• New York's Top Court Reaffirms That Pure Economic Loss From Construction Accidents Is Not Recoverable In Tort
  • December 9, 2003 | Authors: Alan C. Eagle; Frank J. Giliberti
  • Law Firm: Rivkin Radler LLP - Uniondale Office
  • Courts across the country have generally prohibited plaintiffs from recovering damages in tort for pure economic loss (i.e., a loss without bodily injury or property damage to the plaintiffs) unless the defendants owed the plaintiffs a special duty. Courts have found that this doctrine is necessary to avoid exposing defendants to unlimited liability to an indeterminate class of persons conceivably injured by negligence in a defendant's act.

    As we reported several months ago in our column here, courts in construction defect cases have similarly limited the class of defendants liable for pure economic loss to those in contractual privity with or who owe a special duty to the plaintiff.1 For example, Schneider National, Inc. v. State of New York2 arose after the collapse of a bridge that was part of the New York State Thruway. The claimant sought damages from New York State and the New York State Thruway for the interruption of its trucking business and for associated business expenses on the ground that the defendants had been negligent in the design, construction, maintenance, repair, and inspection of the bridge. The Court of Claims ruled that the claimant was not entitled to any recovery.

    The Schneider court emphasized that it found no authority that would permit it to hold that the defendants' duty to exercise reasonable care in maintaining its highways to prevent injury to unwary travelers should be extended to allow recovery for pure financial losses by those who have suffered no physical injury or direct property damage. To allow the defendants to be held responsible for those losses "would expand the orbit of duty to an uncontrollable degree and extend liability to a point totally disproportionate to the fault found." Indeed, the court concluded, unless plaintiffs were restricted in their ability to recover for pure economic loss, the only limits on a plaintiff's recovery would be determined "by the metaphysical dexterity of . . . claimant's counsel."

    Despite the general consensus that plaintiffs may not recover in tort for pure economic loss, there are occasional instances when courts permit such a recovery even where there is seemingly no special duty. Indeed, we reported in our column that a divided intermediate appellate court in New York had recently refused to bar such recovery in claims arising from the collapse of a building in mid-town Manhattan. However, New York State's top court, the Court of Appeals, has reversed the intermediate appellate court. The Court's unanimous decision in companion cases under the name 532 Madison Avenue Gourmet Foods, Inc. v. Finlandia Center, Inc.3 should leave no doubt that New York does not allow recovery in construction defects cases for pure economic loss in the absence of a recognized special duty in tort or a contractual duty. Defendants in construction defects cases subject to New York law should benefit from this important decision, which limits expansive and unpredictable tort liability.4

    Building Collapse

    On December 7, 1997, a section of the south wall of 540 Madison Avenue, a 39-story office tower, partially collapsed and bricks, mortar and other material fell onto Madison Avenue at 55th Street, a prime commercial location crammed with stores and skyscrapers. The collapse occurred after a construction project, which included putting 94 holes for windows into the building's south wall, apparently aggravated existing structural defects. New York City officials directed the closure of 15 heavily-used blocks on Madison Avenue -- from 42nd to 57th Street -- as well as adjacent side streets between Fifth and Park Avenues. The closure lasted for approximately two weeks, but some businesses nearest to 540 Madison remained closed for a longer period.

    Alleging that shoppers and others were unable to gain access to their stores during the time Madison Avenue was closed to traffic, the operator of a 24-hour delicatessen at 532 Madison Avenue, one-half block south of 540 Madison, and a chocolate retailer at 510 Madison Avenue, two blocks from the building, brought suit against the owner of 540 Madison and its ground lessee and managing agent. The chocolate retailer's suit was styled as a class action on behalf of itself and "all other business entities, in whatever form, including but not limited to corporations, partnerships and sole proprietorships, located in the Borough of Manhattan and bounded geographically on the west side by Fifth Avenue, on the east by Park Avenue, on the north by 57th Street and on the South by 42nd Street." In essence, the plaintiffs contended that the defendants owed them a duty to keep their premises in reasonably safe condition, and that this duty extended to protection against economic loss even in the absence of personal injury or property damage. The defendants countered that the absence of any personal injury or property damage precluded the plaintiffs' claims for economic injury.

