Presnell Construction Managers, Inc. v. EH Construction, LLC

John, majority and I overrules agree that John should be overruled. CONSTRUCTION PRESNELL Dame is the MANAGERS, linchpin because INC. John, I also overrule Dame or at would Appellant, than the least sound its death knell louder Dame, I majority acknowledge does.

strictly speaking, construed subsection CONSTRUCTION, Appellee. EH LLC 403.250, which deals with modifica- KRS upon showing tion of maintenance No. 2000-SC-0571-DG. circumstances,” and that John “changed Kentucky. Supreme Court of (2), provides involved subsection which upon death or termination maintenance May 20, 2004. But, while the John remarriage. have broadened Dame’s holding

somewhat, John’s hardly “came holding field”;

out relied simply of left

Dame’s conclusion that lump-sum mainte- differently be

nance awards should treated awards open-ended maintenance lump-sum maintenance awards should final and

be construed as unalterable.5 Dame, issue

The broader addressed I

and the issue that this Court believe again today, opinion

should address this legislature enacting

was whether the “in ju- intend[ed]

KRS 403.250 to extend per-

risdiction of the circuit so as to court

mit modify lump it to amend or sum open-

award of maintenance as an as well my opinion,

end award?”6 this Court question incorrectly

answered the

Dame, and we need not and should twenty-two years

wait another for an- provide

other case to correct answer Dame; I now for

and overrule would do so prac- of the trial benefit bench and

ticing bar.

GRAVES, J., joins concurring

opinion. Id., Dame, 628 S.W.2d at at 626. Jr., Louisville, Swyers,

Walter J. Coun- Appellant. sel Crafton, George Stigger, Bruce Alber PLLC, Shelton, John R. Parker & O’Con- nell, PLLC, Louisville, Appel- Counsel lee.

OPINION OF THE COURT I. ISSUE (“DeLor”), Inc. Design Group, DeLor building, the owner of a commercial con- Appellant, tracted with Presnell Construc- (“Presnell”), Managers, tion Inc. to act as manager building’s the construction for the (“the Project”). DeLor also renovation Appellee, contracted EH Construc- tion, (“EH”), provide “general LLC EH, Project. trades” work for the claim- ing exclusively economic losses1 from properly its perform Presnell’s failure to Project, contractual to coordinate the in which it against filed a suit Presnell brought upon Presnell’s premised claims misrepresentation and alleged negligent Project. negligent supervision of the that, contract, trial court found duty only to DeLor and Presnell owed against EH’s claims therefore dismissed maintain EH entitled to Presnell. Was to recover action in tort Presnell loss? Because we alleged for its (Second) of the Restatement adopt negligent mis- of Torts as the standard ed.1999). (7th monetary loss LAW DICTIONARY 530 "[a] 1. "Economic loss” means wages profits.” or lost BLACK’S such as lost EH Kentucky, obligations that DeLor and and because duties representation alleged to the complaint against respect EH’s Presnell to each other with owed faulty ... information 1 of supplied Project. Paragraph “Presnell 1.1.20 Article contractors, Project’s guidance” provides: the contract trial court improperly we hold the nothing agrees that The Contractor misrep- for negligent dismissed EH’s claim contained the Contract Documents against Accordingly, resentation Presnell. the and any agreement between Owner Appeals the re- we affirm and Manager or the Owner the Construction trial for fur- mand this case to the court any the Professional creates Design and proceedings. ther relationship the contractual between ... Manager and the Con- Construction II. BACKGROUND any tractor. Contractor waives The material facts the issues involving an the Contractor have as right straightforward are now before this Court any alleged beneficiary of third-party DeLor, 1996, undisputed. May and In as not to agreements such and covenants of its to renovate a part efforts commercial Manager sue the Construction ... as it, building owned Pres- contracted with third-party beneficiary agree- of such act as the manager nell to construction ments. Project. completed DeLor and Presnell And, finally, 2 of paragraph 2.1.1 Article Archi- signed and American Institute of provides: “The the contract Construction (“AIA”) styled, tects document “Standard shall as Manager administer Contract Agreement Form of Between and Owner Man- described herein. The Construction Manager the Con- Construction where this ager performing under Contract Manager struction is NOT Constructor.” in all acting principal agent as the Owner’s The contract set forth the duties and obli- regarding this Contract.” matters to gations DeLor and Presnell owed contracts, of the both signing After respect Project, para- each with to the and EH, contrac- along Presnell and with other graph 10.7 of the contract provides: Project, - on tors and subcontractors “Nothing in this Agreement contained building DeLor’s proceeded renovate relationship shall create a contractual with under their contracts with DeLor. or a cause of action in a third favor of party against either Owner or Con- 1997, EH filed a November Manager.” struction mechanics’ and materialman’s lien

Later, $268,218.00against proper- March DeLor contracted sum of real Project EH to re- was located ty furnish what contract on which the EH “general to as for the and labor unpaid ferred trades” work materials Project. EH that it furnished DeLor completed DeLor and claimed had filed styled, Project. February AIA EH signed an document “Standard DeLor,2 against its lien Form of Contract Between Owner suit enforce Presnell, sought EH and others.3 also The contract set forth Contractor.” and re- in their contract 2. Article 14 of the contact between DeLor arbitration clause "relating provides disputes Consequently, and EH that all to arbitration. ferred the breach thereof” shall this Court. to this contract or claim is not before and, be mediated if the mediation is un- first successful, estate which the binding owners of the real on arbitration. 3. The submitted against building was lienholder Accordingly, was located another EH’s claim DeLor necessary parties law- joined trial court because of the were as dismissed losses, § 552 and held that EH’s tort recover for its economic alleged which EH were the result of Pres- claim Presnell was actionable be- alleged negligent misrepresentation cause, nell’s inde- Presnell owed Project.4 duties, i.e., negligent supervision “a to EH to pendent complaint alleged EH’s Specifically, competence exercise reasonable care or and time properly stage Presnell failed “to collection, supervision, its and distribution Project the work involved” for the and that pro- of information and directions that it result, required as a EH “was to redo result, guidance.” vided to EH for As a already much of the work that it had com- the Court of reversed the trial pleted, due to the other contractors and trial court and remanded the case for coming subsequently subcontractors in and negligent misrepresentation EH’s claim destroying already work that had been against granted Presnell.6 We Presnell’s completed by Additionally, EH al- [EH].” review, discretionary and we motion leged neg- that “Presnell was careless and now affirm the decision of the Court of Project, ligent coordinating sup- Appeals. plied faulty guidance information and working on supervision to the contractors III. ANALYSIS Project.” analysis A of the proper and resolution

