In Prestress Services Industries of TN, LLC v. W.G. Yates & Sons Construction Co., 280 F.Supp.3d 908 (N.D. Miss. 2017), the United States District Court for the Northern District of Mississippi faced a “rather interesting issue of tort law” involving the economic loss rule that has not been addressed by either the Mississippi Supreme Court or the Fifth Circuit. The action arose out of a project to construct a garage on the University of Mississippi campus. In dicta, the court opined that the economic loss rule should not be used to immunize an engineer’s defective design of precast concrete components that did not meet the applicable seismic standards.

The project, which was located in the New Madrid fault’s earthquake zone, was being managed by the Ole Miss Athletic Foundation (Ole Miss). In addition to employing W.G. Yates & Sons Construction (Yates) as the general contractor, and AECOM Design as the architect, Ole Miss had a purchase order with Prestress Services Industries (PSI) to design, fabricate, and deliver, the precast concrete components of the garage. PSI, in turn, hired an engineering firm, Hoch Associates (Hoch),[1] to design the precast concrete components.

The project ultimately suffered delays and cost overruns, which led to numerous disputes. Pertinent here, Yates brought an action against Hoch, asserting, among other things, a negligence claim for Hoch’s failure to design the precast concrete components in accordance with the applicable seismic requirements.

Hoch moved for summary judgment on Yates’ negligence claim, arguing that it was barred by the economic loss rule. In asserting the economic loss rule as a defense, Hoch claimed that the precast components were goods or products and thus, that Yates was barred from recovering any economic damages—such as damages for delay—because the economic loss rule restricts recovery of damages arising out of a defective good to damages for physical harm and excludes recovery for purely economic losses.

Yates argued that the economic loss rule didn’t apply because its negligence claim was directed at the services Hoch provided, i.e. the design of the precast concrete components, not how the components were manufactured. Yates pointed out that it was PSI—not Hoch—that manufactured the components at issue. Yates explained that the components themselves were not defective; they all remained as originally erected but “[i]n order to bring the design into compliance with the seismic code, Hoch had to design additional cabling, curbs, and plates to go on top of the existing precast structures.”

The court reasoned that because the nature of Hoch’s role was, “at least potentially, relevant as to whether or not [Hoch] may validly raise the economic loss rule as a defense, the issue would be better decided at the directed verdict stage after the court had viewed the evidence and had a fuller picture regarding the exact nature of Hoch’s role in designing and manufacturing the precast concrete components. The court ultimately did not rule on the issue because the case settled before it reached the directed verdict stage but the court did contemplate the propriety of allowing a design professional to raise the economic loss rule as a defense where a negligence claim is brought against the design professional for its failure to comply with relevant professional standards.

In declining to infer a broad “professional services” exception to the economic loss rule, the court expressed concern that Hoch’s position would distort the rule, which “is intended to strike a balance between encouraging products manufacturers to design their products with care and imposing essentially unlimited liability when they fail to do so.” The court reasoned that in a “more typical” products liability context, the economic loss rule appears to serve the purpose of providing some limitation of damages which a manufacturer might face. For example, “a manufacturer of a car which crashed due to a design defect might conceivably face liability for business losses suffered by individuals who were delayed in traffic following the accident.” Such concerns, the court pointed out, were inapplicable in the instant case because Hoch—unlike the car manufacturer—knew exactly what project they were working on, and it seemed clear that its job was to provide competent professional services in light of that knowledge. In other words, for Hoch and similar defendants, the economic loss is foreseeable.

The court also expressed concern that allowing Hoch to avoid liability under the theory of the economic loss rule would “lead to rather perverse financial incentives.” In the context of this case, the court opined, physical harm resulting from Hoch’s failure to comply with the relevant seismic standards would only occur in the event that an earthquake actually damaged the garage. This would give a contractor in Yates’ position, upon learning of a defect in the engineer’s work, a financial incentive to say nothing in the hopes that an earthquake would not actually occur. Hoch’s argument would leave Yates holding the financial bag for preventively fixing the defects caused by Hoch’s failure to do its job correctly.

As discussed previously, the court ultimately did not rule on this issue. However, the court noted that if it were to fashion the parameters of an exception to the economic loss rule, it would consider whether the economic harm rule serves a useful purpose in cases involving professional services whose core purpose is to produce a product with specified requirements. In closing, the court noted that failing to produce a product that meets those requirements involves “a basic failure to do one’s job correctly and it strikes this court that professionals carry liability insurance for situations such as this.”

Fifth Circuit jurisprudence has already established that the economic loss doctrine does not apply to negligence claims arising out of the performance of services contracts. See Lyndon Property Ins. Co. v. Duke Levy and Associates, LLC, 475 F.3d 268 (5th Cir. 2007) (declining to apply economic loss rule against engineer for costs incurred to fix and test work that had been inspected and approved by engineer); see also Mississippi Phosphates Corp. v. Furnace and Tube Service, Inc., No. 1:07CV1140 LG-RHW, 2008 WL 313770 (S.D. Miss. Feb. 1, 2008) (declining to apply economic loss rule to negligence claims arising out of contract to provide material, labor, and equipment to retube a waste heat boiler). The question faced here, which remains unanswered, is whether the economic loss rule will apply where the core purpose of the services contract is to produce a product that meets specific requirements. In other words, will the fact that the design services are for the manufacturing of a product somehow impact the established jurisprudence?

[1] Hoch had hired Nangia Engineering of Texas, Ltd since it had on staff the required engineer licensed to practice in Mississippi. While Nangia was a party to the case, I only refer to Hoch.