Economic Loss Doctrine may not Preclude Claims Against Building Contractors for Negligent Construction that Results in Foreseeable Damage to Property

Harris v. Suniga, 344 Or. 301, 180 P.3d 12 (Or. 2008)

In this case, the defendant general contractors constructed an apartment building for a California investment company.  The California investment company sold the completed apartment building to the plaintiffs, trustees for the Harris Family Trust.  Following the sale, plaintiffs found the apartment building had problems with leaking water and dry rot and filed a claim for negligent construction against the defendant contractors.  Prior to suit, the plaintiff and defendants were “strangers.”  The plaintiffs did not purchase the apartment building from the defendants, did not contract with the defendants, and did not have any previous contact with the defendants.  Plaintiffs alleged that defendants’ failure to install required flashings in the building caused the dry rot damage, and that the failure constituted negligence.

The Supreme Court of Oregon addressed whether the economic loss doctrine barred the plaintiffs from making a negligence claim against the defendants in the absence of a contract or special relationship between the parties.  Oregon law confers no liability on a party for negligently causing a stranger’s pure economic loss without also injuring the stranger’s person or property, unless there is a special relationship between the parties.  See Hale v. Groce, 304 Or. 281, 284, 744 P.2d 1289 (Or. 1987).  The issue in this case was the appropriate scope and application of the economic loss doctrine.  The court found the economic loss doctrine did not bar the plaintiff’s claim, in part because the dry rot damage constituted “property damage” as opposed to being a purely “economic loss.”  As a result, the economic loss doctrine did not bar the claim.

The defendants argued that the plaintiffs were strangers and that any property damage was purely economic.  Therefore, defendants argued the claim was barred by the economic loss doctrine.  According to the defendants, if their negligence harmed any property, it only harmed the property of the original owner (the California investment company).  Rather than a property loss, the plaintiffs only suffered an investment loss:  the monetary difference between the price they paid for the property and the price they would have paid if they had known about the dry rot damage.

The court acknowledged the logical appeal of the defendant’s argument, but ultimately rejected it.  The court noted every physical injury to property can be characterized as a type of economic loss—all injuries to property diminish the value of the property.  Therefore, the court recognized a distinction between “purely economic losses” on one hand and “damages for physical injuries to person or property” on the other.  In defining pure economic losses, the court drew a distinction between physical damage to real property and economic losses like reduced stock price, monetary gifts to beneficiaries, or indebtedness.

The defendants also argued that permitting the suit—with no relationship between the building contractor and a subsequent purchaser—had the potential to create ongoing liability, where a defendant would have to pay each successive owner of the property for the same property damage.  The court responded that doctrines like claim preclusion, contribution, comparative fault, and mitigation of damages were available to a defendant to prevent repeated lawsuits from subsequent owners seeking to recover for property damage resulting from a the same negligent act.

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