Virginia’s Economic Loss Rule (the “Rule”) has proved a formidable obstacle to plaintiffs in the Commonwealth of Virginia. Intended to distinguish between claims arising in contract verses those arising in tort, the Rule has provided fodder for debate and extensive discussion in all of Virginia’s courts. A recent decision from the Western District of Virginia, McConnell v. Servinsky Engineering, PLLC, 22 F. Supp. 3d 610 (W.D. Va. 2014) made clear that the Rule is alive and well in the Commonwealth. Indeed, an engineer escaped personal liability for allegedly defective design services in large part due to the Rule.
The Owner, Kenneth McConnell (“Owner”), entered into a written contract with a Michigan company, Servinsky Engineering, PLLC (“the Company”) to design the foundation for a fabric-roofed building on a farm intended to be used as a feed barn (the “Project”). Mark S. Servinsky (“Servinsky”), a professional engineer licensed in Virginia and principal of the Company actually performed the design services. According to the Owner’s contract with the Company, the Company was to take area conditions into account in preparing the design.
Unfortunately, shortly after the building was constructed, the foundation failed. In the lawsuit, the Owner alleged that the designed foundation and structural posts were insufficient to handle local topography, wind and snow loads, contrary to the contract requirements. The Owner alleged that the building was too unstable to be safely used for its intended purpose and the attempted fixes to the structural deficiencies were insufficient to bring the building up to code and contract requirements.
In addition to the Owner’s claims against the Company, he asserted claims against Servinsky personally. In particular, the Owner brought a breach of professional standard of care – a tort claim – against Servinsky for his performance of design services for the Company. In other words, the Owner claimed that Servinsky was personally liable for the Owner’s damages.
In response to the complaint, Servinsky filed a motion seeking to dismiss the Owner’s claims against him based upon the Economic Loss Rule and because Servinsky had not entered into a contract with the Owner, i.e., there was a lack of privity between the Owner and Servinsky. Based upon its application of Virginia law, including the Economic Loss Rule, the court sided with Servinsky and dismissed all of the claims against him personally.
The Economic Loss Rule Generally
Simply put, under Virginia law a party cannot sue for economic losses without establishing that it has a contract. Further, a plaintiff cannot sue in tort for a duty assumed solely by contract. Stated differently, the Rule provides that where the plaintiff is a party to a contract and has suffered only disappointed economic expectations, such as damages for inadequate value, lost profits or the cost to repair defective construction, the remedy sounds in contract, not in tort. In this situation, the plaintiff would be limited to a breach of contract claim and any damages permitted under the contract. Importantly, if the plaintiff is limited to its contract, special recovery such as punitive damages will be unavailable.
It is important to keep in mind, however, that a tort, such as negligence or breach of a professional standard of care, may be pursued against a party that violates a duty that arises independent of the parties’ contract and for damages to persons or property beyond the scope of the contract.
Was The Loss Solely Economic?
In McConnell, the first issue the district court considered in its analysis was whether the Owner sought purely economic losses. In that regard, the court noted that the Owner sought monetary damages in order to remove the existing building and to erect a new building sufficient to withstand local conditions, as originally bargained for in the contract. The court determined that the Owner’s loss was “economic,” noting that economic losses occur when a product injures itself because one of its component parts is defective. Relying on the Virginia Supreme Court’s decision in Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 374 S.E.2d 55 (Va. 1988), the McConnell court found that such losses are not recoverable in a tort action.
In reaching its conclusion, the McConnell court explained that pursuant to the Rule, when the bargained-for level of quality in a contract is not met, the law of contracts provides the sole remedy. In that instance, tort recovery is not available to a plaintiff, such as the Owner in the McConnell case, because the contract defines the breach and the damages.
Was The Owner’s Underlying Injury To “Persons” Or “Property?”
As noted above, the Rule does not bar a tort action if the plaintiff’s injury is to persons or property. Consequently, this was the second issue the McConnell court considered. Initially, the court reviewed Virginia case law where courts had declined to dismiss negligence claims based on the Economic Loss Rule. In one case, the claims survived an attempt to dismiss because plaintiff alleged that the defendant breached an independent duty of care to prevent injury to property by spraying chemicals that killed pine tree crops. The McConnell court noted that in another case, the court refused to dismiss a negligence action based on the Rule where the plaintiff alleged that the defendant’s failure to repair a leak caused mold infestation resulting in personal injury.
Distinguishing the cases supporting the exception, however, the McConnell court found that “a structurally deficient building [such as alleged by the Owner in McConnell] is an economic loss rather than injury to property.” The court concluded that Plaintiff had not alleged any damages beyond economic loss in order to fall within the exception to the Rule.
Was There Privity Of Contract Between The Owner And Servinsky?
Having found that application of the Rule limited the Owner to a contract action, the McConnell court turned to the issue of privity. In that regard, the court noted that “[b]ecause the law of contracts provides the sole remedy for economic loss under Virginia law, privity is an indispensable requirement for a viable claim.” The Owner’s pleadings made clear that his contract was with the Company, not with Servinsky.
The court was not persuaded by the Owner’s arguments that he should be permitted to seek economic losses directly against Servinsky since Servinsky actually performed the Company’s design work and affixed his engineering seal to the foundation plans. Further, the court found that Servinsky had not assumed an independent tort duty by sealing the drawings and/or by performing professional services under the Company’s contract.
The court concluded that the lack of privity was fatal to the Owner’s claim for economic losses against the engineer and dismissed the case against Servinsky.
The McConnell decision demonstrates that Virginia’s Economic Loss Rule is alive and well and will be applied by the courts to preclude tort claims for purely economic losses. Further, such claims will not succeed in the absence of privity. This case also reminds plaintiffs seeking to recover economic losses to properly plead their case. If a plaintiff is able to allege injury to persons or property, it should do so clearly and may be able to overcome a challenge under the Rule.