Robert J. Golterman, Jeremy P. Brummond and Patrick F. Ganninger | Lewis Rice
Parties negotiating construction agreements often think about the types of damages either party may claim if the other party breaches the agreement. Many times, however, the parties do not consider other damages that may be available under state law tort theories (such as punitive damages) if there is a dispute arising from their Project. This is because many parties negotiating construction agreements assume they will be protected against state law tort claims by “the economic loss doctrine.” The economic loss doctrine generally bars the use of tort theories—such as negligence—to recover damages arising out of commercial transactions (like construction agreements) when the damages are not associated with personal injury or damage to property other than a product sold.
Many contractors and owners incorrectly believe the economic loss doctrine is universally adopted and uniformly applied by all States and thus that tort claims and punitive damage claims will generally not be available to an owner or contractor if the parties end up in a dispute. There is, however, significant variation among the states in their application of the doctrine. Some states do not recognize the economic loss doctrine at all for certain types of agreements. See Commercial Painting Co. Inc. v. Weitz Co. LLC, 676 S.W.3d 527 (Tenn. 2023) (holding doctrine inapplicable for construction services agreement). Others, like Missouri, recognize the doctrine, but with various exceptions.
The significance of the economic loss doctrine’s applicability (or inapplicability) should not be understated. In the Tennessee case cited above (Commercial Painting Co. Inc. v. Weitz Co. LLC), the underlying subcontract was valued at slightly over $3 million. However, the lower court awarded the plaintiff subcontractor $3.9 million in punitive damages, on top of approximately $1.7 million in compensatory damages. This case distinctly illustrates how the availability of tort and punitive damages in construction services contracts can substantially impact the risk a party is assuming in entering into a construction agreement. Contractors and Owners should investigate their possible exposure to state-law tort claims and damages, particularly when pursuing a Project in a new jurisdiction.
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