Presnell filed a motion to dismiss EH’s an presented by appeal requires issues ground claims on the it (1) i.e.: analysis separate topics, of two trial owed no to EH.5 The court negli- the tort of privity of contract and found that duties agreed, Presnell’s under gent misrepresentation. We will discuss exclusively the contract were owed to De- Lor, apply them to topic each turn and then against and dismissed EH’s claim however, Appeals, Presnell. The Court of this case. prop- mat- that if a motion to dismiss is made and suit because of their interests real presented, erty. personal judgment pleadings EH did not seek a ters outside the are against parties. summary these other shall be treated as one for motion affidavits.”); judgment supporting with Craft Simmons, Ky.App., 777 S.W.2d 618 alleged

4. EH also a breach of contract claim against Presnell. This claim was dismissed by Appeals's the trial court and EH does not contest the Court of 6.It is unclear from the ruling. trial court's opinion opinion EH's whether the reinstated negligent separate against claim Presnell for appears supervision. Although it discovery 5. We would note that no was taken of the trial court Presnell, Appeals’s Court of reversal by parties against on EH's claim adoption solely Presnell, fact, premised was on its did not file an and that i.e., opinion, doing, language "In so complaint. answer to EH's since determin- trial court erred in hold that the the trial considered matters outside the court EH, contractor, ing could not maintain a complaint with Presnell’s mo- in connection negligent misrepresentation and dismiss, an action for appropriately treated Pres- tion to Presnell, supervision against the construction as a motion for sum- nell’s motion to dismiss privity manager, no ("If, with whom EH had mary judgment. a motion CR 12.02 contract[,]” added) might be con- (emphasis pleading asserting that the fails to the defense reinstating what EH refers to as its strued as grant- upon can be state a claim which relief ed, "ordinary negligence Presnell.” claim presented pleading are matters outside the Ap- court, likely We that the Court find it more by the the motion to and not excluded negligent erroneously su- peals treated EH's summary judg- shall be treated as one for Lohre, negligent ment....”); pervision allegations part of its Ky., as Johnson v. (1974) ("[CR misrepresentation provides claim. 12.02] S.W.2d promise made his benefit

A. PRIVITY CONTRACT enforce a OF stranger though he is a both even “Privity rela of contract” “[t]he But, the consideration.”10 contract contract, to a al tionship parties between give who is every contract will one “[n]ot prevent them to other lowing sue each but therein, Thus, right of action privy not thereto a party doing ing a third so.”7 “[o]rdinarily, party might third obligations arising though out such even only are to those a contract due with whom completion a from the received benefit made; a cannot it is contract be enforced Only a who third-party contract.”11 a it or in person party a who is not parties intended benefit was it, a privity except party real contract, a or a namely, donee from the or, statute under certain circum interest standing has to sue on beneficiary, creditor stances, by third-party beneficiary.”8 contract; beneficiary does incidental rule, Consequently, general when “[a]s acquire right.12 such wrong is founded a breach of ever contract, suing respect the plaintiff Although longer is no re privity must party privy thereof be a action,13 a tort “one who quired maintain contract, and con party none but a to a party privity not a to the contract or in for right tract has the to recover may for thereto not maintain against any parties its of the there breach negligence merely which consists 9 to.” Accordingly, the breach of contract.”14 duty some to EH unless Presnell breached

“It is third well established that a the person may, right in his own name from its to DeLor under apart duties Wallace, 179, (7th Ky., 7. BLACK’S LAW v. 704 DICTIONARY 1217 13. Tabler S.W.2d ed.1999). (1985) (observing "the of the erro 186 demise cases”); negligence privity defense in neous 2D, (1991). § 8. 17A AM. JUR. Contracts 425 Herme, Co., Tway Ky., C.D. Inc. v. R.C. 294 534, (1956) ("The so- S.W.2d 537 ancient Taylor County, Ky. also 9. Id. See Sexton v. 'general called rule’ of the manufacturer’s 808, (1985) ("It App., 692 S.W.2d 810 is the non-liabiliiy persons to for jurisdiction stranger law in this that no relation, whom he has no contractual fol contract sue for its unless the breach benefit.”). by this in Olds v. [Works contract was his lowed Motor made for 616, (1911)], Ky. Shaffer, S.W. 145 140 1047 2D, § 10. 17AAM. JUR. Contracts 435 by substantially all mod has been abandoned reconsideration, Upon we em authorities. Handling B & C Co. v. Construction Grain we now determine also to abandon it and 98, Corp., (Tex.Civ.App.1975). 521 S.W.2d 101 hereby expressly overrule the Motor Olds Sexton, (“Parties 692 at 810 S.W.2d (citation omitted)). case.” two whom these contracts are made fall into ben- classes—donee beneficiaries creditor Industries, Penco, Inc. v. Detrex Chemical beneficiary eficiaries. 'One is a donee if Inc., 948, Ky.App., 672 S.W.2d 951 purpose promisee buying prom- of the in Co., C (quoting B & Construction 521 S.W.2d gift beneficiary. is to make a to the A ise 102-03). also Kevin & Associ- at See Tucker beneficiary person promis- ais creditor if the Inc., Ritter, ates, Ky.App., Inc. Scott & expressed party ee’s intent is that third (1992) (“Scott con- & Ritter S.W.2d performance to receive the contract any an act both a clude that time constitutes any duty supposed actual or or satisfaction contract, plaintiff and a breach of ') liability beneficiary.” promisee of the We and sue in must waive contract. Inc., Industries, (quoting King v. National believe this is now ever was do not or (6th Cir.1975)); B F.2d & C Construc- law.”). Co., 521 tion S.W.2d 101-2. (a) by independent duty EH, person contract —i.e. an or one of limited — group persons was, most, whose benefit who at the an incidental benefi- guidance supply he intends ciary of the contract between DeLor and or that the the information knows Presnell, in neg- cannot maintain an action it; recipient supply intends to ligence against Presnell. order to de- (b) an independent termine whether such through reliance it in a exists, negligent we next turn to the tort of that he intends the in- transaction formation to influence or knows misrepresentation. recipient