    The trial court dismissed the plaintiffs' negligence claims on the ground that the plaintiffs could not establish that the defendants owed a duty of care for pure economic loss in the absence of personal injury or property damage. The trial court also dismissed the chocolate retailer's additional claims for gross negligence and negligence per se on the ground that the plaintiffs could not establish a duty owed by the defendants.

    By the time the issue reached the Court of Appeals, these cases had been consolidated with a third case arising from similar circumstances. Goldberg, Weprin & Ustin LLP v. Tishman Construction Corp. involved the July 21, 1998 collapse of a 48-story construction elevator tower on Manhattan's West 43rd Street between Sixth and Seventh Avenues -- the heart of bustling Times Square. Immediately after the accident, New York City prohibited all traffic in a wide area of midtown Manhattan and also evacuated nearby buildings for varying time periods. A law firm filed a complaint on behalf of itself and a proposed class against the construction company and others. The law firm alleged gross negligence, among other things, and sought damages for economic loss on behalf of itself and "all persons in the vicinity of Broadway and 42nd Street, New York, New York, whose businesses were caused to be closed" as well as a subclass of area residents who were evacuated from their homes.

    Noting the enormity of the liability sought, including recovery by putative plaintiffs as diverse as hot dog vendors, taxi drivers and Broadway productions, the trial court concluded that the failure to allege personal injury or property damage barred recovery in negligence. An appellate court affirmed the dismissal of the law firm's complaint, concluding that, absent property damage, the connection between the defendants' activities and the economic losses of the purported class of plaintiffs was "too tenuous and remote to permit recovery on any tort theory." The appellate court, however, reinstated the negligence claims of the operator of the delicatessen and the chocolate retailer, holding that the defendants' duty to keep their premises in reasonably safe condition extended to "those businesses in such close proximity that their negligent acts could be reasonably foreseen to cause injury," which included the named merchant plaintiffs, and that, as such, they had established a special injury distinct from the general inconvenience to the community at large. Two justices dissented, urging application of the economic loss rule.

    Court of Appeals Ruling

    In its decision, the Court of Appeals observed that the common law of torts is a means of apportioning risks and allocating the burden of loss. Courts determine the existence and scope of one's duty to another by balancing various factors, including the reasonable expectations of parties and society generally, the proliferation of claims, the likelihood of unlimited or insurer-like liability, disproportionate risk and reparation allocation, and public policies affecting the expansion or limitation of new channels of liability.

    The Court pointed out that the foreseeability of harm does not define duty and that absent a duty running directly to an injured person, there can be no liability in damages, however careless the conduct or foreseeable the harm. As the Court explained, this restriction is necessary to avoid exposing defendants to "unlimited liability to an indeterminate class of persons conceivably injured by any negligence in a defendant's act."

    According to the Court, a duty may arise from a special relationship that requires the defendant to protect against the risk of harm to the plaintiff. For example, landowners have a duty to protect tenants, patrons and invitees from foreseeable harm caused by the criminal conduct of others while they are on the premises, because the special relationship puts them in the best position to protect against the risk. However, that duty, the Court emphasized, "does not extend to members of the general public." This limits a defendant's liability because the "special relationship" defines the class of potential plaintiffs to whom the duty is owed, the Court said.

    To illustrate this principle, the Court examined Strauss v. Belle Realty Co.5 In that case, a plaintiff injured in a fall on a darkened staircase during a citywide blackout sued the electric utility. The Court noted that there was no contractual relationship between the plaintiff and the utility for lighting in the building's common areas. Although the plaintiff's injuries had been logically foreseeable, the Court refused to allow the plaintiff to recover and restricted liability for damages in negligence to direct customers of the utility to avoid imposing "crushing exposure" on the utility.

