Exceptions to the Economic Loss Rule in North and South Carolina

In North Carolina, the economic loss rule will not bar recovery on a negligence claim when there is no contract between the parties. In Lord v. Customized Consulting Specialty, Inc., a general contractor contracted with the plaintiff owners to construct a home. The owners subsequently sued the general contractor for alleged defects in the home’s construction. The general contractor named as defendants the subcontractors with whom the general contractor had contracted with to provide the trusses for the home. These subcontractor defendants asserted that the economic loss rule should apply to bar the plaintiffs’ negligence claim against them. The court acknowledged that, “simply stated, the economic loss rule prohibits recovery for purely economic loss in tort, as such claims are instead governed by contract law.” However, the court recognized the economic loss rule is not fair to those plaintiffs who have suffered economic loss or damage from improper construction but “who have no basis for recovery in contract” in the absence of a contract between the parties. Therefore, the court held “that the [subcontractor defendants] had a duty to use reasonable care in performing its promise to provide reliable trusses to [the general contractor] for use in the construction of the [plaintiffs’] residence, and it further held that because there was no contract between the plaintiffs and the subcontractor defendants, the economic loss rule did not apply and therefore did “not operate to bar the plaintiffs’ negligence claims.”

The North Carolina Court of Appeals recently acknowledged in the 2016 case Buffa v. Cygnature Constr. & Dev., Inc., 796 S.E.2d 64 (unpublished) Lord’s holding that the economic loss rule does not bar a negligence claim where there is no contract between parties in a home construction case. However, the court qualified this holding by stating that “where a basis for recovery is available by warranty,” the economic loss rule will apply to prevent recovery for purely economic loss under a negligence claim. In this case, the plaintiffs sustained damage to their home as a result of defective windows. The seller of the windows did not have a contract with the plaintiffs, as the windows were purchased by the subcontractor who installed the windows. These windows were covered by the manufacturer’s express warranty. Because a basis for recovery was available by warranty, the court held that it was appropriate to apply the economic loss rule to bar negligence claims seeking to recover for purely economic loss.

However, it may be important to note that the Buffa case concerned an express warranty. A more detailed analysis may be required as to the issue of whether an implied warranty would bar a negligence claim per the economic loss rule, but the general rule in North Carolina is that a contract “is required to assert a claim for breach of an implied warranty involving only economic loss.” Energy Inv’rs Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 338, 525 S.E.2d 441, 446 (2000). Therefore, the economic loss rule will likely bar negligence claims if a court has recognized the existence of an implied warranty, because an implied warranty typically only exists when there is a contract between parties.

South Carolina law is complicated in that there are a number of uncoordinated opinions touching on the subject. However, similar to the Lord case above, the South Carolina Supreme Court has ruled that the economic loss rule will not bar a negligence action against a builder when a legal duty has been violated, “no matter the type of resulting damage. . . . But the economic loss rule will apply [to bar negligence actions] where duties are created solely by contract.” Kennedy v. Columbia Lumber & Mfg. Co. This case further emphasized that “privity of contract as a defense to an implied warranty action” has been abolished in South Carolina. So, unlike in North Carolina, the existence of an implied warranty is not likely to bar a negligence claim for economic loss in South Carolina where there is no contract between the parties. Further, in Beachwalk Villas Condo. Ass’n, Inc. v. Martin, the holding in Kennedy was expanded to architects in addition to builders, as the court stated that “architects may be held liable to home buyers for negligence in connection with home construction projects and breach of implied warranty where no contractual privity exists between the architect and the home buyer.” However, the South Carolina Supreme Court has since held that the principle set forth in Kennedy is limited to the residential real estate construction context. Sapp v. Ford Motor Co.

In sum, in both North and South Carolina the economic loss rule will not apply in certain instances to bar recovery for purely economic loss in tort, although the justification for such an exception may differ somewhat between the two states. Therefore, if a party seeks to recover for pure economic loss and does not have adequate recourse via typical contract law, it would be wise to explore the various exceptions in North and South Carolina regarding the economic loss rule when bringing a claim.

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Collaborative Training In Asheville June 19-20

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The NCBA has offered six basic training courses in Collaborative Law Practice in the past, and is offering the next one June 19-20  in Asheville. Click here to view the brochure with all the details and to register.

Collaborative Practice Training
Wednesday-Thursday, June 19-20, 2019
Renaissance Asheville Hotel

This 14-hour training is for any lawyer who wishes to add the collaborative approach to their practice, whether they are family lawyers or other civil lawyers, including those practicing in the areas of construction, employment, small business, probate, as well as general litigation. Because collaborative law is practiced entirely out of court, it is not necessary to have training or experience as a litigator to become a collaborative lawyer.

