Massachusetts Supreme Court Holds Economic Loss Rule No Bar to Condo Trustees’ Claim for Damages to Common Areas Caused By Building Defects

Wyman v. Ayer Properties, LLC, 469 Mass. 64,  2014 Mass. LEXIS 524 (July 10, 2014)

The Massachusetts Supreme Court ruled that the economic loss rule, which bars recovery of tort damages from the negligent supplier of a defective product when there is no claim of personal injury or damage to other property, does not apply to claims asserted by a condominium association or similar condominium organization seeking compensation for damage to common areas of a condominium building caused by defective construction.

This case arises out of a dispute between the Market Gallery Condominium Trust, the trustees responsible for management of a condo building, and Ayer Properties, the developer and builder of the condo building, after the trustees observed that Ayer had negligently constructed the window frames, the exterior brick masonry, and the roof of the building. The trustees commenced an action alleging that the negligent construction caused damage to both the common areas and the residential units in the building.

At trial, the Superior Court found that Ayer was negligent. The court awarded damages to the trustees for Ayers defective installation of the window frames and roof because those defects caused damage to the common areas and several condominium units in the building. The court refused to award any damages, however, for the defective masonry, concluding that the damage was limited to the masonry work itself and, therefore, recovery was barred by the economic loss rule. In determining the appropriate measure of damages, the court calculated the cost to repair and replace the damaged portions of the building, and then reduced that amount by twenty percent to reflect what those costs would have been at the time of the negligent construction as opposed to at the time of the actual repair.

Both parties appealed the Superior Court’s decision. On appeal, Ayers claimed that the condominium building constituted an integrated product, and that since there was no damage other than to that product, the economic loss rule precluded any damages in this case. The Appeals Court disagreed, concluding that application of the economic loss rule was not appropriate in this context. Indeed, in addition to affirming the Superior Court’s ruling as to the window frame and roof damages, the Appeals Court reversed the Superior Court’s dismissal of the trustees’ claim for damage to the masonry. On the damages calculation issue, the Appeals Court determined that the Superior Court’s decision to reduce the damages by twenty percent to reflect what the replacement costs would have been at the time of the negligent construction “fell well within the range of reasonable alternative calculations.”

Both parties also appealed the Appeals Court decision. The trustees argued that the Appeals Court correctly awarded damages on all of the trustees’ claims and that the trial judge erred in reducing their damages by twenty percent. Ayers argued that the economic loss rule should preclude all damages. The Supreme Court agreed with the trustees on both points.

First, the Supreme Court observed that the economic loss rule was developed, in part, to prevent tort claims from undermining the expectations of contracting parties, noting that “when a product injures only itself, a party should be left to its contractual remedies.” The Supreme Court reasoned that because of the unique nature of condominium ownership, which is a hybrid form of ownership entitling the owner to exclusive ownership of his unit and an undivided interest in common areas, the economic loss rule should not apply. In this context, unit owners cede management and control of the common areas of the building to an organization of unit owners, like the trustees in this case, and that organization is the only party that may commence litigation relating to the common areas of the condo building or development. Since the trustees (and other similar organizations) have no contract with the builder, there is no contractual mechanism for them to recover the economic losses caused by defective construction. Therefore, the Supreme Court held that the economic loss rule does not apply in these circumstances, as it was never intended to leave a wronged party with no remedy.

Second, the Supreme Court held that the proper measure of damages in this case is the actual and projected repair and replacement costs, as determined by the judge without any reductions. The Supreme Court noted that while the general rule for determining property damage is diminution in market value, where such a measure is unavailable, replacement or restoration costs are often allowed, provided that both the repair or replacement itself and the corresponding costs are reasonable. In evaluating the Superior Court’s decision to reduce the repair and replacement damages in this case by twenty percent, the Supreme Court determined that absent a finding that the costs were excessive, the trustees should be entitled to recover the full amount of the costs they incurred.

To view the full text of this decision, courtesy of Lexis ®, click here.

James M. Kwartnik

 

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