    The Court also referred to Milliken & Co. v. Consolidated Edison Co.,6 in which an underground water main burst near 38th Street and 7th Avenue in Manhattan. The waters flooded a subbasement where Consolidated Edison maintained an electricity supply substation, and then a fire broke out, causing extensive damage that disrupted the flow of electricity to the Manhattan Garment Center and interrupting the biannual Buyers Week. Approximately 200 Garment Center businesses brought more than 50 lawsuits against Con Edison, including plaintiffs who had no contractual relationship with the utility and who sought damages solely for economic loss. Relying on Strauss, the Court held that only those persons contracting with the utility could state a cause of action. The Court circumscribed the ambit of duty to avoid limitless exposure to the potential suits of every tenant in the skyscrapers embodying the urban skyline.

    The Court then observed that although a landowner who engages in activities that may cause injury to persons on adjoining premises surely owes those persons a duty to take reasonable precautions to avoid injuring them, it had never held that a landowner owes a duty to protect an entire urban neighborhood against pure economic losses.

    The plaintiffs sought to rely on a New Jersey Supreme Court decision, People Express Airlines, Inc. v. Consolidated Rail Corp.,7 which allowed recovery for pure economic loss. In that case, a fire started at the defendant's commercial freight yard, which was located across the street from the plaintiff's airport offices. A tank containing volatile chemicals located in the yard was punctured, emitting the chemicals and requiring closure of the terminal because of fear of an explosion. The New Jersey court reasoned that the extent of liability and degree of foreseeability stood in direct proportion to one another: the more particular the foreseeability that economic loss would be suffered as a result of the defendant's negligence, the fairer it was that liability be imposed and recovery permitted. The New York Court of Appeals rejected the New Jersey court's reasoning, emphasizing that the presence of members of the public, while forseeable was nevertheless fortuitous, and the particular type of economic injury that they might suffer was "hopelessly unpredictable." The Court of Appeals also rejected the intermediate appellate court's attempt to draw a boundary at storefront merchant-neighbors who suffered lost income, noting that it "excludes others similarly affected by the closures," such as thousands of professional, commercial and residential tenants situated in the towers surrounding the named plaintiffs, and suppliers and service providers unable to reach the densely populated New York City blocks at issue.

    In these circumstances, the Court concluded, limiting the scope of defendants' duty to those who have, as a result of these events, suffered personal injury or property damage -- as historically courts have done -- afforded a principled basis for reasonably apportioning liability. It therefore held that plaintiffs' negligence claims based on economic loss alone fell beyond the scope of the duty owed them by the defendants and should be dismissed.

    Conclusion

    The clear majority rule in construction defects cases rejects recovery of damages in cases involving only economic loss in the absence of contractual privity or some recognized special duty. The recent decision by the New York Court of Appeals in 532 Madison Avenue Gourmet Foods reemphasizes the validity and applicability of this rule, and makes it clear that defendants -- from property owners to contractors -- in construction defects lawsuits facing negligence complaints that allege only economic loss should seek to have those complaints dismissed as early as possible in the proceedings.

    1 Alan C. Eagle and Frank J. Giliberti, "Economic Loss Rule Limits Plaintiffs' Ability To Recover Damages," Mealey's Litigation Report: Construction Defects, December 2000.
    2 523 N.Y.S.2d 756 (Ct.Cl. 1988).
    3 N.Y. Court of Appeals, No. 84, June 7, 2001.
    4 Although the Court stated that the "economic loss" rule per se did not apply in this situation, the Court applied traditional tort analysis and essentially reached the same conclusion it would have reached had it specifically relied on the economic loss doctrine. The Court said that the "economic loss" rule as reflected in Schiavone Const. Co. v. Elgood Mayo Corp., 56 N.Y.2d 667 (1982), applies to limit an end-purchaser of a product to contract remedies and prohibits the end-purchaser from seeking damages in tort for economic loss against a manufacturer.
    5 65 N.Y.2d 399.
    6 84 N.Y.2d 469.
    7 100 N.J. 246 (1985).