Indiana Construction Update: Defective Design And Inspection Services Are Subject To Indiana’s Economic Loss Doctrine

An interesting case, involving the Indianapolis-Marion County Public Library, alleged defective design and inspection services on the part of two defendants, which were involved with building a parking garage at the new library facility.  Indianapolis-Marion Library v. Charlier Clark & Linard, P.C., et al, 900 N.E.2d 801 (Ind. App. 2009). 

The first defendant, TTE, was hired by the architect, WMP, which settled out of the case.  TTE was hired to provide the structural design for the project, as well as to obtain bids and provide construction documents. WMP also hired CCL, a small civil engineering firm, to perform site visits to determine whether the project was in general compliance with engineering standards. 

A contractor was hired to perform the construction of the garage, and numerous design changes were then implemented by TTE.  Several concrete pours were made on the garage, and after each, numerous defects were discovered, including major voids in the concrete beams and columns of the garage.  Indianapolis-Marion Library (“Library”) hired an expert who stated that the garage would be “at serious risk for structural failure if construction were allowed to continue.”  Therefore, Library suspended work upon the project, and was required to repair the garage at an additional cost of $40-$50 million dollars.  Library, which had never contracted with either TTE or CCL, then sued both in negligence for defective design and inspection of its garage.

Both TTE and CCL filed motions for partial summary judgment, claiming that Library’s causes of action against them were barred by Indiana’s economic loss doctrine, which states that damage from a defective product or service may be recoverable in negligence if the product or service caused personal injury or damage to other property, but contract law governs purely economic loss arising from the failure of the product or service to perform as expected.  If there is no physical harm to property other than the product or resulting from the service, these “economic losses” are viewed as disappointed contractual expectations, and damage to the product itself is not recoverable.  Likewise, consequential damages resulting from the destruction or damage to the product, such as lost profits, rental expense or lost time are similarly not recoverable.

Previous Indiana cases applied the economic loss doctrine to the construction realm and explained that the theory underlying the economic loss doctrine is that this type of loss is best relegated to contract law or warranty, where buyer and seller are able to allocate risks and price their product or service accordingly.  Therefore, under the economic loss doctrine, the contract is the sole remedy for the failure of the product or service to perform as expected. 

In this respect, the court of appeals analyzed the case of Gunkel v. Renovations, Inc., 822 N.E.2d 150 ( Ind. 2005), which involved construction of a single-family residence, and relied heavily on its findings.  The Gunkel court held that the economic loss rule did not bar recovery in tort for damage that a separately acquired defective product or service causes to other portions or a larger product into which the former has been incorporated.  Id. at 156.  In Gunkel, the homeowners had separately contracted with a mason to apply a stone façade to their home, who did so improperly, which resulted in water damage to the residence. 

In that case, there was a direct contract between the homeowners and the mason.  However, in this case, there was no direct contract between Library and TTE or CCL.  The court held that the complete design of the projects was the “product” that Library purchased; therefore, there was no separately acquired defective service causing damage to part of the larger project, and the damages sought by Library were not recoverable in tort.  All of the repair expense, legal fees, additional architectural and engineering service costs were merely consequential damages, which were not available in a setting where Library merely lost the benefit of its bargain.

Library then asserted that its claims fell within exceptions to the economic loss doctrine, which would keep its action alive under tort law.  It first claimed that the defendants’ failure to fulfill their professional duties to perform design services in accordance with applicable standards of care should be an exception to the doctrine.  The court held that unless there was a risk of imminent danger or personal injury resulting from the professional’s services, a third party’s claim against the professional is not favored. 

Library then argued that there was indeed an imminent danger, since its expert determined that there was “serious risk for structural failure if construction were allowed to continue.” The court held fast to its determination that if there was no physical injury or damage to property, then there was no exception to the doctrine.  The fact that Library made repairs to insure the structural integrity of the building was not relevant.  The court asserted that Library did the correct thing by suing the architect and the general contractor for their breach of contract, which ultimately resulted in settlements with both prior to this appeal.

Library next emphasized that the defendants conveyed false or misleading information to it, which constituted negligent misrepresentation by them.  However, since Library did not sue either defendant upon that theory, the court threw out that exception to the doctrine. 

Finally, Library maintained that because the suit involved a service, rather than a product, it should not be subject to the economic loss doctrine.  Unfortunately, Library failed to cite any case or provide any analysis as to why a service should not be subject to the same doctrine as a product, and therefore, the court rejected Library’s argument on that issue as well.

In summary, the court found that Library was restricted to contract law against both defendants in this case.  However, because Library never contracted with either defendant, it could not recover anything from either defendant.  No exceptions to the economic loss doctrine were applicable here, and the trial court’s entry of summary judgment for both defendants on Library’s allegations of negligence against them was proper.

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Should you have any questions regarding this article, please contact Teresa via tmysliwy@querrey.com, or via 219-738-1820.