The economic loss doctrine is widely misunderstood and often misapplied. The premise of the economic loss doctrine is that a party cannot recover purely economic losses in a tort action. To understand the rationale behind the economic loss doctrine, attorneys must simply recall that joyous moment when they first set their eyes upon Hadley v. Baxendale. The Hadley decision stands for the proposition that, in a breach of contract action, a party may only recover the damages that naturally flow from the breach, or that were of the type within the reasonable contemplation of the parties at the time of contracting. In other words, economic losses such as lost profits, diminished bonding capacity, and loss of use are not recoverable in a breach of contract action unless such damages were contemplated by the parties at the time of contracting.
Unsurprisingly, enterprising attorneys sought to avoid the results of this rule by suing in tort to recover purely economic losses and, in some cases, punitive damages, sustained due to a breach. The economic loss doctrine preserves the common law rule set forth in Hadley by preventing contracting parties from using tort claims to obtain damages not otherwise available under contract law. In other words, the economic loss rule maintains the distinction between contract and tort damages by preventing a party to a contract from recovering purely economic damages due to its failed contractual expectations.
The economic loss doctrine has suffered from wide variations in application. States are split, for example, about whether the rule bars third-party claims against design professionals. A majority of states preclude third-party lawsuits against design professionals. Nevertheless, exceptions abound. For example, some states allow third-party claims by contractors or subcontractors against design professionals for defects in design plans and specifications. Other states, such as Alaska, exempt all third-party professional negligence claims under the economic loss doctrine. And other states allow tort claims against a design professional where the design professional’s work creates a “serious risk of personal injury.”
A comparison of two 2017 decisions—one in Alaska and one in Maryland—highlights the disparity in application of the economic loss rule from one jurisdiction to the next.
Municipality of Anchorage v. Integrated Concepts & Research Corporation
The U.S. District Court for the District of Alaska was asked whether the economic loss doctrine barred claims by an owner against the design professionals that performed geotechnical and design work for a major infrastructure project. The project owner was not in privity of contract with any of the designers, and brought tort-based claims for negligence, professional negligence, and negligent misrepresentation. The designers argued that allowing such tort claims would upset the carefully-ordered risk allocation and limitations of liabilities in the contracts executed by the parties. The court disagreed with the designers. While the court dismissed the negligence claims, the Court allowed the professional negligence and negligent misrepresentation claims to proceed stating that “Alaska law imposes an independent duty in tort on design professionals, regardless of the contractual allocation of liability among the various parties.”
Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP
A decision out of the Maryland Court of Appeals reached the opposite conclusion, at least with respect to large government construction projects. In Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, Maryland’s highest court addressed the economic loss doctrine as applied to claims that an engineer’s defective design and negligent misrepresentations resulted in compensable damages to the general contractor. The contractor asserted negligence and misrepresentation claims against an engineer with whom it was not in privity, claiming that design defects and misrepresentations about the schedule resulted in the contractor sustaining delays and cost overruns. Rejecting the contractor’s claims, the court noted that, in Maryland, “the economic loss doctrine bars recovery when the parties are not in privity with one another or the alleged negligent conduct did not result in physical injury or risk of severe physical injury or death.” The court went on to state that “the reason for requiring privity or its equivalent to impose tort liability is to limit the defendant’s risk exposure to an actually foreseeable extent, thus permitting a defendant to control the risk to which the defendant is exposed.”
The Balfour Beatty court found most persuasive the fact that large public construction projects have complex contracting schemes providing each party with ample opportunity to allocate risk. In fact, the court stated that “the complex web of contracts that typically undergirds a public construction project should govern because parties have sufficient opportunity to protect themselves (and anticipate their liability) in negotiating these contracts.” The court was further persuaded that allowing tort claims on large public construction projects would result in increased costs to the public, which weighed against imposing tort duties on parties who are not in privity.
It is worth noting that the Balfour Beatty holding may be limited to large, public construction projects. For example, in ruling on the negligence claim the court wrote: “Although we decline to extend the privity-equivalent intimate nexus test to design professionals on government construction projects, we do not hold that the test cannot apply to design professionals in other contexts.” This cryptic dicta leaves open the possibility that the economic loss doctrine may not apply in Maryland to tort claims asserted in connection with smaller public projects or to tort claims arising out of private projects.
Conclusion: Know the Economic Loss Rule of Your Jurisdiction
The Anchorage and Balfour Beatty cases are only a small sampling of economic loss doctrine cases and the potential for disparate outcomes. Courts in Washington, Nevada, Wyoming, Colorado, and Indiana have held that the economic loss doctrine bars most tort claims against design professionals. Courts in Montana, Pennsylvania, Rhode Island, and Delaware, however, have refused to apply the economic loss doctrine to bar tort claims against design professionals. In short, the outcome of the economic loss defense depends on the facts of each case and the binding precedent in the forum where the complaint is filed. Failure to account for the relevant economic loss rule at the outset of a project can result in unintended and unfortunate consequences when carefully negotiated contractual risk is thrown out the window and a claim of negligence or misrepresentation is allowed to proceed. Even if such claims are ultimately unsuccessful, the cost to the parties to defend such claims is usually substantial—a headache worth the cost of preempting with informed contractual risk allocation.
 9 Exch. 341 (Court of Exchequer 1854).
 See, e.g., Lincoln Park West Condo. Assn. v. Mann, Gin Ebel & Frazier, 136 Ill. 2d 302 (1990) (affirming dismissal of claims by condominium association against architect for allegedly defective design plans and specifications); BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004) (holding that the economic loss doctrine barred negligent misrepresentation claim by subcontractor against designer); SME Industries, Inc. v. Thompson, Ventulett, Stainback & Assoc., Inc. 28 P.3d 669 (Utah 2001) (holding that economic loss doctrine barred negligence claims asserted by contractor against designer); Berchauer/Phillips Constr. Co. v. Seattle School District No. 1, 881 P.2d 986 (Wash. 1994) (holding that economic loss doctrine barred tort claims for delay brought by contractor against designer).
 See, e.g., Conforti & Eisele, Inc. v. John C. Morris Assoc., 199 N.J. Super. 498 (App. Div. 1985); see also Ins. Co. of N. Am. v. Town of Manchester, 17 F.Supp. 2d 81 (D. Conn. 1998) (Connecticut would not apply the economic loss doctrine to preclude claims by contractor against architect for negligent design and contract administration).
 See Municipality of Anchorage v. Integrated Concepts & Research Corp., et al. Case No.: 3:13-cv-00063 SLG, Docket No. 501 (D. Alaska 2016).
 See Balfour Beatty Infrastructure, Inc. v. Rummel Klepper & Kahl, LLP, 2017 WL 701441, at *4 (Md. 2017) (citing Morris v. Osmose Wood Preserving, 340 Md. 145 (1995)); U.S. Gypsum Co. v. Mayor & City of Balt., 336 Md. 145 (1994); A.J. Decoster Co. v. Westinghouse Elec. Corp., 333 Md. 245 (1994); Council of Co-Owners Atlantis Condo., Inc. v. Whiting-Turner Contracting Co., 308 Md. 18 (1986)).
 See Municipality of Anchorage v. Integrated Concepts & Research Corp., et al. Case No.: 3:13-cv-00063 SLG.
 2017 WL 701441, *1-3 (Md. 2017).
 Id. at *4.
 Id. at *7.
 Id. at *11.
 Id. at *12.