Contractors Beware – Maryland’s Economic Loss Doctrine is Alive and Well

Contractors Beware – Maryland’s Economic Loss Doctrine is Alive and Well

Summary

Maryland recently reaffirmed application of the “economic loss doctrine” to damages sought in construction disputes in Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, No. 496, Sept. Term 2014, 2016 WL 360875 (Md. Ct. Spec. App. Jan. 28, 2016).  Thus, while some jurisdictions permit a contractor’s cause of action against a design professional/engineer for negligence arising from defective plans and specifications, even in the absence of contractual privity, Maryland is not one of them.  Maryland steadfastly holds to the economic loss rule, which does not permit a cause of action for purely economic losses (such as delays or problems caused by defective plans) in the absence of direct contractual privity or its equivalent between the construction contractor and the design professional.

In Beatty, a contractor on a public construction project brought an action against an engineering firm for professional negligence. The contractor incurred costly delays and complications in reliance on allegedly defective designs and negligent misrepresentations concerning project timeline projections. In this design-bid-build project, there was no contract between the engineer and the contractor, both of which contracted directly with the public entity.  The complaint sounded in tort, supported by the theory that the engineer owed the contractor a duty based on an “intimate nexus.”  The trial court granted the engineering firm’s motion to dismiss pursuant to the economic loss doctrine, and the Court of Special Appeals affirmed.  

In a comprehensive analysis of the doctrine, the Court held that there “can be no negligence where there is no duty that is due; for negligence is the breach of some duty that one person owes to another....”  Moreover, the general rule is that a party cannot recover against another in tort where the resulting harm is purely economic loss and the parties have no contract between them. 

The Court noted that the Spearin doctrine permits the contractor to rely on the plans, and thereby have a cause of action against the public entity with which it contracted, but that absent a direct contract between the contractor and the engineer, no cause of action may be brought against the engineer.  See United States v. Spearin, 248 U.S. 132, 136, 54 Ct. Cl. 187, 39 S.Ct. 59, 63 L.Ed. 166 (1918).

Although the Court recognized that states are divided on the doctrine’s application to professional design plans, it nevertheless held that the “recovery of purely economic, benefit-of-the-bargain-type damages has long been limited in the United States.”  Thus, a “construction contractor’s ability to recover for economic losses against a design professional where there is no contractual privity is generally limited to situations involving death, personal injury, property damage, or the risk of death or serious personal injury.”  

Lessons Learned:

  • In the absence of a direct contract, a construction contractor may not recover for professional negligence against design professionals in Maryland. So, carefully assess your contractual relationships, particularly in design-build and design-bid-build projects.
  • This is not the law in every jurisdiction, so be aware of which law applies in the place where the contract is performed.
  • Obtain third-beneficiary language in separate agreements where appropriate and permissible in order to preserve potential claims.
  • Remember that causes of action against the public entity/owner are still viable in Maryland under the long-standing Spearin doctrine.  
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