that the so intends or in substantially similar transaction. B. NEGLIGENT (3)The liability of one who is under a MISREPRESENTATION public duty give the information jurisdictions A majority of by any extends to loss suffered (Second) adopted Restatement Torts persons class of for whose benefit § neg which outlines the elements of created, any duty is of the transac- ligent misrepresentation as follows: protect it intended to tions which who, One in the course of his busi- them.15 ness, profession employment, or Although Kentucky appellate courts have any other transaction which he has long recognized the tort of fraudulent mis interest, in- pecuniary supplies false representation and delineated its elem formation for guidance of others ents,16 have neither transactions, in their business is sub- explicitly recognized negli nor the tort of ject loss pecuniary gent misrepresentation as relates ei justifiable caused to them their physical ther economic loss or harm.17 information, upon reliance if he Nevertheless, Kentucky’s appellate courts fails to exercise reasonable care or § approval, have cited 552 with and have competence obtaining or communi- Kentucky recog suggested otherwise that cating the information. misrepre negligent nizes a tort action for (2) (3), Except as stated in Subsection Seigle Jasper,18 v. the Court sentation. (1) liability attorney’s duty Appeals stated Subsection of held that an performance ordinary

limited to suffered exercise care loss (SECOND) (1986) ("In OF TORTS order sustain an action for 15. RESTATEMENT fraud, (1977). convincing § clear and 552 there must be (b) (a) representation, evidence of a material false, (c) to be false or made which is known Vick, Ky. Grocery v. 16. Cresent Co. 194 (d) recklessly, made with inducement be ("We (1922) 240 S.W. thereon, (e) upon, acted acted in reliance general rule that an action cannot be (f) causing injury."). See also RESTATE- fraud or deceit unless it be maintained for (SECOND) (1965); § MENT OF TORTS 525 (1) appear that defendant made a made PALMORE, KENTUCKY IN- JOHN S. false; (2) representation; it was material that (CIVIL) §§ 31.01- STRUCTIONSTO JURIES false, (3) that when he made it he knew it was 1989). (Anderson Publishing 31.09 Co. recklessly, any knowledge made it without assertion; (4) positive its and as a truth (SECOND) generally 17. See RESTATEMENT inducing that he made it with intention (1965); act, § Moore v. Common- OF TORTS 311 plaintiff upon be acted or that it should wealth, Ky.App., 846 S.W.2d (5)- plaintiff plaintiff; that acted in (Johnson, dissenting). it; J. thereby upon plaintiff reliance ”); Heritage injury. Ins. suffered Investors Life Colson, (1993). Ky.App., Ky.App., 867 S.W.2d 476 717 S.W.2d Co. v. ‘neg the term not use Chemick court “did lending of a title for the bank examination nor did it cite ligent misrepresentation,’ of the real purchasers extended to the Restatement, message its was cer but noted its property, and the Court i.e., consistent!!,]”24 negligent mis tainly “holding § 552.19 is consistent with” Kentucky. is actionable representation Then, in the Bluegrass v. Bank Morton Co.,20 Appeals indi and Trust the Court made different The federal courts have misrepresentation cated negligent this Court would predictions as to whether jurisdiction tort in this recognized was negligent misrepre- recognize the tort the extent that the “[t]o when ruled that § Although as in 552.25 sentation set forth complaint a cause of asserts they persuasive, the federal are decisions negligent summary misrepresentation, however, binding precedent; are not judgment appellees/cross- in favor Ingram particular take notice of Indus- as com appellants appropriate, only was Nowicki,26 tries, case, In that Inc. v. allowed pensatory damages are for this scope of of an which involved “the And, Fasig-Tip claim.”21 in Chernick v. causing accountant loss to Inc.,22 Kentucky, ton the Court of party,”27 third then-Federal District Fasig-Tipton ruled that had to use Reed, former Chief Justice of Judge Scott ordinary care to ensure information jurist, Kentucky this Court and an eminent provided prospective purchaser its Court, “if it were con- concluded that this consignment auction sale was as accurate adopt fronted with issue” would so, possible, as and that its do “fail[ure] to Judge standards set out in 552.28 Reed thereby duty, “[tjhere its breach[ed] exhibited a steady noted that has been negligent purchasers behavior toward in this continuing development area law[,]”29 justifiably who relied strict and information and that “the restric- catalog longer completely contained in the of sale.”23 The tive view ... is no via- negli tucky recognize Id. would this standard for at 482. gent misrepresentation.”); Goldman Services Ky.App., 18 S.W.3d Contracting, Inc. Bank Mechanical Citizens Paducah, 738, F.Supp. 742 & Trust Co. of Id. at 358. ("Based upon Kentucky’s (W.D.Ky.,1992) general adoption of the Restatement in other (1986). 22. Ky.App., 703 S.W.2d 885 situations, tort the court concurs with that conclusion.”). Id. at 890. Leibson, 24. 13 KY. David J. PRACT. TORT 1981). (E.D.Ky., F.Supp. 26. 527 LAW, § 19.3 27. Id. at 684. See, Gas, Borg- e.g., Bottled Miller's Inc. v. (6th Corp., Warner 955 F.2d Cir. ("The with the 28. Id. Court concurs conclu- 1992) (divided predicted on court that based apparently by Judge sions reached Siler Kentucky preclude its that would conclusion unreported of American States Insurance case product-liability Miller’s claim for Morris, al., et Civ. Co. v. D. Action William injury, resulting purely economic it "like 31, 1978). (E.D.Ky. May that No. 2372 In [Kentucky] wise not that would conclude[d] that, view, case, Judge his declared Siler theory negligent recovery allow under a of Kentucky adopt the standards set out would misrepresentation.”); Scheck Mechanical Torts, (Second) Section 552 in Restatement Borden, Inc., Corp. F.Supp.2d (1977)”). that, ("We (W.D.Ky.,2001) recognized have Kentucky's general adoption based situations, other tort Ken 29. Id. Restatement in And, ble.”30 in accordance with the suaded to follow the lead of the Tennessee “steady continuing development” and to Supreme Court in John Martin Co. v. alluded, Judge “many Morse/Diesel, Inc.,34 § which Reed courts it adopted 552. Ac recognized have now that under some re- cordingly, the Court held “that may circumstances the defendant strictive in determining the trial court erred that a duty repre- be under of care to make his EH, contractor, could not maintain an accurately may sentations and for be liable for negligent misrepresentation a limited measure of to a limited Presnell, supervision against the construc group persons negligent misrepre- if his whom EH no manager, privi tion with had justifiable sentations induce reliance to the contract.” ty agree privity We fact, plaintiffs loss.”31 In courts action, “[m]ost necessary not to maintain tort adopted the Restatement’s position and, agree § by adopting we something close to it.”32 Because we negligent representation tort of defines an Kentucky § find 552 to be consistent with independent duty recovery for which law, join majority jurisdic- case we for loss is There tort available. § hereby adopt tions and 552’s standards fore, agree Appeals’s the Court of negligent misrepresentation claims conclusion that EH could maintain a tort jurisdiction. this negligent misrepresentation action for pleadings under the against Presnell

