The ICA issued an opinion today affirming summary judgment in favor of a designer's motion for summary judgment on the grounds that professional negligence claims were barred by the economic loss doctrine. In the case, a building owner contracted with a general contractor to install a thermal eneregy system. The general contractor subcontracted mechanical engineering work to Dorvin Leis, which in turn subcontracted the system design to defendant/appellee Silversword Engineering, Inc. ("Silversword"). Silversword subcontracted its design work to Morikawa and C. Don Manuel.
Appellants, the Leis Family Partnership, filed suit against Silversword and it subcontractors. Without alleging negligent misrepresentation regarding the qualities or capabilities of the system, Appellants made claims for professional negligence against the designers. The designers sought summary judgment, arguing that the economic loss doctrine barred Appellant's claims for professional negligence. The trial court agreed and granted summary judgment.
On appeal, Appellants argued that the economic loss doctrine, as adopted in Hawaii, only precludes tort actions for negligence when the parties are in privity in contract. Since the Appellant and the defendant designers were not in privity of contract, the Appellant retained its tort claims and summary judgment was improper. Appellant also argued the trial court incorrectly failed to apply the "deviation-from-industry-standard" exception to the economic loss doctrine.
Appellant's non-privity tort claim arises from a Hawaii Supreme Court decision which enforced the economic loss doctrine by and between an owner and its contractee/designer. In City Express v. Express Partners, 959 P.2d 836 (1998), the Hawaii Supreme Court furthered its prior adoption of the economic loss doctrine regarding damages to products themselves in the stadium rust case (State ex rel. Bronster v. U.S. Steel Corp.), by applying it to claims made against an architect by the project owner who contracted with the architect. In City Express the Supreme Court ruled as follows: "[i]n the context of construction litigation, where a party is in privity of contract with a design professional, economic loss damages are limited to contractual remedies, and a negligence action may not be maintained." 959 P.2d. at 839.
Based upon this language, the Appellant in the present case argued that as it was not in privity with its designers, they were subject to liability in tort. The ICA disagreed. The ICA held that the City Express case only noted the non-privity nature of the parties because that was the facts of the case before the court. The ICA noted that in a later case the Supreme Court applied the economic loss doctrine in all construction cases, even in the absence of privity of contract, so long as allowing such recovery would blur the distinction between contract and tort law.
The ICA accordingly held that in the present case, because allowing a negligence claim to proceed would blur the distinction between contract and tort law, the economic loss doctrine applied and the claim was barred. The claims made against the designers arose out of the owner's deliberate choice not to contract with the design professionals but with a general contractor instead.
The ICA also rejected the deviation from industry standards argument, holding that because a duty to conform to industry standards would run parallel to any contract, the design professional would constantly be subject to litigation.
The ICA decision addresses (for now) a lingering confusion left after the City Express decision which separated Hawaii's economic loss doctrine application from that of other states. In City Express the Hawaii Supreme Court noted that having elected to dispose of their rights and reponsibilities through contract, the courts should not upset the parties' agreements by imposing tort duties separate from those for which they contracted. Otherwise, this might upset the construction industry as a whole — an industry formed by the contracts of the parties acting within it. In other states, however, the courts have taken a line much more similar to that of the ICA's today — having chosen not to contract with the party, the complainant should not be able to make a claim in tort when it had the opportunity, and declined, to contract for allocation of rights and responsibilities. Because the construction industry is comprised of contractors who define their rights by their agreements, it would be an upset to the industry to allow an end-run around those agreements by allowing a direct claim in tort. Same result, very different theory. The ICA's decision closes the logic gap between the two and forecloses the argument that really did appear to be suggested by City Express, i.e. if you are in privity, you cannot make a tort claim, but if you are not, you can.
Submitted by Anna Oshiro