Economic Loss Rule Precludes Tort Claims For Purely Economic Losses Arising From Defective Product

On October 1, 2014, the Second Department issued a decision in 126 Newton St., LLC v. Allbrand Commercial Windows & Doors, Inc., 2014 NY Slip Op 06563, applying the "economic loss rule" to bar the plaintiff (a "downstream purchaser" of a product) from recovering tort damages for economic losses resulting from a defect in the product.

In 126 Newton Street, the plaintiff purchased defective glass doors and windows that permitted water intrusion and brought contract and tort claims against the defendant who had fabricated and installed the defective product. Queens County Supreme Court Justice Orin Kitzes denied the defendant's motion for summary judgment, and the Second Department reversed in part, ruling that the plaintiff's claims for negligence and strict products liability were barred by the economic loss rule to they extent they sought damages for economic losses resulting from damage to the product itself, or consequential damages resulting from the defect. The Second Department explained the often-misunderstood economic loss rule as follows:

The economic loss rule provides that tort recovery in strict products liability and negligence against a manufacturer is not available to a downstream purchaser where the claimed losses flow from damage to the property that is the subject of the contract and personal injury is not alleged or at issue.

The rule is applicable to economic losses to the product itself as well as consequential damages resulting from the defect. Therefore, when a plaintiff seeks to recover damages for purely economic loss related to the failure or malfunction of a product, such as the cost of replacing or retrofitting the product, or for damage to the product itself, the plaintiff may not seek recovery in tort against the manufacturer or the distributor of the product, but is limited to a recovery sounding in breach of contract or breach of warranty.

The Court then proceeded to apply the rule to the Plaintiff's claim, finding that tort claims for damages to the product itself were precluded, but the Plaintiff could recover damages in tort for injury to other structural elements of the building that were not subject to the parties' contract:

Here, the plaintiff alleges, inter alia, that it sustained economic losses generated by the repair and replacement of the glass doors and windows of a building due to the failure of such doors and windows to properly prevent water intrusion. The fabrication and/or installation of those doors and windows were the subject of its agreement with the appellant. To the extent that the plaintiff seeks to recover losses generated by the repair and replacement of these doors and windows pursuant to causes of action sounding in negligence or strict products liability, such causes of action are prohibited by the economic loss rule. Thus, the Supreme Court should have granted those branches of the appellant's motion which were for summary judgment dismissing so much of the causes of action sounding in negligence or strict products liability as sought to recover losses arising from the repair and replacement of the doors and windows.

However, the plaintiff also claims that the intrusion of water caused by the defective windows and doors resulted in injury to other structural elements of the building, such as flooring and walls. These losses constitute damage to "other property" that was not the subject of the parties' agreement and, accordingly, support a valid tort cause of action. We note that while other structural elements of the building may have been damaged as a consequence of the infiltration of water through allegedly defective windows and doors, such losses do not constitute "consequential damages," also known as "special damages," as that term is used in contract law. Consequential or special damages usually refer to loss of expected profits or economic opportunity caused by a breach of contract.

Notably, the Defendant had not made the argument concerning the economic loss rule to the motion court. Nevertheless, the Second Department exercised its discretion to consider the issue for the first time on appeal because it was a "purely legal argument that appears on the face of the record and could not have been avoided had it been brought to the attention of the Supreme Court." Although it would be ill-advised to withhold a winning argument with the expectation of raising it on appeal. One lesson here is that counsel handling an appeal should give new thought to legal arguments that might be raised, even if they were not made in the motion court.