C. APPLICATION OF LAW developed this case and the limited facts TO PRESENT CASE point. noting privity After that no existed EH, Specifically, duty the trial court

between Presnell Presnell’s supply § held that Presnell owed “duties and re 552 was not to false informat ion,35 alleges that sponsibilities only complaint under its contract” and EH’s And, duty supplied faulty “had ... information DeLor. as Presnell no “Presnell [EH],” “[r]elief, Project’s if contractors. guidance” the trial court ruled any, against allegation would be DeLor.” This was sufficient to avoid what [EH] essentially a for failure to Accordingly, granted the trial court sum was dismissal mary judgment develop state a claim for relief. It to Presnell on EH’s that EH cannot against appeal during discovery it. or trial claims its independent Appeals, argued prove Court of EH the elements negligent misrepresentation, did of but at this part existence of a Presnell’s time, sufficiently EH’s states require privity urged adoption complaint negligent claim Presnell for mis Appeals agreed 552.33 The Court of EH’s claim privity prerequisite representation. that is not a for a tort then, Project of the does Kentucky, being per negligent supervision action in and (Tenn.1991). (citation omitted). 34. 819 S.W.2d 428 30. Id. Dobbs, 31. 2 B. THE LAW OF TORTS Dan (SECOND) OF 35. See RESTATEMENT 2001). (West Group § 472 ("[L]iability § cmt. a TORTS 552 negli- Section is based rule stated in this § 32. Id. at 480. failing rea- gence actor in to exercise of the adoption oppose the of

33. Presnell does not competence supplying cor- care in sonable might apply and even concedes that it 552 ”). .... rect information manager to a construction under other cir- cumstances.

583 negligence not for independent may not articulate a claim that is maintain merely of the of Presnell’s contractual duties. Accord- which consists the breach contract,”1 by also economic loss ingly, the trial court did not err dismiss- but rule, Kentucky appellate courts have ing that claim. which I believe

implicitly applied past. IV. CONCLUSION expressly adopt the eco- this Court should encourage in order con- nomic loss rule to reasons, foregoing For the we affirm the tracting parties to allocate such risks Court of vacate the trial and themselves. summary judgment dismissing court’s

complaint. judicially The “economic loss rule”2 is a that funda- created doctrine3 “marks the KELLER, J., All also concur. concurs law, boundary mental contract between by GRAVES, J., separate opinion in which designed expectan- which enforce joins. cy parties, law, interests of the and tort Concurring opinion by Justice duty which imposes reasonable care KELLER. encourages thereby citizens avoid causing harm to others.”4 “The physical I with the reached agree result privity crux the doctrine but the majority and vote to affirm the decision of premise pro- economic are Appeals. separately, Court of I write interests tected, however, all, express if my principles, view EH’s contract principles.”5 Although common law claim rather than tort negligent supervision Presnell for lia- originally primarily product rooted project only by bility is barred not from protect rule cases to manufacturers i.e., majority applies, damage “one who is not a is limited itself,6 party privity product to the contract or in loss thereto economic rule Penco, Industries, Barrett, Jr., Recovery 1. Inc. v. Sidney Detrex Chemical R. Economic Inc., 948, Ky.App., 672 S.W.2d a Criti Loss Tort Construction Defects: (quoting 891, B & C Co. v. Construction Grain Analysis, cal S.C. L. REV. 894-895 98, (Tex. Handling Corp., 521 S.W.2d 102-03 (hereinafter "Barrett”). See also SME Civ.App.1975)). Industries, Ventulett, Thompson, Stain Inc. v. Associates, Inc., back and 28 P.3d 2. The "economic is also loss rule" referred to (Utah 2001) (“The loss rule is economic harm as "economic rule” and "economic loss judicially doctrine that marks the fun created doctrine.” BLACK’SLAWDICTIONARY531 law, boundary damental between contract (7th ed.1999). protects expectancy which interests created through agreement parties, between the Contract, Steffey, Negligence, 3. Matthew S. law, protects Loss, which individuals their Liability and Architects’ Economic physical by imposing properly (1994) ("The harm 660 n. KY. L.J. (citation omitted)). care.” reasonable usually Dry ... rule[ ] loss traced Robins Flint, 303, 309, Repair & Co. 275 U.S. Dock Barrett, supra 4 at note (1927)[.]"). 48 S.Ct. L.Ed. 290 But Barton, Note, Joseph Drowning see R. Co., Seely 6. See v. White Motor 403 P.2d 145 Contract; Application Sea the Economic (1965) (truck); Corp. East River v. Trans S.S. Negligent Misrepresen- to Fraud Loss Rule Delaval, Inc., 858, 866, 476 Claims, 1789, america U.S. 106 41 & MARYL.REV. tation WM. 2299-2300, 2295, 90 865 (2000) ("The S.Ct. L.Ed.2d 1794 economic loss rule is a (turbines ("Products doctrine, supertankers) liabili judicially created first articulated ty grew public policy judgment of a Supreme Seely out the California v. 9, 17, dangerous people protection Cal.Rptr. need more from [63 White Motor Co. Cal.2d (1965)]”). war- products is afforded the law of 403 P.2d 145 than modern, many jurisdictions

