By the Court,
The United States District Court for the District of Nevada has certified, under NRAP 5, the following questions to this court. Does the economic loss doctrine apply to contractors who solely provide services in construction defect cases? Does the economic loss doctrine apply in construction defect cases to design professionals, such as engineers and architects, who solely provide services, regardless of whether the services are rendered before or during construction? Although we accept the federal court’s referral, we do so by reframing its two questions as one in order to address precisely the particular negligence claim and factual scenario that led to the certification order and to avoid any overly broad conclusions about claims against “contractors,” a term that the federal district court did not define in its certification order. Thus, we answer the following question. Does the economic loss doctrine apply to preclude negligence-based claims against design professionals, such as engineers and architects, who provide services in the commercial property development or improvement process, when the plaintiffs seek to recover purely economic losses?
The answer to the question is yes. “Purely economic loss” has been defined as “ ‘the loss of the benefit of the user’s bargain . . . including . . . pecuniary damage for inadequate value, the cost of repair and replacement of [a] defective product, or consequent loss of profits, without any claim of personal injury or damage to other property.’ ”
Calloway v. City of Reno,
PROCEDURAL HISTORY AND FACTS
This matter arises from a removed diversity case in which a property owner brought a breach of contract and professional negligence action against certain design professionals (engineering and architectural firms). The property owner alleged that the design professionals provided negligent design advice
Respondents Mandalay Resort Group, Mandalay Development, and Mandalay Corporation (collectively, Mandalay) managed the construction of the approximately $1 billion Mandalay Resort and Casino (the resort) in Las Vegas. To complete the resort, Mandalay hired various subcontractors, including appellants Terracon Con sultants Western, Inc., Terracon, Inc. (collectively, Terracon), Lochsa, LLC, and Klai-Juba Architects, Ltd. Mandalay entered into a written contract with Terracon, under which Terracon agreed to provide geotechnical engineering advice about the subsurface soil conditions and recommended a foundation design for the property. The parties do not dispute that Terracon’s work was limited to providing professional engineering advice and that Terracon was not involved in physically constructing the property. Although Mandalay did not have written agreements with Klai-Juba or Lochsa, those firms, apparently acting in accordance with an oral arrangement with Mandalay, provided architectural and engineering services, respectively, by designing parts of the resort’s structure. As with Terracon, Klai-Juba and Lochsa played no role in the resort’s physical construction.
In accordance with the written contract’s terms, Terracon prepared a geotechnical report with its foundation design recommendations, which Mandalay implemented as it began erecting the resort. Based upon Terracon’s soil analysis and the anticipated weight of the building, Terracon predicted a certain amount of settling underneath the foundation. According to Mandalay’s complaint, however, the ultimate amount of settling exceeded Terracon’s projections. Because Clark County believed that the settling presented a potential danger to the resort’s structural integrity, the county required Mandalay to repair and reinforce the foundation before proceeding with the construction. Consequently, Mandalay sued Terracon for damages in state court, alleging that the deficient engineering advice caused the resort’s foundation problems. 1 Mandalay’s theories of recovery included breach of contract, breach of the covenant of good faith and fair dealing, and professional negligence.
Terracon removed the matter to the United States District Court for the District of Nevada and, thereafter, moved for partial summary judgment on Mandalay’s professional negligence claim, arguing that the claim was barred under the economic loss doctrine. Mandalay opposed the motion, arguing, among other things, that as a matter of law the economic loss doctrine did not apply to negligence claims against design professionals or contractors who solely provide services.
Terracon also filed a third-party complaint against, among others, Lochsa and Klai-Juba for negligence, contribution, and equitable indemnity. Terracon argued that if the economic loss doctrine did not bar Mandalay’s negligence claim, then the doctrine likewise would not bar its claims against Lochsa and Klai-Juba. In response, Lochsa and Klai-Juba argued that the economic loss doctrine applied and moved the federal court to dismiss Terracon’s third-party complaint on that basis.
The U.S. District Court denied without prejudice the motion for partial summary judgment and the motion to dismiss the third-party complaint, after determining that Nevada law was unclear on whether the economic loss doctrine applied to bar a claim grounded on allegations that design professionals negligently rendered services when the plaintiffs sought to recover purely economic losses.
