Application of the Economic Loss Doctrine in Construction Defect Cases

The economic loss doctrine is a judicially created doctrine that initially arose out of products liability claims.  The essential holding of the economic loss doctrine is that a plaintiff cannot recover in a tort action (i.e., a negligence claim) if the damages claimed are purely economic loss.  For example, if you purchased a refrigerator and the ice maker was defective, you could not recover the cost to repair the ice maker in a negligence claim.  Instead, the proper claim would be for a breach of contract or breach of warranty.  The rational behind the doctrine is that product imperfection, absent any injury or damage to other property, concerns customer expectations, and these expectations are better dealt with through a breach of contract or breach of warranty claim.  In other words, the contract between the parties should deal with the parties’ expectations, and therefore adequately address the parties’ risks.  On the other hand, if the defective refrigerator ruined all of the food stored within it, burned down the house, or caused some personal injury, such claims could be brought as a tort or negligence claim.

In 2004, the Kansas Court of Appeals extended the economic loss doctrine to construction defect claims.  Thus, plaintiffs were barred from bringing tort claims against builders where the claims were for pure economic loss (i.e., the cost to repair or replace the construction defect).  This created significant legal advantages for the construction industry, especially where there were delays in the discovery of the defects or where the contractor (typically a subcontractor) did not have a contract with the buyer.

In 2011, the Kansas Supreme Court significantly modified the economic loss doctrine’s application in the construction defect setting.  As a result, here are a few things you should know about the current interpretation of the economic loss doctrine in Kansas:

• The doctrine no longer uniformly bars claims by homeowners seeking to recover economic damages resulting from negligently performed residential construction services. The reasoning is that homeowners need protection because warranty and contract laws sometimes provide little to no remedy to homeowners in construction cases, and homeowners lack equal bargaining power to assume risks in construction contracts.

• While the economic loss doctrine does not mechanically preclude a plaintiff from seeking economic damages for negligently performed residential construction services, such a tort claim will survive only if the plaintiff can establish that the contractor owed the plaintiff a duty imposed by law, independent of the underlying construction contract. If no independent duty exists, the tort claim would still fail.

• Currently, the economic doctrine does not apply to negligent misrepresentation claims because the duty underlying such claims arises by operation of law and the doctrine’s purpose would not be furthered by extending it to such claims.

There is still an open question as to whether the economic loss doctrine would apply in commercial construction settings.  Certainly, there is an argument that it would still apply as the Kansas Supreme Court’s decision was limited and uniquely predicated on the residential construction