“has unclear in general prohi- evolved into a what because recovery applied bition for economic the rule “is stated with ease but formulation, great “In Apparently, its broadest the with much loss.”7 difficulty.”12 prohibits economic recovery difficulty loss rule arises because the tradi- in negligence products liability or ‘absent tional articulation of the economic loss rule physical injury subject proprietary appli- to a inter- and is not exceptions13 ’8 rule, sweeping est.” “Under this cable in all situations recov- because certain com- ery of economic loss is foreclosed when a mon law actions that sound in tort permit, and, fact, product or falls of an expect- recovery service short are limited to the yet ed of quality personal level causes no economic loss.

injury property damage.”9 or develop Two landmark decisions

Although the economic loss rule has ment of the economic loss rule are Seely v. adopted by majority been of courts10 general White Motor which is Company,14 rule, extensively published ly recognized genesis discussed arti- as the parameters Corp. the rule’s remain some- East River S.S. Transa cles,11 clear, however, ranly. It is if devel courts the economic loss rule far, opment progress recovery purely were allowed to too and do not allow in tort for losses, contract law would drown in a sea of tort.” regardless of the risk im- (citation omitted)). posed.”). Steffey, supra 7. note 3 at 674. Spangler, sample 11. For a small see John I. Hill, Evolving &III William M. Liabilities (footnote omitted). 8. Id. at 674-75 See also Managers, Construction 19 CONSTRUC- Industries, Inc., ("Simply SME 28 P.3d at 680 of TION LAW 35 n. 11 30, (1999) (observing put, the rule economic loss holds that ‘eco- "[tjhere addressing is no dearth of articles negli- nomic are not recoverable in privity, doctrine of the eco- destruction of the gence physical property damage absent or ’ rule, evolving tort nomic loss and the liabili- (footnote bodily injury.” and citations omit- parties design professionals to ted)); 26(a) (1997) ("The ties of third § 86 C.J.S. Torts negligence” citing eleven law review recovery economic loss rule bars in tort when topics those con- party unaccompanied articles that address suffers economic loss context). by personal injury property damage.” struction law We would additional- or (footnote omitted)); ly LAW a Westlaw for "eco- BLACK’S DICTIO- observe that search (7th ed.1999) ("economic-loss 1,000 NARY will find more than nomic loss rule” principle plaintiff "[t]he rule” is that a cannot articles. purely monetary sue in tort to recover for injury proper- opposed physical loss—as Ass'n, Inc. v. W.R. Archi Sandarac Frizzell ty damage.”). 1349, tects, Inc., (Fla.Dist.Ct. 609 So.2d App.1992), by implication by Moran overruled (footnotes Steffey, supra note 3 at 675 omit- Heathman, (Fla.1999). 744 So.2d 973 sais v. AL., ted); W. PAGE KEETON ET PROSSER Schwiep, Paul J. The Economic Loss Rule AND KEETON ON THE LAW OF TORTS Ate Commercial Outbreak: The Monster That (5th 1984) ("Generally § at 657 ed. Torts, B.J., ("[I]t at 34 FLA. Nov. speaking, general duty there no to exercise judges, lawyers clear that and commercial intangible economic reasonable care to avoid desperately struggling clients alike are all loss or losses to others that do not arise from parameters define the of the economic loss tangi- tangible physical persons harm doctrine.”) things.”). ble exceptions recognized by 13. For various Christopher D’Angelo, Scott The Economic 26(b) (1997). see 86 C.J.S. Torts courts Saving Warranty Loss Doctrine: Contract Law Torts, Drowning in a Sea U. TOL. (Cal.1965). (1995) ("The majority 14. 403 P.2d 145 L. REV. 10) liability Delaval, Inc.,15 limits strict firmly similarly s 402A] es merica which part person property.16 to harm to physical tablished the rule as of American In liability jurisprudence. both product River, Court, Supreme in And East the cases, in tort recovery sought solely was add- approvingly Seely, from quoting after from a defec resulting for economic loss ed: in Seely truck product tive defective —a only the injures itself product When a in supertankers turbines for and defective are imposing for reasons River. These set forth the East cases the leaving party weak those for rule. In rationale for the economic loss strong. its contractual are remedies Seely the court stated: safety concern with is re- The tort The that law has drawn distinction the only injury an is duced when recovery physical inju- between tort in- product person itself. is When warranty recovery ries and for economic jured, injury of and the loss the “cost an arbitrary not rest loss is not and does on of or health be an time overwhelm- having ‘luck’ plaintiff the of one an misfortune,” ing person and one the causing physical injury. accident The contrast, prepared not meet. rests, rather, distinction under- itself, injures when a the com- product standing responsibil- of the nature of the lose the mercial user stands to value ity manufacturer undertake in must its product, displeasure risks the products. his can distributing ap- He who find that the product customers propriately held physical be liable for or, needs, does meet their in this not as injuries by requiring caused defects case, per- experiences increased costs goods safety his to match a standard like can forming a service. Losses these defined in terms of conditions cre- not Society presume be need insured. ate