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May 20, 2013 Article

Equitable Principles May Push Aside the Application of Economic Loss Doctrine

The Wyman case represents a potentially significant shift from generally recognized principles of tort recovery

by Anthony L. DeProspo Jr.

Although the economic loss doctrine has historically barred recovery of certain classes of tort damages, the Massachusetts Appeals Court recently held that the doctrine did not bar a condominium association’s negligent construction claim against a developer for alleged faulty construction. The court’s ruling in Wyman v. Ayer Properties LLC, 979 N.E.2d 782 (Mass. App. Ct. 2012), based almost entirely on equitable principles, represents a potentially significant shift away from generally recognized principles of tort recovery.

As is true of the majority of jurisdictions that have addressed the issue, Massachusetts courts have consistently recognized the economic-loss doctrine, whereby purely economic losses are not recoverable in tort (or strict liability) in the absence of personal injury or property damage. The rationale underlying the doctrine is that where a commercial transaction goes awry—absent harm to persons or property—the resulting loss is essentially a failure to receive the benefit of the bargain, traditionally the realm of contract law. Massachusetts’s highest court has held that recovery for harm to the product or structure itself, without more, falls within the remedial range of contract and warranty law, not within the more uncertain range of reasonable foreseeability governing tortious negligence damages. Id. at 788 (citing Bay State-Spray & Provincetown S.S., Inc. v. Caterpillar Tractor Co., 533 N.E.2d 1350, 1353, 1355 (Mass. 1989)). Against this backdrop, the Wyman case was decided.

In 2002, the defendant Ayer Properties, LLC, purchased a vacant mill building in Lowell, Massachusetts. Ayer began converting the building to residential and commercial condominium units in 2003. At the time of the first residential unit sale, Ayer executed a master deed establishing the condominium trust. In August 2004, after several additional units had been sold, Ayer transferred control of the condominium to trustees made up of a consortium of unit owners.

Soon thereafter, the trust became concerned about the condition of the condominium building. The trust retained a professional engineering firm to evaluate the building’s condition and to prepare a report based on its findings. Ayer assembled its own inspection team. The trust’s engineer identified three major categories of concern: (1) 22 window frames required repair or replacement, and they were suffering excessive weather damage and leakage beyond the common area and into the individual units; (2) the roof was absorbing water and leaking, causing damage to insulation under the roof and to individual units; and (3) the exterior brick masonry façade was deteriorating. The trust pursued four causes of action at trial: (1) negligent design and construction of common areas, (2) breach of fiduciary duty for failure to deliver common areas free of defects, (3) breach of implied warranty for failure to deliver complete the renovation in a workmanlike manner, and (4) unfair and deceptive conduct pursuant to the Massachusetts consumer protection statute (Mass. Gen. Laws ch. 93A (Chapter 93A)).

At the conclusion of an 11-day jury-waived trial, the court found that Massachusetts did not recognize a fiduciary duty owed by a condominium developer to a yet-to-be-established condominium association. The court also found that an implied warranty of habitability did not apply to the conversion and renovation of an existing structure. Finally, the court found that the trust had failed to show the requisite misconduct rising to the level of a Chapter 93A violation. By making these determinations, the trial judge effectively narrowed the case to the trust’s claim of negligence and Ayer’s defense under the economic loss doctrine.

The trial judge awarded the trust $34,000 as compensatory damages resulting from negligent design and construction of the window frames and $106,000 in damages for losses resulting from negligent construction of the roof. The judge reasoned that the damage caused to the window frames and the roof had caused additional harm within individual condominium units. The judge, however, found that defects to the exterior masonry (damages estimated at $80,000) did not extend beyond the exterior walls to cause damage to the individual units. Accordingly, the trial judge declined to assess liability for damage to the exterior walls.

Both sides appealed. Ayer claimed that the condominium structure constitutes an integrated product, that no damages flowed beyond that product, and that the economic loss doctrine therefore precluded recovery of all damages. The trust averred that the trial judge improperly applied the economic loss doctrine to the masonry work.

