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September 3rd, 2018
architects and engineers
INDIANA FEDERAL DISTRICT COURT CLARIFIES THE REQUIREMENTS FOR APPLICATION OF ECONOMIC LOSS DOCTRINE

In City of Whiting, Indiana v. Whitney, Bailey, Cox, & Magnani, LLC, 2018 WL 1400890 (U.S. Dist. Ct., N.D. Ind. March 20, 2018), the United States District Court for the Northern District of Indiana held that an owner’s tort claim for damage caused by the failure of a retaining wall designed by a subconsulting engineering firm was barred because all claimed damages were to the overall project and therefore barred by Indiana’s economic loss doctrine.

The City of Whiting (“the City”) redeveloped a portion of its waterfront property along Lake Michigan, called the Whiting Lakefront Park Project. The City hired American Structurepoint, Inc. (“ASI”) to serve as the Engineer of Record for the Project. In 2010, ASI subcontracted the marine engineering services to Whitney, Bailey, Cox & Magnani, LLC (“WBCM”). WBCM designed a retaining wall to protect the shoreline. The wall subsequently failed and caused damage to the Project.

The City sued WBCM for negligence. WBCM filed a Motion for Summary Judgment, arguing the economic loss doctrine barred the City’s claim. Indiana Courts previously held tort claims related to construction are subject to the state’s economic loss doctrine. The economic loss rule in Indiana provides that a defendant not in privity of contract is not liable under a tort theory for purely economic losses caused by its negligence, including, in the case of a defective product or damage to the product itself. A defendant can be liable in tort for a plaintiff's losses, however, if the damage is to property other than the product itself. WBCM argued the damage was to the Project and therefore the only loss was to the “product” itself. The City argued its claim was not barred because only the wall constituted the product, not the Project as a whole.

The Indiana Supreme Court previously addressed what constitutes a “product” in construction cases and held the term “product” generally includes the entire construction project, not just the portion of the project constructed by the defendant. Indianapolis-Marion Cty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 727 (Ind. 2010). The City agreed with WBCM’s argument that the economic loss doctrine applied, but re-addressed the question of what constitutes the product versus “other property.” The City recognized previous cases defined the product as the entire project, but argued those cases could be distinguished because they addressed construction of a single structure, not a large multi-structure facility as in this case. The Court disagreed, noting the defining character of a product was the nature of what was purchased, not the size. The Court noted the wall was an “integral part” of the overall project and therefore the entire project should be treated as a single product.

While comparison of construction projects to defective products can be difficult at times, as this Court recognized, this case upholds the idea that a project should be treated as a single product, not a collection of separate properties. Design and construction entities not in direct contractual privity with the owner should begin their evaluation of any damage claim by analyzing the potential impact of the jurisdiction’s version of the economic loss doctrine.
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