• The Economic Loss Doctrine Scaled Back in Massachusetts
  • July 22, 2014 | Author: Asha Echeverria
  • Law Firm: Bernstein Shur - Portland Office
  • In a case recently decided by the Massachusetts Supreme Court, the Court reaffirmed that the Economic Loss Rule applies to construction cases in Massachusetts. The trustees of the Market Gallery Condominiums in Lowell filed an action against Ayer Properties seeking damages for the negligent construction of elements of a condominium, including window frames, exterior brick masonry, and the roof of the building, that resulted in damages to both common areas of the condominium as well as individual residential units. The Superior Court concluded that the contractor was negligent, and that the condominium association was entitled to damages for everything but the brick masonry. On that issue, the Court held that the economic loss rule precluded the condominium trustees from recovering for damage to the defective masonry work, because the defective masonry work did not damage any other part of the condominium property.

    The Massachusetts Supreme Court overruled the lower court and concluded that damages for the masonry work was appropriate as well. The Court restated the Economic Loss Rule, which states that in the absence of personal injury or physical damage to property beyond the defective product itself, the supplier of the defective product is not ordinarily liable on a negligence theory. Instead, the parties must look to contract remedies. Economic losses covered by the doctrine include damages for inadequate value, cost of repair, and replacement of the defective product, so long as there’s no claim of personal injury or damage to other property. The Court concluded that in a condominium context, the Economic Loss Doctrine does not apply to the negligent design and construction of common areas of a condominium. The Court explained that the particular nature of a condominium is a hybrid form of interest in real estate where an owner has exclusive ownership and possession of his or her individual unit, but an undivided interest in the common areas. The trustees of the condominium are the ones who have standing to bring the action against the builders for the common area damage, but did not have a direct contract with the builder and thus could not bring a contract claim in order to recover its economic losses caused by the defective construction. The Massachusetts Supreme Court concluded that in this particular circumstance, the purposes underlying the Economic Loss Rule would not be applicable and the association could proceed and recover damages on a negligence theory.

    The economic loss rule has been applied in varying degrees in construction cases for over two decades now. However, the application of the rule, and its reach, differs from state to state, and under different factual scenarios. Do not assume that the economic loss rule automatically bars or does not bar a negligence action. As this case shows, depending on the particular facts, the answer may differ.