unreasonable of harm. risks He protection. special that a needs customer perform- cannot be held for the level public The increased cost to products ance his in the consumer’s holding would result from a manufactur- agrees prod- business unless he that the injury product er in tort for liable designed uct was to meet the consumer’s justified.17 itself is not A demands. consumer should not be charged specifically not Although at the will the manufacturer Presnell has sup- bearing physical injury with the risk of referenced the economic loss rule argument he EH be buys product port when on the market. of its should can, however, charged asserting He be claims fairly prohibited it, if product clearly implicated, the risk not the rule will match intertwined, expectations inexorably legal his unless with the economic re- agrees arguments presented and authorities manufacturer that will. Even in this negligence, upon by parties a manufactur- lied case. actions eco- specific er’s is limited to for omission of reference parties’ no nomic rule physical injuries there is recov- loss briefs likely fact that no Ken- ery loss alone. traceable [Restate- (Tent. tucky has ever appellate ment of Second Draft No. decision used Torts 871-872, River, S.Ct. 15. 476 90 L.Ed.2d 17. East U.S. U.S. S.Ct. at 2302. Seely, Cal.Rptr. 403 P.2d at 151. rule,”18 fire, specific phrase, “economic loss allegedly caused a manufacturing much approval adop- less indicated its or defect, brought and Falcon Coal a strict tion of the rule. while neither liability claim Equipment Clark for this Court nor the of Appeals has Denying the loss of the loader. Falcon expressly upon articulated or relied claim, Coal’s tort the Court of published opinion, economic loss rule in a stated: applied both courts princi- the rule’s Section 402A of the Restatement ples identifying without their source. (Second) provides Torts relevant Transport Battery Dealers Co. v. part any who sells product “[o]ne Co., Distributing Ky.App., 402 S.W.2d unreasonably defective condition dan- (1965)19 predecessor this Court’s gerous to the user or consumer or to his (Second) § 402A of the Restatement subject property liability physi- for thus, and, Torts20 eliminated privity of thereby cal harm caused to the ultimate product liability contract in claims based consumer, or property user or to his on breach implied warranty physi- “for ” section, .... reading Our of this as well cal harm thereby caused to the ultimate it, as the official comment to convinces consumer, user or or to property[.]” his us that impos- Section 402A is aimed at Although the issue of whether harm to ing liability physical harm caused person property included harm to the an unreasonably dangerous product to product defective itself pre- was neither property, the user or his other but not sented nor Transport addressed Dealers only product harm caused Co., (25) later, twenty-five years in Falcon property” simply term “his Co.,21 Coal Co. v. Equipment Clark itself. appear does not to be intended to case, em- dispositive.22 issue was In that Fal- meaning brace within its “any the term purchased con Coal had a front-end loader product” as those terms are used in Equipment, Clark the loader’s manu- facturer. destroyed by The loader was 402A. Section Inasmuch as this section III, (a) 18. Thomas R. Yocum & engaged Charles F. Hollis the seller is in the business of Kentucky: The Economic Loss Rule in selling product, Will such Tort?, (b) Contract Law Drown in a Sea 28 N. expected it is to and does reach the user (2001) KY. L. (observing REV. change or consumer without substantial Bowling Municipal Green Utilities v. Thomas in the condition in which it is sold. Co., F.Supp. (W.D.Ky. son Lumber (1) applies The rule stated in Subsection 1995) Kentucky was "the first case in to use although ' specific phrase 'Economic Loss Rule” (a) possible the seller has exercised all care only and that the federal district court did so preparation prod- and sale of his request after Court declined the court's uct, and certify Kentucky apply whether would (b) bought the user or consumer has not case). economic loss rule to the facts of the product any from or entered into con- seller, (empha- with the tractual relation (1965). Ky., 402 S.W.2d 441 added). sis (SECOND) 20.RESTATEMENT TORTS Ky.App., 802 S.W.2d 947 (1964): § 402A ("The only question Id. at 948 raised as any product One who sells a defec- phrased by appellant is whether it unreasonably dangerous five condition appellee from the manufacturer 'in a recover property the user or consumer or to his liability product subject liability physical based harm subject thereby doctrine of strict where the caused to the ultimate user or consumer, itself.”’). property, damage product or to his if is limited to the any was limited to by for its economic loss highest ery has been now our avail- remedy might in be recovery contractual court as the standard cases, able, thus, Appeals the Court of liability from our and tort and strict silentio, section, the economic- per- adopted, of it not albeit sub reading this would this, recovery for that bars recovery principle in a case loss-rule mit such like in upon loss based strict are left to conclude that as it now stands economic jurisdiction in does tort. the common law this position.23 support appellant’s the rule,” although, The “economic loss such, not referred to as came before pointed again, court then out that the Uni-

