The Economic Loss Rule in a “Crescent University” Landscape: What Subcontractors and Subsequent Purchasers Should Know
In North Carolina, lawsuits by homeowners against contractors and subcontractors are governed by the economic loss rule. This rule, articulated in the seminal case Ports Auth. v Lloyd A. Fry Roofing Co., states that a plaintiff cannot sue in tort when a contractual remedy exists, with a few exceptions: unless a third-party sustained the injury, a property that was not the subject of the contract sustained the injury, a special duty such as a bailment existed, or the defendant willfully committed the injurious act.
As always, however, layers of nuance exist. In December 2020, the North Carolina Supreme Court decided Crescent University City Venture, LLC v. Trussway Manufacturing, Inc., which clarified the rule in the context of a commercial property owner seeking to sue a subcontractor with whom it lacks contractual privity.
Crescent University Clarifies the Economic Loss Rule
In the case, a commercial property owner attempted to directly sue a subcontractor for negligence rather than suing the general contractor, with which it had a contract. The Court ruled that because the owner had a contractual remedy against the general contractor, it had no remedy in tort against the subcontractor. Thus, at least in commercial cases, the economic loss rule functions to protect subcontractors where a contractual remedy exists against the general contractor.
In reaching its decision, the Court distinguished two cases that allowed negligence claims to proceed in the context of residential construction. First, the 2007 Court of Appeals’ decision in Lord v. Customized Consulting Specialty, Inc. affirmed a jury’s finding of negligence against a residential subcontractor, concluding that there was “a means of redress for those purchasers who suffer economic loss or damage from improper construction but who, because not in privity with the builder, have no basis for recovery in contract or warranty.” Second, Crescent University distinguishes the 1985 North Carolina Supreme Court case Oates v. Jag, Inc., in which the Court allowed a subsequent purchaser of a home to sue the homebuilder. Oates relied on the fact that the implied warranty of fitness in the construction of a residence did not extend beyond the original purchaser, who was the only homeowner in privity with the home builder. Thus, the subsequent property owner did not have an alternative remedy.
In pointing out these two prior cases, Crescent University emphasizes that, in the residential context, a purchaser generally lacks the skill to know whether the construction is defective. Accordingly, neither case “disturb[s] the applicability of the economic loss rule to commercial real estate development transactions.”
Residential Cases: A Twist
Despite the possibility that the Supreme Court’s holding in Crescent University is strictly limited to the context of commercial construction, residential subcontractors facing suits filed directly by original or subsequent purchasers may still be able to avail themselves of the economic loss rule. For example, the U.S. District Court for the Eastern District of North Carolina addressed the issue of subcontractor liability in the 2009 case Kelly v. Georgia Pacific. In Kelly, which interpreted North Carolina law, the Court found that the original homeowner could not bring a claim against the subcontractors who supplied building products to the general contractor where a contractual remedy existed against the general contractor. Similarly, in 2016, the North Carolina Court of Appeals extended protections to subs in the unpublished decision Buffa v. Cygnature Construction and Development. In that case, the plaintiffs sued several defendants including a subcontractor who had installed defective windows. The Court upheld the subcontractor’s dismissal from the case, finding that “[w]here plaintiffs had the remedy of a manufacturer’s express warranty, the economic loss rule precluded plaintiff’s claim for recovery [against the subcontractor] based on the tort of negligence.”
The Implications for Subsequent Purchasers
This body of case law teaches us that generally, subsequent purchasers of residential property without another legal remedy may find relief in a tort claim against the general contractor. However, both residential and commercial subcontractors may be insulated from tort liability if the property owner has a remedy in contract against the general contractor. Of course, none of the decisions discussed in this article would prevent a general contractor sued in negligence by either an original or subsequent purchaser from bringing third-party breach of contract claims against subcontractors. Thus, in the ordinary construction case, subcontractors may be exclusively cast in their already-commonplace role as third-party defendants.