All too often, contractors, architects, and engineers are sued for alleged negligent acts, errors, occurrences, or omissions that take place on a construction site. The laws of Michigan — and the laws of many other states — may not, however, permit those claims based on what has become known as the economic loss doctrine.

The economic loss doctrine is a rule in more than half of the states such “that a plaintiff who has suffered only economic loss due to another’s negligence has not been injured in a manner that is legally cognizable or compensable.”¹ Those states do not permit recovery in tort for purely economic losses. In a small number of jurisdictions including Michigan, recovery in tort is permitted for purely economic losses in only limited and narrow circumstances.²

Michigan’s adoption of the economic loss doctrine dates back at least to 1956, when the Supreme Court decided in Hart v. Ludwig that a breach of contract cannot constitute a separate action in tort.³ At issue in Hart was whether tort claims arising from damages caused by the defendant’s failure to maintain an orchard were cognizable under Michigan law.⁴ The defendant in Hart contracted with the plaintiff to maintain the plaintiff’s orchard and performed the service for some time, but thereafter refused to continue, causing the orchard to fall into neglect and seriously damaging the trees.⁵

The Court held that the question of whether a tort claim could survive depended upon whether a duty existed independent of the contract. If so, a tort claim would lie. If not, no tort claim could be maintained.⁶ Applying this rule, the Court held that the defendant’s alleged breach of contractual duties could not serve as the basis for an accompanying tort claim. The Michigan Supreme Court unanimously held that the tort action must be dismissed because the duty alleged to have been breached — a duty to maintain the orchard — was imposed by contract, not by law.⁷

Since Hart, Michigan courts have consistently applied the economic loss doctrine to bar negligence claims that fail to allege the violation of a legal duty independent of a defendant’s contractual duties.⁸ Further, the economic loss doctrine applies both to contracts for the sale of goods and contracts for services.⁹

According to the Michigan Supreme Court, the threshold question in analyzing a negligence claim based on a contract is “whether the defendant owed a duty to the plaintiff that is separate and distinct from defendant’s contractual obligations.”¹⁰ If no independent legal duty exists separate and distinct from the defendant’s contractual duties, no negligence action can be maintained as a matter of law.¹¹ Michigan courts have consistently reiterated this principle. For example, in Rinaldo’s Construction v. Michigan Bell Telephone Company, the Michigan Supreme Court stated that a plaintiff may not simply recast its contract claim as a tort, reasoning that “the threshold inquiry is whether the plaintiff alleges violation of a legal duty separate and distinct from the contractual obligation.”¹² The Rinaldo Court concluded that a plaintiff may not maintain a tort claim when it “does not allege violation of an independent legal duty distinct from the duties arising out of the contractual relationship.”¹³

Michigan is not alone in its jurisprudential view of the economic loss doctrine. In other jurisdictions, the doctrine has been applied to claims of negligence in an engineering setting for claims of economic damages. For example, in Terracon Consultants Western v. Mandalay Resorts Group, the Supreme Court of Nevada found that:

[a]fter examining relevant authority and contemplating the policy considerations behind the economic loss doctrine, we have determined that the doctrine’s purpose — to shield defendants from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial or professional setting, and thus to keep the risk of liability reasonably calculable — would be furthered by applying it to preclude the professional negligence claims at issue here. Thus, we conclude that the economic loss doctrine bars professional negligence claims against design professionals who provided services in the process of developing or improving commercial property when the plaintiffs’ damages are purely financial.¹⁴

Just prior to the above quote, the court asked about the applicability of and then described “purely economic loss”:

Does the economic loss doctrine apply to preclude negligence-based claims against design professionals, such as engineers and architects, who provide services in the commercial property development or improvement process, when the plaintiffs seek to recover purely economic losses?

The answer to the question is yes. “Purely economic loss” has been defined as “‘the loss of the benefit of the user’s bargain ... including ... pecuniary damage for inadequate value, the cost of repair and replacement of [a] defective product, or consequent loss of profits, without any claim of personal injury or damage to other property.’”¹⁵

The court explained its ruling by stating:

In the context of engineers and architects, the bar created by the economic loss doctrine applies to commercial activity for which contract law is better suited to resolve professional negligence claims. This legal line between contract and tort liability promotes useful commercial economic activity, while still allowing tort recovery when personal injury or property damage are present. Further, as in this case, contracting parties often address the issue of economic losses in contract provisions.¹⁶

The court also noted that many other jurisdictions have been governed by the same policy considerations.¹⁷ In conclusion, the court held:

We conclude that, in a commercial property construction defect action in which the plaintiffs seek to recover purely economic losses through negligence-based claims, the economic loss doctrine applies to bar such claims against design professionals who have provided professional services in the commercial property development or improvement process.¹⁸

The Supreme Court of Illinois came to a similar result in Fireman’s Fund Insurance Company v. SEC Donohue,¹⁹ where the court held that:

We agree with the appellate court that, based on 2314 Lincoln Park West, the economic loss doctrine applies to engineers. In 2314 Lincoln Park West, this court held that the economic loss doctrine applied to architects, preventing the recovery of purely economic losses in tort. This court reasoned that “[t]he architect’s responsibility originated in its contract with the original owner, and in these circumstances [purely economic loss] its duties should be measured accordingly.”²⁰

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Further, the appellate court could not find any substantive difference between architects and engineers for purposes of the economic loss rule, nor can we. In 2314 Lincoln Park West, this court likewise did not distinguish architects from engineers. We hold that the economic loss doctrine bars recovery in tort against engineers for purely economic losses.²¹

Accordingly, the Michigan Supreme Court and the supreme courts of other jurisdictions all arrive at the same conclusion. The economic loss doctrine is a viable legal defense to parties bringing negligence claims in the absence of a breach of a duty separate and distinct from those duties owed under a contract.