The Inc. Marketing, in may provide a con- this Court Real Estate form Commercial Code And, Therein, purchas the remedy Falcon al- v. Franz.28 second tractual to Coal.24 the for struc East of a house sued builder though Appeals the Court of cited ers River, Seeking only economic by tural defects.29 policy as decision the United i.e., i.e., Court, loss, in house’s bet- the diminution the Supreme “that the States alia, value, alleged, injury purchasers to the inter policy product where is the ter only negligent had been purchaser is to the the builder alone leave constructing house. first remedy[,]”25 contractual Court the This Court his the recognized Saylor to that it Appeals required noted that it was not stated had (1973)30 Hall, “a Ky.App., make such a decision in the case 497 S.W.2d 218 policy holding obligation respond damages [for to legal before because its was based 402A, negligent this interpretation personal injury death] which privit the policy despite had .... as construction absence “adopted Court the Then, Transport jurisdiction.”26 Appeals y.”31 citing The Dealers this Court of Inc., the by stating policy Company, this Court addressed concluded until this capri that “it changed by Kentucky Supreme argument was the seems purchasers’ deny to a recovery vigilant proper the to Assembly, Court or General “there cious defect, remedy liability in discovers latent ty no based strict owner who the of his injury ‘only’ it- value product limited which diminishes [for recovery Falcon recov- and allow if he ‘waited’ Accordingly, property, Coal’s self].” (first be its ordi- emphases original product proves last sold unfit for 23. Id. two use.”). added). nary emphasis by holding This the Court supported RESTATE- 25. Id. (THIRD) OF TORTS: LI- MENT PRODUCTS provides: § 21 ABILITY which at 949. 26. Id. Restatement, purposes For of this harm persons property or includes 27. Id. to: loss if caused harm (a) plaintiff's person; or (1994). Ky., 885 28. S.W.2d (b) person of another when harm sellers, other with an interest of interferes purchasers but also sued the 29. The law; protected by plaintiff against the trial court severed case (c) plaintiff property the de- s other than case the sellers builder added). product itself, (emphasis appeal. purpose of fective Coal, ("Sections at 24. Falcon 802 S.W.2d Ky., 497 S.W.2d Code], KRS [the Uniform Commercial Inc., 355.2-315, provide Marketing, S.W.2d a contrac- Real Estate 355.2-314 and remedy such as where the tual in a case family injured for a member of his prove only exists; be as that a defect one defect[,]”32 a result by stating: prove must further a damaging event. of Appeals’ opinion herein Nevertheless, recognizes this Court recognized this limitation as to the claim tort recovery contingent upon negligence, apply but held it does not damage from a destructive occurrence warranty claims, statutory as contrasted with economic loss related agree.34 value, solely to diminution even though, property damage, as to both Although the Court of in Falcon may by be measured repair.33 the cost of principle Coal Co. touched a of the caveat, however, We added a ap- injury rule —no tort action where the is to peared rule, to limit the economic loss at product the it applies product alone—as to applied product least as it liability cases: cases, and we did likewise in Real Marketing, Estate Inc.—no tort recovery go We do not so far as the Court of in negligence for economic loss related Appeals’ opinion in Falcon Coal Co. v. solely to diminution in value—as it applies Co., Clark Equipment limiting recovery cases, to negligence Kentucky has not ex- products liability under a theory to dam- pressly rule, age the economic loss property destruction of “other” than product the much less parameters; itself. But we do rec- addressed its I ognize that to suggest recover tort one cannot that we do so now. vigilant proper- Id. We would note exception” that the dent to the economic loss rule. owner, house, ty purchased Co., Driltech, when he Inc., the See Vulcan Materials Inc. v. bargained could have with the seller for a 383, 253, (1983); 251 306 Ga. S.E.2d 257 warranty contract or to cover latent defects in Lowman, Drainage Systems, Advanced Inc. v. the house so that he could later enforce his 604, Ga.App. 210 437 S.E.2d expectancy of a defect free house. The con- trary view "fails to account for the need to Inc., Marketing, 34.Real Estate 885 S.W.2d at keep products liability and contract law in (citation omitted). See also Gooch v. E.I. separate spheres and to maintain a realistic Co., F.Supp.2d Du Pont de Nemours & River, damages.” limitation on East 476 U.S. (“In (W.D.Ky.,1999) n. Real Estate Mar- 870-871, 106 S.Ct. at 2302. Franz, keting, Kentucky Supreme Inc. v. the Inc., go Court stated that not '[w]e do so far as the Marketing, Real Estate 885 S.W.2d at Court, Supreme Appeals’ opinion Like the United States Court of in Falcon Coal .... we fail to see a distinction based on the man- limiting recovery products liability under a product injured. ner in which the is East theory damage property or destruction of ” River, 476 U.S. at 106 S.Ct. at 2302 Thus, product 'other’ than the itself.' it ("Nor persuasive do we find distinction appears glance Kentucky on first would product rests on the manner in which the is reject the economic loss doctrine. injured. damage may We realize that the be Marketing, Supreme in Real Estate qualitative, occurring through gradual deteri- addressed whether who homeowners were breakage. may oration or internal Or be original purchasers not the could assert a way, calamitous. But either since defini- viable claim homebuilder person property damaged, tion no or other for structural defects. This be case can dis- resulting purely loss is economic. Even cases, tinguished present such as product when the harm to the itself occurs one, traditionally application "that merit the event, through abrupt, accident-like rule, of the economic loss that it does not costs, resulting repair loss due to decreased involve a transaction between a commercial value, profits essentially and lost the failure case, buyer present and seller.” In the Gooch purchaser of the to receive the benefit of its buyers and DuPont are commercial and com- bargain traditionally the core concern of — (citations omitted)). mercial sellers.” law.”). courts, however, contract Some recognized what is referred to "acci- as the must re- parties be tract between agree

I with the economic loss rule’s contract, i.e., dressed need es- underlying rationale — A will lie. breach boundary contract law tablish a between any contract arising independently contract “parties tort law so that to a however, parties, duties between by agreement allocate their risks tort action. may support a protections special not need the [will] tort law recover for caused a contract action Determining when Accordingly, contract.”35 I breach of will lie a tort action will lie when rule that the economic loss would hold maintaining distinction requires applicable Kentucky tort claims. obligations. respective sources rule” neces- phrase “economic loss Generally, adopting the economic courts inqui- sarily implies that focus of have stated that tort re- simply loss rule analysis is the of ry type under its on covery prod- prohibited negligence or by damages aggrieved par- suffered the liability solely ucts for economic loss.36 ty. relationship the between But, Const., Alma v. Azco Inc.37 Town of damages the of and the type suffered Supreme the Colorado Court observed availability of inexact at a tort action is that a indicator more accurate of whether Examining damages the of type best. appropriate an action is in tort the may the determining assist suffered duty the which the source of tort the duty underlying source of the action claim is premised: are profits most actions lost (e.g., key determining The the availabili- of based on breaches contractual duties ty of contract lies in or involving physical in- while most actions determining duty the of source the are common juries persons based on forms the basis of the We find action. care). However, some torts law duties following the the by discussion South remedy designed pure expressly are Supreme Carolina informative: Court professional negli- (e.g., economic loss fraud, fiduciary gence, and breach thus, is question, not whether It is confu- duty). here substantial the damages physical are or economic. the sion arises from the use of term question the Rather whether rule.” “economic loss This confusion plaintiff may maintain action in an avoided, however, by maintaining can be purely tort for economic loss turns on duty the focus the source determination of source alleged to have been violated.38 duty plaintiff [the] claims defen- duty recognized, A Supreme dant owed. breach which The Colorado however, special relationships “that provisions of a con- some arises (Colo.2000). 26(a) (1997). § 35. 86 37. 10 P.3d 1256 Torts C.J.S. Olthoff,

