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Close Quarters

Limiting a Tortfeasor’s Exposure to Third Parties with Economic Loss Doctrine and Espinal

May 21, 2020 Photo

In densely populated areas such as New York City, construction projects often take place close to a neighboring property, and sometimes access to another’s property is required. Access and license agreements are frequently—but not always—entered into between adjacent property owners/lessees to mitigate and transfer risk.

Even when these agreements are in effect, there is no shortage of litigation arising out of damages caused by construction activity in these scenarios. Moreover, contractors and subcontractors often are not parties to these agreements.

A petitioner seeking access to another’s real property can evoke New York’s Real Property Actions & Proceedings Law (RPA) § 881 to gain access from recalcitrant owners who unreasonably withhold consent. Yet, RPA § 881 only provides a limited and discretionary framework for addressing potential future damages that may be incurred by a neighbor stemming from construction activity near or on their property.

Hence, tortfeasors such as building owners, developers, and contractors often defend claims for a variety of damages brought under negligence theories after the damage occurs with no direct statutory guidance for who is responsible and what is compensable.

Any practitioner defending a tortfeasor in New York under this type of scenario would be prudent to consider both the economic loss doctrine and the holding in Espinal v. Melville Snow Contrs., 98 NY.3d 136, 773 N.E.2d 485, 746 N.Y.S.2d 120 (2002) when representing a client. Both concepts could limit a tortfeasor’s exposure to third parties such as a neighbor.

Specifically, Espinal limits when a contractor will owe a duty to a non-contracting plaintiff such as an adjacent property owner or tenant. And even when an access agreement is in effect, the economic loss doctrine could limit the type of damages that a plaintiff recovers under a negligence theory such as lost rent, diminution of business income and fees for professionals hired to assess damage. The interplay between these two recognized concepts can shed light on whether a negligence cause of action is viable or if the plaintiff will need to rely on other counts to recover.

The Espinal Holding

The Espinal decision is one of the most frequently cited cases when a contractor is sued for negligence and there is no contract between the plaintiff and the alleged tortfeasor contractor. The court in Espinal held that a contractor cannot be found to have a duty to the plaintiff unless one of three exceptions applies:

  • Where the contracting party, in failing to exercise reasonable care in the performance of its duties, launches a force or instrument of harm.
  • Where the plaintiff detrimentally relies on the continued performance of the contacting party’s duties.
  • Where the contracting party has entirely displaced the other party’s duty to maintain the premises safely.

Courts in New York have wrestled with a diverse set of fact patterns when determining if the aforementioned exceptions apply. Yet, the case law suggests that a landowner’s potential exposure, unlike a contractor’s, should not be evaluated under an Espinal analysis but defined by a different standard.

Namely, a landowner who engages in activities that may cause injury to adjoining premises owes a duty to take reasonable precautions to avoid injury, as outlined, for example, in 905 5th Ave. Assoc, Inc. v. Weintraub, 85 A.D.3d 667 (1st Dept. 2011). Still, the duty of a landowner is not limitless. Courts, for instance, have held that a landowner owes no duty to protect an entire neighborhood against purely economic damages, such as in 532 Madison Avenue Gourmet Foods, Inc. v. Finlandia Ctr. Inc., 96 N.Y.2d 280 (2001).

The Economic Loss Doctrine

In essence, the economic loss doctrine holds that, absent personal injury or property damage, a plaintiff cannot recover for pure economic loss under a theory of negligence. While the doctrine is used predominantly in product-liability cases, courts have dismissed negligence claims for pure economic loss arising out of construction activities where there was no accompanying personal injury or property damage.

For illustrative purposes, if a store’s sole damages were declining sales due to construction activity performed by an adjacent property owner, this type of damage may not be recoverable against the owner-defendant under a negligence theory alone, as loss of revenue is likely to be found to be a pure economic loss. However, if there is a question of whether other defendants, such as contractors or design professionals, are responsible for the alleged economic loss, then it must be considered in the context of Espinal.

The economic loss doctrine often will not apply in cases that involve personal injury or property damage in addition to economic loss. Further, the economic loss defense may not apply in instances of gross negligence or when damage is caused by disastrous events such as an explosion.

When considering a motion for summary judgment to dismiss negligence claims solely for economic damages, courts also will evaluate whether a contractor owes a separate duty that would support an action for negligence. A separate duty could be one of the three exceptions outlined above in the Espinal decision. Therefore, the case law suggests that a contractor defendant who “launched an instrument of harm” could be liable for economic damages even in the absence of personal injury or property damage.

Overall, there is no hard-and-fast rule establishing what types of damages are recoverable under a negligence theory when a construction project causes damages to a neighbor. Similarly, there is no defined class of defendants that owes a duty under a negligence theory to a neighbor damaged by nearby construction.

Plaintiffs rarely rely solely on breach of contract or nuisance claims when bringing a construction lawsuit. Instead, negligence claims are usually asserted, too. Hence, practitioners representing owners, contractors, developers, and other construction professionals would be wise to consider the implications and limitations of Espinal and the economic loss doctrine when evaluating negligence claims.

About The Authors
John P. Kelly

John P. Kelly is a partner in the New York office of Wilson Elser Moskowitz Edelman & Dicker LLP.  John.p.kelly@wilsonelser.com

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