Fourth Circuit Court of Appeals Holds Owner’s Negligence Cause of Action Against Subcontractor Barred by the Economic Loss Rule

Dur v. Western Branch Diesel, Inc.
2007 U.S. App. LEXIS 16237 (4th Cir. July 9, 2007)

Following the precedent of the Supreme Court of Virginia in Sensenbreunner v. Rust. Orling & Neale, Architects, Inc., 374 S.E.2d 55 (Va. 1988), the Fourth Circuit Court of Appeals upheld the district court’s grant of a motion for summary judgment. The Court held that damage to an owner’s boat caused by an electrical fire fell within the scope of the contract between the owner’s general contractor and the subcontractor and amounted to nothing more than economic loss, which barred the owner from maintaining a cause of action for negligence against the subcontractor.

The case arose out of a retrofit contract where Philip Dur (the “Owner”) hired Moon Engineering (the “General Contractor”) to perform a hull, mechanics and electronics retro fit on a boat that the Owner purchased stripped from the Navy. When the General Contractor believed it had completed the retrofitting work on the boat, the Owner piloted the boat from Norfolk to Alexandria, Virginia. During the voyage, the Owner noticed that the tachometer had stopped working. Upon arrival, the Owner also noticed that a fan belt was missing and that there was melted wiring. The Owner contacted the General Contractor and insisted that the boat be repaired. The General Contractor subcontracted with Western Branch Diesel, Inc. (“Subcontractor”) to perform the repair work in Alexandria. While the boat was still in the custody of the Subcontractor, the boat caught fire and suffered significant damage.

The Owner commenced a lawsuit in the United States District Court for the Eastern District of Virginia alleging that the Subcontactor’s negligence had caused the fire aboard the boat. The Subcontractor moved for summary judgment arguing that because it performed its work aboard the boat pursuant to a contract, the Owner could not pursue a negligence claim against the Subcontractor without demonstrating a separate common-law duty of care. In response, the Owner argued that contractors owe a common-law duty of care, separate and apart from their contractual duties, to use ordinary skill and care not to create a hazardous condition that could physically injure persons or damage property. The Subcontractor responded that the Owner’s negligence claim against it failed because the record contained no evidence that the boat had suffered damage caused by the fire beyond the subject of the retrofit contract.

The district court granted summary judgment in favor of the Subcontractor. The Owner appealed and the Fourth Circuit Court of Appeals affirmed the district court’s decision that Sensenbreunner v. Rust. Orling & Neale, Architects, Inc., 374 S.E.2d 55 (Va. 1988) foreclosed the Owner’s negligence cause of action against the Subcontractor. Sensenbreunner applied the economic loss rule, which rule provides that a cause of action in which only economic damages are sought (i.e., the benefit of a contractual bargain) can only be maintained against a party with whom the plaintiff has privity of contract.

The Court held that the record only supported the conclusion that the work performed by the Subcontractor on the boat’s electrical system was performed to fulfill the General Contractor’s obligations under the retrofit contract. Thus, the damage to the boat caused by the fire fell within the scope of the contractual package and amounted to nothing more than economic loss for which the law of the contracts provides the Owner the sole remedy. The Court also found that the record contained no evidence that the boat suffered damage beyond the scope of the retrofit contract which would permit the Owner to recover under Section 8.01-223 of the Virginia Code, which abolished the lack-of-privity defense in actions to recover damages to persons or property resulting from negligence.

The Owner also contended on appeal that the district court wrongly erred in granting summary judgment without considering whether the Owner was a third-party beneficiary of the contract between the General Contractor and the Subcontractor. On appeal, the Court held that there could be no miscarriage of justice in the district court’s refusal to consider the third-party beneficiary theory as not only did the Owner never move to amend his complaint to allege a cause of action based upon a third-party beneficiary theory, but the Owner was so confident in his negligence theory of recovery that he expressly told the district court not to consider the third-party beneficiary theory. Accordingly, the Fourth Circuit Court of Appeals affirmed the district court’s grant of summary judgment.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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