Economic Loss Rule Does Not Bar Owner’s Negligence Claim Against Subcontractor

Lord v. Customized Consulting Specialty, Inc., 182 N.C. App. 635, 643 S.E.2d 28 (Ct. App. 2007)

In this case, homeowners sued their contractor regarding defective trusses installed in their home, and also brought a negligence claim directly against the subcontractor which supplied the trusses.  A jury awarded no damages against the contractor, but did award damages against the subcontractor.  The subcontractor argued on appeal that the economic loss rule barred the homeowners’ claim.  The North Carolina Court of Appeals affirmed the jury verdict against the subcontractor, holding that the economic loss rule does not bar a negligence claim in the absence of a contract.

The Lords contracted with Customized Consulting Specialty, Inc. to construct a residence.  Customized Consulting subcontracted with 84 Lumber to provide the trusses used in constructing the residence.  Around two years after the residence was completed, Mr. Lord noticed that the trusses were sagging, and brought an action against Customized Consulting alleging defects in the construction of the residence.  Customized Consulting joined 84 Lumber as a third-party defendant.  The Lords voluntarily dismissed their suit but re-filed several months later, asserting claims against both Customized Consulting and 84 Lumber.  All claims against 84 Lumber except for a negligence claim were dismissed before trial – either voluntarily or by the court.  At trial, 84 Lumber moved for a directed verdict on the Lords’ negligence claim on the grounds that this claim was barred by the economic loss rule and statute of limitations.  The trial court denied this motion.  The jury returned a verdict in favor of Customized Consulting, but against 84 Lumber.  The jury thus awarded damages to the Lords on their claim against 84 Lumber for negligent design and manufacture of the trusses.  The Court of Appeals affirmed judgment for the Lords, holding that the economic loss rule did not bar the negligence claim in the absence of a contractual relationship between the Lords and 84 Lumber.

The court stated that “[t]he economic loss rule prohibits recovery for purely economic loss in tort, as such claims are instead governed by contract law.” In other words, “a tort action does not lie against a party to a contract who simply fails to properly perform the terms of the contract…when the injury resulting from the breach is damage to the subject matter of the contract.”  The court found that because there was no contract between the Lords and 84 Lumber, the economic loss rule did not apply, and that the trial court was correct in allowing the Lords’ tort claim to proceed.  In coming to this conclusion, the court cited and relied on Oates v. JAG, Inc., 314 N.C. 276, 333 S.E.2d 222 (1985), where a subsequent purchaser of a home had a cause of action for negligent construction despite his lack of privity of contract with the contractor who built the home.  The court also distinguished Moore v. Coachmen Industries, Inc., 129 N.C. App. 389, 499 S.E.2d 772 (1998), a products liability case where the economic loss rule barred recovery from a manufacturer with which plaintiff had no contract.  The court further cited Ellis-Don Construction, Inc. v. HKS, Inc., 353 F.Supp.2d 603, 606 (M.D.N.C. 2004), for the proposition that the economic loss rule has not “expanded to preclude all claims in tort for economic damages in the absence of a contract, or, more narrowly, outside the products liability context.”  After finding that the economic loss rule was not a bar, the court also rejected several other arguments of 84 Lumber, including arguments regarding the statute of limitations, evidentiary rulings by the trial court, jury instructions, and the award of costs.