Guest Blogger Ellen Bublick: "The ALI, Economic Loss Rules, and Convergence"

          In just a few weeks time the American Law Institute’s annual meeting will consider Chapter 10 of the Restatement Third of Torts: Liability for Physical and Emotional Harms.  That chapter, entitled Liability of Those Who Hire Independent Contractors, ably drafted by reporter Ellen Smith Pryor of Southern Methodist University’s Dedman School of Law, is now a tentative draft for approval of the membership. Once approved, the ALI will publish the second volume of the Physical and Emotional Harms Restatement, and torts restatement work will move on to engage issues beyond physical harm.  Next up: the Restatement Third of Torts: Economic Harms and Related Wrongs. Notably, this September, meetings will commence on the restarted project under the leadership of new Reporter Ward Farnsworth of Boston University School of Law.  Looking forward to that work, I commend to torts professors two recent state supreme court cases written by outstanding jurists actively engaged with the issue of liability for economic loss. 

          The first case, from my own home state, is Flagstaff Affordable Housing Limited Partnership v. Design Alliance, Inc., 223 P.3d 664 (Ariz. 2010).  In Flagstaff Affordable, architects designed eight apartment buildings and a community center for a low income housing project.   Eight years after construction was complete, the U.S. Department of Housing and Urban Development filed a complaint that the buildings did not comply with Fair Housing Act accessibility guidelines. The building owner settled with HUD, made revisions to its properties, and filed suit against the architects for economic loss stemming from the misdesign and  remediation.

          The second opinion, Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010), was issued by the Indiana Supreme Court.  In Indianapolis-Marion County Public Library the library hired a general contractor to renovate and expand the library.  The general contractor subcontracted with engineers who provided architectural and engineering services for the project.  After the construction had progressed significantly, concerns were raised about the structural integrity of the project.  The library spent 40 to 50 million dollars to cure these structural defects and in turn filed suit against the engineers for the damages. 

          Both cases involve factually similar causes of action: professional failures in building design led to significant costs incurred by the parties that had undertaken the construction projects. In both cases the outcome was similar—state supreme courts disallowed recovery in tort for the owners’ purely economic losses that stemmed from professional negligence.  And in both cases, economic loss rules took center stage in the reasoning.  However, the analysis in the two cases proceeds along quite different lines.

          The Arizona Supreme Court criticized an “overly broad” formulation of the doctrine and noted the availability of recovery for solely pecuniary loss in a number of contexts.  It differentiated between economic loss in contractual settings and non-contractual cases, and resolved to attend to the need for limitation on recovery for pure economic loss “based on context-specific policy considerations,” in that case the context of construction contracts. The Indiana Supreme Court, on the other hand, adopted a very broad formulation of the economic loss rule—viewing the economic loss rule as a general no-duty rule, subject to context-specific exception. As the Indiana Supreme Court stated, “[O]ur default position in Indiana is that in general, there is no liability in tort for pure economic loss caused unintentionally.”  However, the court then noted that this general rule is subject to appropriate exceptions “such as (for purposes of illustration only) lawyer malpractice, breach of duty of care owed to a plaintiff by a fiduciary, breach of a duty to settle owed by a liability insurer to the insured, and negligent misstatement.”  Negligent misstatement of an engineer who was party to a web of contracts in which the plaintiff was also a party was not an exception (though in a related case, negligent misrepresentation was actionable to a nonparty to the contract).

          This dispute about starting points—the economic loss rule as an overarching no-duty default limitation from which courts can recognize exceptions or economic loss rules as prudential limits embedded in the duty or scope of liability questions in particular contexts­—hearkens back to a dispute in the first round of Economic Torts Restatement discussions and will no doubt need to be addressed anew this fall.  But as significant as the mode of analysis of these issues is the substantive outcome of the analysis in particular cases.  One might have thought that Restatement Second Section 552 which governs “information negligently supplied for the guidance of others” would have afforded tort recovery in both the Arizona and Indiana cases, and indeed in some similar cases from other jurisdictions, such as Bilt-Rite Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (Pa 2005), section 552 was invoked to support recovery for architect misrepresentations that resulted in economic loss to a builder. The discordant analysis of these questions among state courts hints at the importance of restatement work. A fascinating empirical paper by Anthony Niblett, Richard A. Posner, and Andrei Schleifer, The Evolution of a Legal Rule 39 J. Legal Stud. 325 (2010), examines the question of whether the law in the area of economic loss in construction contexts is converging to an efficient result, and then stops at the more basic question of whether the law is converging at all. The conclusion to date is that perhaps it is not.  Although few forces unify state tort law, the American Law Institute’s Restatement of Torts is one of the most important, particularly in the area of economic torts. As judges, practitioners and scholars converge to discuss liability for economic loss under the project, one hope is that some convergence of state legal rules will be nearer at hand as well. 

--Ellen Bublick, Dan B. Dobbs Professor of Law, University of Arizona College of Law