SW Legal studies in Business

Breach of Contract Not Basis for Negligence Action
Description

Nevada high court held that if a design professional breached its duty to a contractor by providing improper construction advice, the economic loss rule under negligence did not apply. Tort is not a remedy. Breach of contract is the remedy and the loss measures that apply in such instances.

Topic Contracts
Key Words

Negligence; Contract; Design; Construction; Economic Loss

C A S E   S U M M A R Y
Facts

Mandalay managed the construction of a $1 billion resort in Las Vegas. It hired subcontractors for various parts of the work. Terracon provided geotechnical engineering advice about the subsurface soil conditions and recommended a foundation design. Mandalay relied on Terracon’s analysis in construction. County inspectors believed that there was a danger to structural integrity and required Mandalay to repair and reinforce the foundation before proceeding further with construction. Mandalay sued Terracon for breach of contract, breach of the covenant of good faith and fair dealing, and professional negligence. Terracon moved for summary judgment on the professional negligence claim, arguing that it was barred under the economic loss rule, contending that as a matter of law, it does not apply to negligence claims against design professionals or contractors who only provide services. The federal district court held that Nevada law was unclear on that issue and asked the Nevada high court to address the scope of the economic loss rule as applied to design professionals.

Decision

Question answered. The economic loss rule applies to preclude negligence-based claims against design professionals, such as engineers and architects, who provide services in commercial property development, when the plaintiffs seek to recover purely economic losses. Because Mandalay suffered only economic loss, without personal injury or property damage, the economic loss rule barred it from proceeding with its negligence claims against Terracon, a design professional. When economic loss occurs as a result of negligence in the context of commercial activity, contract law can be invoked to enforce the quality expectations derived from the parties’ agreement. Tort is not a remedy in such matters. When the quality of work provided in a contract is defective, resulting in economic loss, remedies are properly addressed through contract law.  A breach of duty arises from the contractual relationship only, which requires an analysis of the damages which were within the contemplation of the parties when framing their agreement.

Citation

Terracon Consultants Western, Inc. v. Mandalay Resort Group, ---P.3d--- (2009 WL 790364, Sup. Ct., Nev., 2009)

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