Construction Defect Claims and the Economic Loss Doctrine Clarified by Ohio's Second District Court of Appeals
By James T. Dixon on March 25, 2015
The Ohio Appellate Court in Dayton recently issued a reminder as to how an important legal doctrine can make it difficult for parties harmed by sub-standard construction work to recover from the responsible party. That doctrine - known as the Economic Loss Doctrine - provides that economic damages (such as lost profits) can only be recovered based upon rights provided by contract, not tort. (Tort law is the distinct body of law developed by the courts to protect people and property.)
The facts involved in Fed. Ins. Co., v. Fredericks Inc., 2015-Ohio-694 (2nd Dist., Montgomery Co.) were typical, though its ruling is based upon the unusual contours of the case. There, a company engaged a general contractor to construct a warehouse. The general in turn engaged a subcontractor to install the structural framing. The subcontractor did not properly brace the walls during construction and a heavy storm destroyed the work. The building owner paid for repairs and was reimbursed by its insurance carrier. That carrier then stood in the shoes of the owner to sue the general contractor and the subcontractor. (This action by the carrier illustrates the concept known as subrogation.) The prospective building tenants joined as plaintiffs to recover losses that the insurance carrier did not reimburse, most likely the revenues lost during the delay.
Where there are rules, there are exceptions. When it comes to the Economic Loss Doctrine, that is where the decision in Fredericks Inc., is important. Where there is no contractual privity, such as between the tenants and the subcontractor, a court may find a “sufficient nexus” exists between the damaged party and the responsible party that serves as a substitute and permits recovery. (Privity is a term used to describe a relationship between two parties established by a contract). The question of whether there was a “sufficient nexus” is based upon the facts of each case. However, the courts have consistently stated that it is not enough for the subcontractor to simply know the identity of the project owner, or, in this case, the tenant.
In Fredericks, Inc., the Court made it clear that the “sufficient nexus” exception can permit recovery not just against design professionals (as other cases had established) but also against subcontractors. The Court provides an analysis of that exception beyond what we have seen from other courts. As for the fact-intensive analysis of whether there was a “sufficient nexus,” the Court suggested that interactions between the damaged party and the responsible party (here, tenant and subcontractor), direct contact, or involvement in negotiations would contribute to the court invoking the exception. Unfortunately for the plaintiffs that were not the owner of the building, the Court did not see a sufficient nexus to permit them to recover from the responsible subcontractor.
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