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How To Handle Construction Cost Escalations Due To Tariffs and Other Market Forces

By Jeffrey M. Reichard

Over the past year, the imposition of tariffs on foreign goods and potential trade wars have caused prices for various construction materials to increase dramatically. Current tariffs affecting the construction industry include tariffs on steel, aluminum, Canadian lumber and a plethora of Chinese imports, while the threat of a trade war and potential sanctions have wreaked havoc on materials such as asphalt, copper, quartz and other building materials. In fact, absent a deal between the United States and China before March 1, 2019, a large number of US tariffs on Chinese imports could increase to 25%. This begs the question: Who in the contracting chain bears the risk of these price increases? Is it the owner, the general contractor, subcontractors or material suppliers? The answers to these questions usually are determined by contractual terms between the parties and the stage of contract formation on a particular project at the time of the price increase. For example, after the parties have signed a binding fixed-price contract, it may be more difficult to obtain additional compensation for price escalations than before a contract is signed. A contracting party, however, may mitigate its risks associated with price escalations at any stage in the construction project.

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Section Happenings: February CLE, Electronic Deskbook, Diversity Initiative, YLD Committee

By Jason Herndon

Friends –

Ready or not, 2019 is upon us. As we enter this new calendar year (and the midway point of our 2018-209 Bar year), I wanted to take the opportunity to highlight a few important Section issues and happenings.

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Are Public Payment Bond Rights Assignable Under NC Law? Maybe.

By Jonathan Massell

Contractors, like other businesses, often find it advantageous to assign their accounts in exchange for some other form of consideration from the assignee.  What is different about a contractor’s accounts, as compared to most other businesses, is that the amounts owed might be secured by payment bonds.

It should not be disputed that a contractor can assign its accounts to a third party so long as the proper procedures are followed.  However, if the accounts relate to a project where the contractor would have a valid claim on a public payment bond, can this right be assigned along with the accounts?  Practically, the ability of a third party purchaser to make a bond claim would make the assignment of accounts more lucrative for the assignee and would provide some bargaining power for the contractor who wants to assign the accounts.  However, once the accounts are assigned and the third party assignee goes to make a claim on the bond and enforce that claim in court, will a court dismiss the action right off the bat for lack of standing of this new claimant?  In North Carolina, maybe.

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NC Court of Appeals Clarifies When a Nonsignatory Can Compel Arbitration

By Bryan Scott and Steven Hemric

Generally, only signatories to an arbitration agreement can compel one another to arbitrate their claims. However, in certain situations a nonsignatory may take advantage of an arbitration agreement between other parties. One such situation arises when a signatory to an arbitration agreement is “equitably estopped” from refusing to arbitrate its claims against a nonsignatory, under the doctrine of equitable estoppel, concepts of fairness prevent the signatory from refusing to arbitrate its claims. See, e.g. Am. Bankers Ins. Group, Inc. v. Long, 453 F.3d 623, 627 (4th Cir. 2006). In (Smith Jamison Construction v. APAC-Atlantic, Inc.,) the North Carolina Court of Appeals recently clarified what types of claims by a signatory against a nonsignatory give rise to equitable estoppel. The key issue, according to the Court of Appeals, is whether the claims rest on the terms of the contract containing the arbitration clause at issue.

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Top 10 Changes to the AIA A201: What You Need to Know

By Melissa Brumback

In 2017, as it does every ten years, the American Institute of Architects (AIA) updated most of its standard form contract documents, including the A201 General Conditions.   This cycle, the contract changes are evolutionary in nature, not revolutionary.  Even so, it is crucial to know the changes to avoid making a fatal mistake that could cost you money on a construction project.  In reverse order, the top 10 changes you need to know include:

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How To Manage the Confluence Of Construction Law and Intellectual Property

By Jeff Reichard

Construction lawyers may face myriad issues related to intellectual property, including patents, copyrights, trademarks and trade secrets.  Intellectual property disputes can create substantial economic risks and even completely shut down an otherwise successful construction project.  While these issues often are misunderstood, the intellectual property issues that arise most often in construction can be easily recognized and managed via contract negotiation or otherwise after educating yourself on the various types of intellectual property and how they may apply to construction projects as identified below.

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Getting Liquidated Damages in Your Default Judgment

By Luke Farley

Owners, if you want liquidated damages to be included in your default judgment against a contractor, then be sure to plead the LDs in your complaint.

In Aoun & Cole, Inc. v. Fitzpatrick, a new, unpublished opinion from the N.C. Court of Appeals, the court affirmed an order under Rule 60(b)(6) setting aside liquidated damages that were awarded to an owner against a contractor as part of a default judgment.

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House Bill 707: What’s New With Lien Agents?

By Nan Hannah

In late June 2017, the North Carolina General Assembly passed legislation revising the Lien Agent statutes. Because these changes involve upgrades and changes to the www.LiensNC.com website, the effective date for the new law is October 1, 2018.  So, what’s new?

44A-11.1(f) now provides for a designated lien agent to accept renewals and cancellations of Notices to Lien Agents.  What should catch your attention is the fact the original statute did not provide for either renewal or cancellation of such notices.

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