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How a college party resulted in clarification to N.C.’s economic loss rule

Published Jan. 28, 2021, in The Resource, the monthly newsletter of the North Carolina Association of Defense Attorneys


By Christopher E. Faircloth
Attorney at Law

In 2012, a commercial developer, Crescent University City Venture, LLC (“Crescent”), contracted to have several student apartment buildings built on property it owned near the UNC Charlotte campus. Crescent hired a general contractor to construct the project, and as is common in the industry, the general contractor hired various subcontractors to provide labor and materials for the job. The subcontractor hired for the provision and installation of wood framing materials then contracted with Trussway Manufacturing, Inc. (“Trussway”), via purchase order, for the manufacture and supply of the trusses it would use to construct the apartments. In this context, “trusses” are prefabricated wooden structures used to support the floor/ceiling section between units on each level of Crescent’s apartment buildings. The purchase order provided the required specifications, and Trussway manufactured the trusses—which were eventually installed project-wide.

Fast forward to a Friday night in January 2015. The project is complete, students have moved in, and 100 or so of them went to a party in “Building C,” in an upstairs unit. Afterwards, residents of the unit below reported their ceiling was cracked and sagging. Those living in the impacted units were relocated; but three-months later, residents of a unit in “Building E” reported a similar issue. After floor trusses in Buildings C and E were inspected and found to be defective, Crescent hired an engineering firm to investigate a random sampling of apartments in multiple buildings across the project. The investigation revealed defective or dangerous conditions related to numerous floor trusses project-wide. When Crescent and the general contractor could not agree on a plan or timeframe to correct the defective trusses, Crescent eventually hired a third-party contractor to conduct repairs.

Predictably, the parties found themselves in litigation involving various claims, including Crescent’s claims against the general contractor related to the defective trusses. Trussway and various other subcontractors were brought into the suit as third/fourth-party defendants, and litigation carried on for a few years. In that time, the matter was designated as a complex business case and sent to the North Carolina Business Court. Along the way, Crescent filed a separate lawsuit against Trussway asserting one claim for negligence (and nearly $8 million in damages), based on Trussway’s manufacture of the defective floor trusses.

Eventually, the cases were consolidated, the parties were realigned, and Crescent came before the North Carolina Business Court to defend against Trussway’s motion for summary judgment and argue the issue that would ultimately make it to the Supreme Court of North Carolina—as stated by the Court, “[W]hether, under North Carolina law, a commercial property owner who contracts for the construction of a building, and thereby possesses a bargained-for means of recovery against a general contractor, may nevertheless seek to recover in tort for its economic loss from a subcontracted manufacturer of building materials with whom the property owner does not have contractual privity.” Crescent Univ. City Venture, LLC v. Trussway Mfg., Inc., No. 407A19, 2020 N.C. LEXIS 1134, at *1 (Dec. 18, 2020). Or said another way, in light of North Carolina’s economic loss rule—which prohibits the use of tort law to recover purely economic losses, particularly in the context of commercial transactions—can a commercial property owner successfully sue a subcontractor for negligence based on breach of contractual duties when said owner did not contract with said subcontractor?

The Business Court said no. Crescent, as a commercial property owner, could not recover its economic losses from Trussway, a subcontractor with whom Crescent had not contracted. Applying the economic loss rule to Crescent’s negligence claim, the Business Court granted Trussway’s motion for summary judgement because there was no evidence that Trussway had breached any duty outside of duties under its contract with the framing subcontractor. Crescent appealed, and, eventually, the question was presented to the Supreme Court of North Carolina, who, after hearing one of the first virtual oral arguments in the Court’s history, ultimately affirmed the Business Court’s decision and clarified the scope of North Carolina’s economic loss rule in the commercial construction context.

In its written opinion, filed on December 18, 2020, and penned by Justice Michael Morgan, the Court began its analysis with reference to its Ports Authority opinion—a case familiar to North Carolina construction defect attorneys, as it adopted the economic loss rule in the State. See Ports Auth. v. Lloyd A. Fry Roofing Co. (Ports Authority), 294 N.C. 73 (1978). Under Ports Authority, the economic loss rule prevents a plaintiff from recovering in tort “against a promisor for his simple failure to perform his contract, even though such failure was due to negligence or lack of skill.” Ports Authority at 83.

Summarizing the historical context, the Crescent Court explained, “that the purpose of the economic loss rule is to prevent contract law from drowning in a sea of tort.” Crescent at *10 (internal quotations omitted). While the Court acknowledged a potential public policy exception to the economic loss rule for layperson homeowners (i.e., unsophisticated, noncommercial plaintiffs who purchased a defectively constructed home), those policy considerations do not apply in situations like Crescent and Ports Authority, where all parties involved are sophisticated commercial entities and the plaintiffs’ losses are purely economic. As the project owner, Crescent had a bargained for means for recovery of its economic losses related to the defective floor trusses, i.e., a breach of contract suit against the general contractor. Since Crescent already had an avenue to recover its economic losses under a contract law theory, the Court held that the economic loss rule barred Crescent from recovering the losses from Trussway under a negligence theory.

Notably, and of particular importance to defense counsel for subcontractors and general contractors, the Court here explicitly held, “[t]he lack of privity in the commercial context between a developer and a subcontractor, supplier, consultant, or other third party—the potential existence of which is readily known and assimilated in sophisticated construction contracts—is immaterial to the application of the economic loss rule.” Crescent at *13. Thus, it did not matter that there was no contract between the Crescent and Trussway, the economic loss rule would apply regardless. No recovery in tort for purely economic losses, period.

This piece of the Crescent Court’s analysis is critical, because after Crescent’s clarification on the scope and applicability of the economic loss rule, North Carolina trial courts will likely start “cracking down” on a common practice in construction litigation where the plaintiff project owner seeks negligence-based recovery directly from the general contractor’s subcontractors. Given that project owners rarely contract directly with the subcontractors, and in light of the Court’s clarification of the economic loss rule, going forward, project owners will have a difficult time recovering economic damages directly from a subcontractor. Instead, project owners must seek to recover their economic damages from the general contractor with whom it initially contracted for the construction of the project. As such, owner/developers and general contractors should consider adjusting the terms of future construction contracts to account for the impact Crescent will have on the industry.

For attorneys defending construction defect claims, Crescent could be a boom or bust, depending on whether the client is a subcontractor or general contractor. But one thing is clear—like the party in Building C that set this whole thing off—the party is over for project owners seeking to leverage negligence claims over subcontractors to extract extra funds, and for the general contractors who stood to benefit from that leverage via a smaller check to write at the end of the day. But for subcontractors defending against tort claims from project owners they never contracted with—the party just got started.