2
The federal court thus asked
Acknowledging that our caselaw addressing this doctrine contains nuanced ambiguities, we accept the federal court’s referral. We re-frame the questions presented therein, however, to answer directly whether the economic loss doctrine bars professional negligence claims against design professionals who provide only their services in the commercial property development or improvement process, when the plaintiffs are seeking to recover purely economic losses. In doing so, we point out that this opinion has no bearing on NRS Chapter 40’s provisions governing actions brought based on construction defects in newly constructed residential property. 3 Appellants and respondents have briefed the issue, as directed, and we permitted certain professional organizations to file a brief as amici curiae. 4
DISCUSSION
NRAP 5
This court has discretion in determining whether to accept and answer a question certified by a federal court. NRAP 5;
Volvo Cars of North America v. Ricci,
As noted, the federal district court certified two questions. The first question asked whether the economic loss doctrine precluded tort claims brought against contractors who solely provide services. As the defendants here were design professionals, namely engineers and architects, any issue concerning contractors would not fit within the scope of the unresolved legal issue raised in the parties’ pleadings. The second question asked whether the economic loss doctrine precluded tort claims against design professionals. That question, however, did not address the commercial aspect of the project, and thus, it was too broad. Consequently, we have reframed the federal court’s two questions as one question. In so doing, we point out that, in exercising our discretion to answer certified questions, we nevertheless must constrain ourselves to resolving legal issues presented in the parties’ pleadings. In that regard, we avoid answering academic or abstract matters that a certifying court may have included in posing its questions to this court. In restating the federal court’s questions into one more precise question, it now fits within the three criteria outlined in Volvo Cars. Id. Accordingly, we answer it.
The economic loss doctrine
The economic loss doctrine is a judicially created rule that primarily emanates from
As indicated, for purposes of the certified question, the U.S. District Court has determined that any losses that Mandalay suffered were purely economic.
5
Thus, while we typically begin analyzing economic loss doctrine matters by ascertaining whether the damages are purely economic in nature,
Arco Prods. Co. v. May,
Our answer begins with a discussion of the economic loss doctrine’s purpose, and then we discuss the policy behind the doctrine. Next, we discuss the recognized exceptions to the economic loss doctrine. Finally, we apply our interpretation of the doctrine to the current case.
The economic loss doctrine’s purpose
The seminal Nevada decision concerning the economic loss doctrine is
Stern,
[W]e believe the tests that have been developed to determine who should recover for negligent interference with contract or prospective economic advantage are presently inadequate to guide trial courts to consistent, predictable, and fair results. The foreseeability of economic loss, even when modified by other factors, is a standard that sweeps too broadly in a professional or commercial context, portending liability that is socially harmful in its potential scope and uncertainty. We therefore decline to adopt the minority view allowing such recovery.
Id. Thus, we focused on crafting a predictable, fair articulation of the economic loss doctrine.
With that focus in mind, we reasoned that allowing the plaintiffs to sue under a negligence theory for purely economic losses, without accompanying personal injury or property damage, would have defeated the primary purpose of the economic loss doctrine: “to shield a defendant from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial
While the doctrine generally provides that purely economic losses are not recoverable in tort absent personal injury or property damage, courts have made exceptions to allow such recovery in certain categories of cases, such as negligent misrepresentation and professional negligence actions against attorneys, accountants, real estate professionals, and insurance brokers.
See, e.g., Goodrich & Pennington v. J.R. Woolard,
Policy considerations underlying the economic loss doctrine
The economic loss doctrine draws a legal line between contract and tort liability that forbids tort compensation for “certain types of foreseeable, negligently caused, financial injury.”
Barber Lines A/S v. M/V Donau Maru,
In addition to balancing economic activity incentives against providing compensation to negligence victims, the economic loss doctrine is driven by financial considerations. In that regard, the doctrine works to reduce the cost of tort actions, but still provides tort victims with a remedy because less expensive alternative forms of compensation, such as insurance, generally are available to a financially injured party.
See Barber Lines A/S,
Another consideration behind the economic loss doctrine is balancing the disproportion between liability and fault. Id. To that end, cutting off tort liability at the point where only economic loss is at stake without accompanying physical injury or property damage “provides . . . incentives and disincentives to engage in economic activity or to make it safer.” Id. On the other hand, imposing unbounded tort liability for pure financial harm could result in “incentives that are perverse,” such as insurance premiums that are too expensive for the average economic actor to afford. Id. For those reasons, courts have been reluctant to impose tort liability for purely financial harm. Id.
Exceptions to the economic loss doctrine
Nevertheless, as pointed out above, exceptions to the economic loss doctrine exist in broad categories of cases in which the policy concerns about administrative costs and a disproportionate balance between liability and fault are insignificant, or other countervailing considerations weigh in favor of liability. For example, negligent misrepresentation is a special financial harm claim for which tort recovery is permitted because without such liability the law would not exert significant financial pressures to avoid such negligence. Id. at 56. An exception also has been created for commercial fishermen, who generally are permitted to sue for economic losses as “favorites of admiralty” law. Id.
