APPEALS COURT CREATES EXCEPTION TO THE ECONOMIC LOSS RULE FOR CONDOMINIUM ASSOCIATIONS

Published on: December 18, 2012

The Appeals Court has issued a pivotal decision that has effectively carved out an exception to the “economic loss rule” for condominium associations seeking to recover against developers for defective construction.  In Wyman v. Ayer Properties, LLC, the Appeals Court reversed the Superior Court’s dismissal of a condominium association’s claims associated with negligently constructed masonry – allowing the association to recover more than $375,000 from the developer of a Lowell condominium.

The Appeals Court (Sikora, J.) recognized that the economic loss rule had placed an unintended and substantial burden upon condominium associations, and held that “a condominium unit owners’ association may recover damages in tort from a responsible builder-vendor for negligent design or construction of common area property in circumstances where damages are reasonably determinable, in which the association would otherwise lack a remedy, and in which the association acts within the time allowed by the applicable statute of limitations or statute of repose.”

The economic loss rule holds that in a “tort” action (distinguished from a breach of contract claim), plaintiffs can recover damages only for actual property damage or personal injury – they may not recover damages for purely economic loss.

In the condominium arena, this had meant that an association that discovered that they had a defective roof could not directly sue the developer for the cost of repairing the roof itself – unless that defective roof caused personal injury or damage to other property.  In other words, if the condominium association could not demonstrate that the defective roof was causing water infiltration into the individual units or common areas of the condominium, for example, the association could not recover against the developer for negligence under the economic loss rule.

The legal theory behind this rule is that the party contracting to have the roof installed had an opportunity to negotiate an express warranty guaranteeing its performance.  If the purchaser of the roof had failed to negotiate such a warranty, the economic loss rule served to prevent the purchaser from receiving a “second bite at the apple” by recovering against the roof installer with a tort claim.

The economic loss rule posed a significant problem for community associations, as, in certain circumstances, the rule provided developers with a potential shield of protection against construction defect claims.  Community associations, which do not have the ability to negotiate express warranties covering the original construction of the common areas, are generally unable to advance contract-based claims to recover for construction deficiencies.  As such, the economic loss rule, which serves to prevent recovery in tort unless certain criteria were satisfied, effectively rendered community associations without recourse against a developer for certain claims of negligent construction.

The Wyman case involved the Market Gallery Condominium, located in Lowell.  The four-story brick building, which was originally constructed in the 19th century, was purchased by Ayer Properties, LLC in 2002 and converted to condominium status, after the developer performed a renovation of the building over nearly three years.  After control of the condominium was transferred from the developer to the unit-owner-elected board, the association engaged an engineering consultant to investigate the building.  The investigation performed by the association’s consultant revealed deficiencies associated with the windows, the roof and masonry of the building.

After an eleven-day trial, the Superior Court (Chernoff, J.) awarded damages to the association for the negligent design and construction of the window frames and the negligent construction of the roof.  The Court determined that the economic loss rule did not serve as a defense to the association’s claims concerning the windows and the roof because these deficiencies caused additional harm within the individual condominium units (i.e., water infiltration).  The Court did not allow the association to recover for the negligently constructed masonry, however, because it determined that the deficient masonry did not extend to any harm beyond the masonry itself.

The Appeals Court, in reversing the Superior Court’s dismissal of the association’s masonry-related claims, reasoned that a developer’s “liability should not hinge on the fortuity of secondary harm (such as damage to an interior unit)”.  The Court noted that the economic loss rule was intended to divert liability and damages away from negligence damages and toward available alternative contract claims.  The Court recognized that condominium associations, which “do not ‘buy’ the common areas from the developer”, have no alternative contract claims upon which to rely, and concluded that an application of the economic loss rule – under the unique circumstances presented by condominium ownership – would not serve the fundamental purpose of the rule.

The Appeals Court’s decision will make it easier for condominium associations to obtain a remedy for all of its construction defect claims.

Thomas O. Moriarty, chair of the Litigation Practice Group at Marcus, Errico, Emmer & Brooks, P.C., and David M. Rogers handled the trial and subsequent appeal for the Trustees of the Market Gallery Condominium Trust.

[CLICK HERE FOR A COPY OF THE DECISION]