The Massachusetts Appeals Court rejected Ayer’s argument. First, the appeals court found that the trial judge correctly viewed the condominium building as two separate properties or products—the common areas and the privately owned condominium units. The court held that the trial judge properly found that damage to the roof and window frames caused damage to the individual units: “Those consequential physical damages to separate property satisfied the requirement of the rule for a concomitant harm beyond the damage to the original product or structure furnished by the defendant.”

With regard to Ayer’s claim that the condominium structure constitutes a single integrated product, the appeals court observed that the trial judge found that Massachusetts law had not squarely addressed the application of the integrated product concept to condominium properties. For example, in McDonough v. Whalen, 313 N.E.2d 435 (Mass. 1974), the Massachusetts Supreme Judicial Court held that the economic loss doctrine specifically applied to claims of negligence against a “builder of houses or other realty structures.” Similarly, in Aldrich v. ADD Inc., 770 N.E.2d 447 (Mass. 2002), the same court expressly approved the application of the economic loss doctrine to actions for negligence arising from condominium construction. In contrast, the court in Berish v. Bornstein, 770 N.E.2d 961 (Mass. 2002), held that allegations of structural damage to a condominium building were sufficient to withstand a motion to dismiss where the plaintiff had also alleged damage to individual units arising from the same structural defects. Having recognized that Massachusetts law regarding the application of the integrated product concept to condominium properties was not entirely clear, the appeals court found that the trial judge supported his characterization of the condominium structure as two separate property interests (susceptible to separate harms) with additional analysis.

First, the trial judge interpreted the Berish decision as an “implied rejection” of the economic loss doctrine’s application to condominium common area damage. The appeals court agreed, reasoning that recent jurisprudence leaned against the unqualified application of the economic loss doctrine to defectively designed or constructed condominium common areas.

Second, the trial judge concluded that strict application of the rule in this case would leave the trust without a remedy because no contract existed as a source of potential damages. Again, the appeals court agreed: “The fundamental purpose of the [economic loss doctrine] is to confine the indeterminacy of damages, not to nullify a right and remedy for a demonstrated wrong and its harm.” Wyman, 979 N.E.2d at 789. Denying tort damages in the present case, the court reasoned, would do nothing to advance this fundamental purpose because reliably specific damages—as opposed to intangibles such as lost profits or diminished goodwill—were adduced at trial.

The appeals court also found that the trial court’s own analysis applied equally to the trust’s claim for damages arising from the exterior masonry work and reversed the trial court’s decision rejecting recovery of those damages. The court found no Massachusetts authority to preclude such damages; there was no danger of speculative or exorbitant damages, and the trust had no alternative remedy. Therefore, the court found that a damages award arising from the masonry work did not violate the policy underlying the economic loss doctrine.

The Wyman case was decided on somewhat unique circumstances because the plaintiff condominium trustees did not have a direct relationship with the defendant developer/builder. Nevertheless, its holding serves as a cautionary tale. At its essence, the Wyman decision rests on equitable principles. The court ostensibly ignored the bright-line standards of the economic loss doctrine. It was of no consequence that the plaintiff could not prove specific damage to individual condominium units (at least concerning the masonry work). Rather, the case turned on the lack of a remedy for damages that were straightforwardly ascertainable. It will be interesting to see if other jurisdictions adopt (or extend) this logic. A “complete bar” to recovery under one damages theory may not be so complete after all, especially where no alternative recovery is available.

Keywords: real estate litigation, benefit of the bargain, common area, condominium, contract law, fiduciary duty, negligent construction, tort damages, warranty law, Wyman v. Ayer Properties LLC

Anthony L. DeProspo Jr. is a partner at Sherin and Lodgen LLP in Boston, Massachusetts, and a cochair of the Sound Advice Subcommittee of the ABA’s Real Estate Litigation Committee.

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