A recent decision by the Massachusetts Supreme Judicial Court (SJC) has added another twist to the ever-evolving “economic loss doctrine,” a legal rule that ordinarily bars recovering damages for economic loss based on negligence, absent physical property damage or personal injury. In Wyman v. Ayer Properties, LLC1, the SJC held that this rule does not extend to claims by condominium trustees against a design-build contractor for the negligent design and construction of common areas.
The design-build contractor, Ayer Properties, LLC (“Ayer”), had purchased a vacant mill in Lowell, Massachusetts and converted the building into a mixed-use condominium containing five commercial and 22 residential units.
After Ayer turned control of the condominium over to the unit owners (the “Trust”), certain units and common areas of the building became plagued by weather-related deterioration. The Trust hired an engineer to perform a survey, which identified three major issues: (1) several window frames had suffered excessive weather damage and leakage into common areas and individual units; (2) the roof was leaking, causing water damage to insulation under the roof and to individual units; and (3) the exterior brick masonry façade was deteriorating. The Trust sued Ayer to recover damages for negligent design and construction of the common areas.
After an 11-day trial, the trial court awarded $140,000 in damages to the Trust for Ayer’s negligent design and construction of the window frames and roof, finding that those defects caused additional physical damage to the individual residential units that was exempt from the economic loss doctrine. However, the judge found that the defective masonry work did not involve damage to individual units or any other part of the building besides the masonry itself, and ruled that the economic loss doctrine barred recovery for this work.
Both sides appealed. The Appeals Court affirmed the Superior Court’s decision as to the window units and leaking roof, but it reversed with respect to the exterior masonry, holding that the economic loss doctrine did not bar the Trust’s right to recover damages for that work. The Appeals Court reasoned that an organization of condominium unit owners like the Trust “typically lack[ed]” remedies of contract and warranty for common areas because they do not “buy” the common areas from the developer, leaving the condominium association to pursue relief only through common law tort principles (e.g., negligence). The Appeals Court concluded that rigidly applying the economic loss doctrine to this unique set of circumstances would frustrate the purpose of the rule.
On further appeal, the SJC affirmed, holding that strict application of the “economic loss doctrine” to condominiums was inappropriate because of the “hybrid” nature of the property interest held by individual owners, which comprised ownership in both their individual units and portions of the common areas. According to the Court, “the fundamental purpose of the rule is to confine the indeterminacy of damages, not to nullify a right and remedy for a demonstrated wrong and its harm.”
The Court also noted that the “rule is intended to preclude recovery for intangible and unknown damages for lost contract or economic opportunity,” whereas the damages alleged by the Trust were a “reliably proven amount needed to repair or replace the negligently constructed window frames, masonry and roof,” making the purpose of the economic loss rule inapplicable under the circumstances.
Therefore, under the SJC’s ruling in Wyman, the economic loss doctrine should not bar claims by condominium trustees against the developer for negligent design and construction of common areas, even where there is no “resulting personal injury or property damage” to those specific areas.
It is not evident from the face of the Wyman decision whether the SJC’s opinion was influenced by the developer’s status as a design-build contractor. The SJC’s conclusion ostensibly turned on the Trust’s lack of an appropriate remedy for damages that could be readily quantified. Nevertheless, Wyman remains a cautionary tale of the expanded liability that design-build contractors will face in the context of condominium development, and to which they may be increasingly vulnerable in other, more traditional building scenarios, depending on the nature of the damages and on the availability of alternative remedies for the plaintiffs.
1 Wyman v. Ayer Properties, LLC, SJC-11474 (July 19, 2014).