retrofit building defects that pose an imminent risk of physical danger. But that was not enough to convince a majority of the judges in this case who responded by saying:
Thus, in response to the owner's question as to whether they 'should have waited until a catastrophic failure occurred and someone was seriously injured' prior to suing the structural engineer in negligence, the answer is 'yes.'Economic Loss Rule Does Not Apply To Services
Then the owner suggested that the economic loss rule should not apply to bar claims for negligently providing services. Courts in some states, like Wisconsin, have held that the economic loss rule does not apply to bar claims for negligently providing services (as opposed to negligently producing goods of improvements to real property (i.e., building construction)). The judges disagreed and said that at least as far as Indiana is concerned, the economic loss rule bars claims for negligent delivery of services.
Dissent And Supreme Court Appeal
One of the three judges hearing the case dissented on two points:
- Denying an exception to the economic loss rule where negligent design creates an imminent risk of physical danger.
- Applying the economic loss rule to negligently delivered services.
Conclusions
- For engineers, architects, and other design professionals.
This case offers you a significant amount of protection, both in who
can make claims against them and the damages they'll be exposed to
under those claims. Someone who does not have a contract with you
can't successfully sue you for negligence if the only damages they're
seeking as economic losses.
If your opponent has a contract with you (either originally, or like the owner in this case, by an assignment of someone else's contract) and sues you for breach of that contract, in most cases (1) the amount of damages they can recover will be more limited and the (2) types and amount of proof they need to offer will be more demanding.
Your professional errors and omissions liability insurers should like this case.
- For owners.
This case closes out the possibility of of suing a design professional
for negligence if all the damages you're seeking qualify as economic
losses. You'll need to find other ways to recover if any are available
(e.g., breach of contract, negligent misrepresentation).
The lesson of this case is to get contractual rights against sub-designers who your prime designer hires to help them with their design work. That's a tall order, especially at the original contracting phase of a project when nothing has yet gone bad. It's tough, but you can do it. I have.
- For Contractors. This case does not affect you directly and its outcome is both good and bad for you. It's good because it shows an trend in Indiana towards stricter enforcement of the economic loss rule. That helps you oppose negligent construction claims by owners. But it's also bad for you too. A stricter economic loss rule makes even longer your odds of your successfully suing a design professional for negligence in designing, inspecting, or certifying on a project in a way that costs you extra money (1) to repair or retrofit that work and (2) in delay costs (e.g., extended jobsite overhead costs, extended deployment of your forces that could be working on other projects).
- For Everyone. Remember that this case was just one judge's vote away from going the other way. And there are cases in other states that support the dissenting judge's positions. The Indiana Supreme Court may decide to hear an appeal of this case. And if they do, they just might reverse it. Stay tuned and I'll let you know what happens.
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
