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Court rejects economic loss rule in condo development case

By Jeffrey T. Yick, Esq. Zetlin & DeChiara

The Massachusetts Appeals Court recently issued a decision essentially nullifying the economic loss rule in claims by condominium associations against condominium developers, despite well-settled precedent that the economic loss rule applies to such claims.

(See Wyman v. Ayer Properties, LLC, 83 Mass. App. Ct. 21 (Dec. 12, 2012).

The economic loss rule bars tort claims, such as negligence claims, for purely economic losses, such as the cost to repair a defective product when the defective product does not cause any damage to property other than itself.

The Wyman case involved claims by a condominium association against the condominium developer for various construction defects, including with respect to windows, the exterior brick masonry façade, and the roof.

After a trial, the trial court applied the economic loss rule and dismissed the association’s negligence claim with respect to the exterior brick masonry façade since the only damages claimed by the association with respect to the masonry was the damage to the masonry itself.

The trial court permitted the association’s negligence claim with respect to the windows and roof because it found that the defects to the windows and roof resulted in leaks which caused damage to other property, such as damage to window bodies, sashes, and panes inside individual units and insulation under the roof.

Both parties appealed. The association argued on appeal, among other things, that the trial court improperly applied the economic loss rule in dismissing the masonry claim.

The developer argued on appeal that the trial court improperly applied the economic loss rule in declining to dismiss the windows and roof claim based on the integrated products concept.

The integrated products concept is that an entire building is a single integrated product, and therefore, a claim for damage caused by one part of the building to another part is merely a claim for damage to the product itself and precluded by the economic loss rule.

The Appeals Court recognized that the integrated products concept is an unsettled area of law in Massachusetts, but rather than render a decision on the applicability of this concept, it simply held that the economic loss rule as a whole does not apply in the context of a condominium project when the condominium association would otherwise lack a remedy and the damages are reasonably determinable.

The Appeals Court held that since a condominium association does not have a contract with the condominium developer, and hence no ability to assert a contract claim, it should be permitted to assert a tort claim, since otherwise, it will have no remedy for construction defects1. The Appeals Court issued this decision in the face of two decisions from the Supreme Judicial Court of Massachusetts explicitly holding that the economic loss rule applies to tort claims arising from condominium construction.  (See Berish v. Bornstein, 437 Mass. 252 (2002) and Aldrich v. ADD Inc., 437 Mass. 213 (2002).

Curiously, the Appeals Court acknowledged the Supreme Judicial Court’s holdings in Berish and Aldrich and even quoted from those decisions.

It remains to be seen whether the Supreme Judicial Court will review the Wyman decision, and if so, how it will rule on it.

It is also unclear how the Wyman decision affects the economic loss rule as applied to contractors and design professionals on condominium projects, since the Wyman case only involved claims against the condominium developer.

This memorandum briefly describes generally the economic loss rule. It is for information purposes only and should not be construed as legal advice applicable to specific facts or circumstances.

* The association also asserted fiduciary duty, implied warranty, and statutory claims, but the trial court dismissed those claims as not applicable to this case on other grounds. The association did not appeal the dismissal of those claims.

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