SUPREME JUDICIAL COURT CREATES EXCEPTION TO THE ECONOMIC LOSS RULE FOR CONDOMINIUM ASSOCIATIONS

Published on: January 22, 2015

The Supreme Judicial Court has issued a landmark decision that has effectively carved out an exception to the “economic loss rule” for condominium associations seeking to recover for defective construction and design.  In Wyman v. Ayer Properties, LLC, a case handled by Tom Moriarty and Dave Rogers of this office, the Supreme Judicial Court reversed the Superior Court’s dismissal of a condominium association’s claims associated with negligently constructed masonry – finding that the association could recover more than $500,000 from the developer of a Lowell condominium.

The Supreme Judicial Court (Cordy, J.) recognized that the economic loss rule had placed an unintended and substantial burden upon condominium associations and “conclude[d] that the economic loss rule is not applicable to the damage caused to the common areas of a condominium building as a result of the builder’s negligence.”

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 Supreme Judicial Court, in reversing the Superior Court’s dismissal of the association’s masonry-related claims, reasoned that “[t]he nature of condominium unit ownership supports our conclusion that claims such as those raised here do not fit into the rubric of claims intended to be covered by the [economic loss] rule.”  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 a condominium association, which “has no contract with the builder under which it can recover its costs of repair and replacement”, has 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 Supreme Judicial Court’s decision will make it easier for condominium associations to obtain a remedy for all of its construction defect claims.

It is notable that the Supreme Judicial Court also reversed the Superior Court’s decision to reduce the repair and replacement damages to reflect costs at the time the damages were incurred.  The Superior Court had reduced the amount of damages awarded at trial by twenty percent to reflect what costs would have been at the time of the negligent construction rather than at the time of the actual expenditures for repair and replacement.  The Supreme Judicial Court – in determining that the Superior Court’s reduction of the condominium association’s damage award was unreasonable – noted that “it appears that the judge’s decision to reduce the amount of damages was motivated, in significant part, by a desire to prevent the trustees from receiving the full benefit of statutorily mandated interest” and found that the judge’s “subsequent twenty per cent reduction is largely unexplained and unsupported by any evidence.”

For a copy of the Decision [click here].