36. Mark A. Know You Don’t Where If Alma, (quoting 10 P.3d at 1262-63 Town Going, Up You’re You’ll End Somewhere Else: Heating Tommy Plumbing Co. v. L. & Griffin Applicability Comparative Principles Fault Of Jordan, Inc., 320 S.C. Goulding, Jones & Cases, 49 DRAKE L. Purely Economic Loss added). (1995)) (emphasis 463 S.E.2d (2001) (“The loss doc- REV. 589 recovery generally provides that trine precluded when the actions harm.”). pecuniary limited to are And, their automatically trigger nature an noting after question of “[t]he independent whether a duty plaintiff of care that defendant owes a supports a injury to act to avoid is a question of tort action parties even when the court[,]”43 law to be determined entered into a contractual relation- court “expressly adopt[ed] the economic ship!;,]”39 and identified certain relation- rule[,]”44 loss and held “that a party suf- ships recognized that Colorado had as cre- fering only economic loss from the breach ie., ating independent an duty of care — of an express implied contractual duty attorney-client relationship, physician- may not assert a tort claim for such a patient relationship, a physician’s indepen- independent duty breach absent an of care dent medical a non-patient, examination of under tort I law.”45 find the Colorado and the quasi-fiduciary nature of a insurer- Supreme Court’s articulation of the eco- relationship. insured The court “also rec- nomic prior loss rule to be consistent "with ognized that certain common law claims Kentucky decisions of appellate sound tort and expressly are de- courts,46 I adopt and would therefore it as signed remedy economic loss exist jurisdiction. economic loss rule in this independent of a breach of contract adoption today With Court’s of Re- claim[,]”40 gave examples as common (Second) statement of Torts law fraud negligent misrepresenta- independent have created the tort action of tion.41 The Supreme Colorado Court con- negligent misrepresentation, which is not cluded its prefatory by stating: comments by barred the economic loss rule. Because In these ordinary negligence situations where we have rec- EH’s claim for eco- ognized resulting nomic loss from duty the existence of a Presnell’s al- indepen- leged negligent supervision of Project any dent of obligations, contractual duty independent does not articulate a economic loss application rule has no duties, however, Presnell’s contractual I plaintiff’s and does not bar a tort claim would hold it is by barred the economic because the claim is a recog- based on loss rule. independent duty nized of care and thus fall scope

does not within the of the reasons, foregoing For the I too would rule.42 affirm the Court of and vacate the Id. at 1263. 44. Id. 40. Id. Tasulis, 45. Id. Accord Hermansen v. 48 P.3d (Utah 2002) (expressly adopting 41. The court cited to Keller v. A.O. Smith quoting Supreme Court of Colorado’s in- Prods., Inc., (Colo. Harvestore 819 P.2d rule, terpretation Supreme 1991) Court of negligent misrepresen- as a case where "Therefore, inquiry Utah stated: the initial princi- tation was a tort claim "not based on ples obligation princi- of contractual but on cases where the line between contract and ples duty and reasonable conduct.” Town indepen- tort blurs is whether a exists Alma, important 10 P.3d at 1263. It is obligations dent of an contractual between note, however, negligent misrepre- that the parties. independent duty When an ex- claim in Keller sentation was based al- ists, the economic loss rule does not bar leged representation made the defendant recog- claim 'because the claim based on a prior to the execution of the contract. independent duly nized of care and thus does ’). scope not fall within the of the rule.” Alma, 42. Town 10 P.3d at 1263. 111(A). supra Id. at 1264. 46. See discussion Part summary dismissing judgment trial court’s

the complaint.

GRAVES, J., joins concurring

opinion.

Spencer BAUCOM, Jr., Appellant, A. Palombi, Assistant Public Anthony John Advocate, Frankfort, Appel- Counsel for Kentucky, lant.

COMMONWEALTH Appellee. Stumbo, Attorney D. Gregory General of Tarter, Kentucky, R. Assistant Attor- John No. 2002-SC-1050-MR. General, Frankfort, ney for Ap- Counsel Supreme Kentucky. Court of pellee. May Opinion the Court Justice

WINTERSHEIMER. judgment appeal

This based jury verdict that convicted Baucom of second-degree escape, theft unlawful over three dollars be- taking hundred ing first-degree persistent felony offend- twenty a total of er. He was sentenced to years prison. presented are whether questions

The “hybrid right Baucom was denied his representation” and enti- whether he was tled a “no inference” instruction adverse penalty phase. during the serving Baucom was time previous at felony conviction the Warren County Regional Detention Center. While program on a the Humane work release unlawfully the work Society, Baucom left site, pickup allegedly organization’s captured three months la- truck. He was Nashville, pickup ter in Tennessee. At that state. truck was also recovered se, he left trial, Baucom, pro admitted

Case Details

Case Name: Presnell Construction Managers, Inc. v. EH Construction, LLC

Court Name: Kentucky Supreme Court

Date Published: May 20, 2004

Citation: 134 S.W.3d 575

Docket Number: 2000-SC-0571-DG

Court Abbreviation: Ky.