With regard to the particular type of claim at issue here, those jurisdictions that have made exceptions to the economic loss doctrine to permit tort-based claims against design professionals when only economic loss is at issue, reason that the economic loss doctrine does not apply to bar tort claims grounded on negligently rendered services.
See,
e.g.,
McCarthy Well Co.
v.
St. Peter Creamery,
The economic loss doctrine applies to preclude Mandalay’s professional negligence claim
Guided by the doctrine’s purpose — “to shield [defendants] from unlimited liability for all of the economic consequences of a negligent act, particularly in a commercial or professional setting, and thus to keep the risk of liability reasonably calculable,”
Local Joint. Exec. Bd. v. Stern,
In the context of engineers and architects, the bar created by the economic loss doctrine applies to commercial activity for which contract law is better suited to resolve professional negligence claims. This legal line between contract and tort liability promotes useful commercial economic activity, while still allowing tort recovery when personal injury or property damage are present. Further, as in this case, contracting parties often address the issue of economic losses in contract provisions.
Based on the same policy considerations that guide our decision here, other jurisdictions have reached the same conclusion.
See, e.g., Holden Farms, Inc.
v.
Hog Slat Inc.,
We perceive no significant policy distinction that would drive us to permit tort-based claims to recover economic losses against design professionals, such as architects and engineers, who provided their professional services in the commercial property development and improvement process, when we have concluded that such claims are barred under the economic loss doctrine if brought against contractors and subcontractors involved in physically constructing improvements to real property.
See Calloway v. City of Reno,
116 Nev.
250,
While the loss alleged here arguably was foreseeable, we do not read the rule as necessarily being dependent on foreseeability notions.
See Barber Lines A/S v. M/V Donau Maru,
In this case, for purposes of the certified question, Mandalay suffered only economic loss without any attendant personal injury or property damage, and therefore, the economic loss doctrine bars Mandalay from proceeding with their negligence-based claims against Terracon. Thus, adhering to our general policy of applying the economic loss doctrine in a predictable and fair way, we answer the federal court’s question affirmatively.
CONCLUSION
We conclude that, in a commercial property construction defect action in which the plaintiffs seek to recover purely economic losses through negligence-based claims, the economic loss doctrine applies to bar such claims against design professionals who have provided professional services in the commercial property development or improvement process. Accordingly, we answer the U.S. District Court’s certified question in the affirmative.
Notes
Although, according to Mandalay’s complaint, Terracon’s negligence also caused property damage to the resort structure itself, we do not address that aspect of Mandalay’s claim because the U.S. District Court asked this court only whether tort recovery is permitted assuming the losses are purely economic.
The U.S. District Court, in presenting the certified questions, pointed out that this court’s jurisprudence suggests that the economic loss doctrine might not extend to preclude tort-based claims against design professionals even when the plaintiffs are seeking to recover only financial losses.
See Calloway v. City of Reno,
In
Olson,
The amici curiae brief was submitted on behalf of the American Institute of Architects (ALA), ALA Nevada; AIA Las Vegas; the American Council of Engineering Companies; the American Council of Engineering Companies of Nevada; the Design Professionals Coalition of the American Council of Engineering Companies; the National Society of Professional Engineers; the Nevada Society of Professional Engineers; ASFE/The Best People on Earth; the American Society of Civil Engineers; and the Nevada Section of the American Society of Civil Engineers.
This opinion is not intended to address any property damage-based claims Mandalay may have raised in the district court, as such claims are beyond the scope of the question addressed here.
The full statement of the economic loss doctrine’s scope in
Stem
provided that “absent privity of contract or an injury to person or property, a plaintiff may not recover in negligence for economic loss.”
Stern
also addressed the plaintiffs’ strict products liability theory of recovery, explaining that it had been widely held that recovery under such a theory was unavailable for purely economic losses.
Subsequently, we addressed whether a residential property owner could assert a negligence claim in a construction defect action brought under NRS Chapter 40 when purely economic losses were at stake and determined that, notwithstanding our decision in
Calloway,
such a claim could be maintained if initiated under NRS 40.640.
See Olson
v.
Richard,
We again point out that
Calloway
was not decided in the context of NRS Chapter 40, as the underlying action was initiated before the effective date of the pertinent portions of that chapter, and, at any rate, the discrepancies between
Calloway
and NRS Chapter 40 were resolved in
Olson v. Richard,
In
Calloway,
we cited with approval
Casa Clara
v.
Charley Toppino and Sons,