Illinois Economic Loss Doctrine Prevents Owner from Suing Subcontractor In Tort for Property Damage and Construction Delays

Since the Illinois Supreme Court decided the case of Moorman Manufacturing Company v. National Tank Company, 91 Ill.2d 69 in 1982, the Illinois construction industry has had to consider the effects of the Moorman economic loss doctrine on construction claims. Simply put, the economic loss doctrine under Moorman prevents a party from bringing a tort suit for purely economic damages unless:

• the plaintiff has sustained personal injury or property damage as a result of a sudden or dangerous occurrence
• the plaintiff's damages are proximately caused by the defendant's intentional, false misrepresentation, or
• the plaintiff's damages are proximately caused by a negligent misrepresentation made by a defendant in the business of supplying information for the guidance of others in their business transactions

The Moorman doctrine was recently examined in Mars, Inc., v. Heritage Builders of Effingham, Inc., 2002 WL 124274 (Ill. App. 4th Dist. January 29, 2002), where the court was asked to decide whether the economic loss doctrine barred an owner from seeking tort damages against a subcontractor for a frame collapse during construction. The owner, Kal-Kan, operated a dog and cat food manufacturing plant and warehouse in Mattoon, Illinois. Kal-Kan contracted with Heritage Builders of Effingham to construct a 60,000 square foot warehouse extension. Heritage Builders, in turn, subcontracted with GF General Contractors, Inc. (GF) to erect a steel-frame system that eventually would support the warehouse building. Kal-Kan already had purchased the steel-frame system that was at the construction site. GF was only to unwrap and erect it.

Midway through construction, GF had erected between 70% to 80% of the frame, bracing it temporarily with cable bracing. GF did not install any permanent bracing. At this point, severe thunderstorms passed through Mattoon causing the frame to collapse. This collapse caused irreparable damage to the frame and further resulted in an eight-week delay in the completion of the warehouse.

Kal-Kan sued GF, alleging that its failure to erect and brace the frame properly caused its collapse. No one was injured in the collapse, and Kal-Kan sought to recover only purely economic losses, the value of the frame itself and lost profits due to construction delays.

GF moved to dismiss, arguing that such a claim was barred by the economic loss doctrine. Kal-Kan argued that the first exception to the economic loss doctrine applied, that the property damage was the result of a "sudden or dangerous occurrence." The circuit court granted GF's motion, and Kal-Kan appealed.

On appeal, the court examined whether the economic loss doctrine applies to the loss of construction materials where a subcontractor's negligence is alleged to have caused the loss. In deciding the issue, the court first considered whether the thunderstorm was a "sudden and dangerous occurrence" and then whether the destruction of the frame was "property damage."

The court concluded that the "sudden occurrence" exception applies in a situation where the occurrence is, "highly dangerous and presents the likelihood of personal injury or injury to other property." Working from this definition, the court found that Kal-Kan had sufficiently alleged that its claim for property damage was caused by a sudden and dangerous event. The character of the storm combined with the collapse of the frame almost certainly presented a situation in which personal injury or property damage to other property was likely to occur. The court then considered the second part of the test.

For economic damages to be recoverable in tort, the occurrence also must result in personal injury or property damage. The property damage cannot be mere damage to any property, but must be "other property" extrinsic from the product itself. A product that damages only itself cannot be the subject of a tort suit. Kal-Kan argued that, by virtue of its ownership of the frame, the frame itself constituted "other property" within the meaning of Moorman. The court disagreed.

Kal-Kan was not able to prove to the court's satisfaction that it owned the steel-frame. While this seems incredible, the court alluded to the fact that Kal-Kan had neglected to attach the invoice it received for the steel frame, proving ownership. Consequently, Kal-Kan lost its appeal. However, the court noted that, even if the invoice had been introduced in the case, Kal-Kan still would have lost because Kal-Kan had contracted for a completed warehouse, and the frame itself had no intrinsic value. The frame was merely a component part of the warehouse. As such, the frame could not be separated from the warehouse and be considered "other property."

The court noted that the dispute revolved around who was responsible for the replacement cost of the frame. Allocating risk, especially the risk of loss, is traditionally within the purview of contract law. The right to recover damages for construction delay is consistent with contract remedies. When the frame collapsed, only the business expectancy was damaged. Further, the product here only damaged itself, not any "other property." Had the frame fallen and damaged the existing warehouse, or vehicles belonging to Kal-Kan, the court's analysis would have been different.

Mars, Inc. v. Heritage Builders of Effingham, Inc., represents a significant extension of the economic loss doctrine in Illinois construction cases. Even if a subcontractor is clearly negligent and causes significant damage and delay, the owner cannot pursue the subcontractor on a negligence theory unless personal injury or damage to "other property" occurred as a result of his negligence.