Crescent Univ. City Venture, LLC v. Ap Atl., Inc.

2019 NCBC 48

Opinion

Crescent Univ. City Venture, LLC v. AP Atl., Inc., 2019 NCBC 48.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION MECKLENBURG COUNTY 15 CVS 14745 (Master File)

CRESCENT UNIVERSITY CITY VENTURE, LLC,

Plaintiff,

v.

AP ATLANTIC, INC. d/b/a ADOLFSON & PETERSON CONSTRUCTION,

Defendant,

v.

MADISON CONSTRUCTION GROUP, INC.; TRUSSWAY MANUFACTURING, INC.; T. A. KAISER HEATING & AIR, INC.; ORDER AND OPINION ON MOTIONS SEARS CONTRACT, INC.; MACEDO FOR SUMMARY JUDGMENT CONTRACTING CO.; WHALEYS DRYWALL, LLC; STALLINGS (18 CVS 1642) DRYWALL, LLC; MAYNOR PI, INC.; MATUTE DRYWALL, INC.; INTERIOR DISTRIBUTORS, A DIVISION OF ALLIED BUILDING PRODUCTS, CORP.; MANUEL BUILDING CONTRACTORS, LLC; EAGLES FRAMING COMPANY, INC.; DIAZ CARPENTRY, INC.; SOCORRO CASTILLE MONTLE; and GUERRERO CONSTRUCTION PRO, INC.

Third-Party Defendants. MADISON CONSTRUCTION GROUP, INC.,

Third-Party Plaintiff,

v.

MANUEL BUILDING CONTRACTORS, LLC,

Fourth-Party Defendant.

CRESCENT UNIVERSITY CITY 16 CVS 14844 (Related Case) VENTURE, LLC,

Plaintiff,

v.

ADOLFSON & PETERSON, INC.,

Defendant.

CRESCENT UNIVERSITY CITY 18 CVS 1642 (Related Case) VENTURE, LLC,

Plaintiff,

v.

TRUSSWAY MANUFACTURING, INC.; and TRUSSWAY MANUFACTURING, LLC,

Defendants.

1. THIS MATTER is before the Court upon motions titled (i) Defendant

Trussway Manufacturing, LLC’s (“Trussway”) Motion for Summary Judgment as to

Crescent’s Negligence Claim (“Trussway’s Motion”); (ii) Third-Party Defendant Madison Construction Group, Inc.’s (“Madison”) Motion for Summary Judgment in

18-CVS-1642 (“Madison’s Motion”); (iii) Third-Party Defendant Sears Contract, Inc.’s

(“Sears”) Motion for Summary Judgment (“Sears’ Motion”); and (iv) Third-Party

Defendant T.A. Kaiser Heating & Air, Inc.’s (“T.A. Kaiser”) Motion for Summary

Judgment as to Trussway Manufacturing Inc.’s Claims in 18-CVS-1642 (“T.A.

Kaiser’s Motion”) (collectively, with one or more of the other summary judgment

motions, the “Motions for Summary Judgment”) in the above-captioned case.

2. For the reasons stated herein, the Court GRANTS Trussway’s Motion and

DENIES the remaining motions as moot.

Troutman Sanders LLP, by Kiran H. Mehta, for Plaintiff Crescent University City Venture, LLC.

Fox Rothschild LLP, by Jeffrey P. MacHarg, and Pagel, Davis & Hill, P.C., by Martyn B. Hill and Kent J. Pagel, for Defendant Trussway Manufacturing, LLC f/k/a Trussway Manufacturing, Inc.

Baucom, Claytor, Benton, Morgan & Wood, P.A., by Brian E. Wolfe and Robert C. Gunst, Jr., for Third-Party Defendant Madison Construction Group, Inc.

Goodman McGuffey LLP, by W. James Flynn, for Third-Party Defendant T.A. Kaiser Heating & Air, Inc.

Hedrick Gardner Kincheloe & Garofalo LLP, by David L. Levy and Adam R. DeNobriga, for Third-Party Defendant Sears Contract, Inc.

Bledsoe, Chief Judge.

I.

BACKGROUND

3. The question posed to the Court in this case is whether, under North

Carolina law, a commercial property owner who contracts for the construction of a building, and thereby possesses a bargained-for means of recovery against a general

contractor, may nevertheless seek to recover in tort for its economic loss from a

subcontracted manufacturer of building materials with whom the property owner

does not have contractual privity. Because North Carolina’s economic loss rule

requires negligence claims to be based upon the violation of an extra-contractual duty

imposed by operation of law, and simultaneously recognizes that parties generally do

not owe each other a duty of care to prevent economic loss, the Court concludes that

the answer to this question is no.

A. Factual Background

4. The Court does not make findings of fact when ruling on motions for

summary judgment, but “it is helpful to the parties and the courts for the trial judge

to articulate a summary of the material facts which he considers are not at issue[.]”

Hyde Ins. Agency, Inc. v. Dixie Leasing Corp., 26 N.C. App. 138, 142, 215 S.E.2d 162,

165 (1975).

5. This case arises from the construction of a multi-building apartment

complex (the “Project”) near the University of North Carolina at Charlotte (“UNC

Charlotte”) and a dispute over alleged floor truss defects that developed shortly after

the Project’s completion. Plaintiff Crescent University City Venture, LLC

(“Crescent”) was the owner and developer of the Project. (Crescent Univ. City

Venture, LLC’s Resp. Opp’n Trussway’s Mot. Summ. J. Crescent’s Negligence Claim

1 [hereinafter “Crescent’s Opp’n Br.”], ECF No. 555; Trussway Mfg., LLC’s Br. Supp.

Mot. Summ. J. Crescent’s Negligence Claim Ex. I, at 1 [hereinafter “General Conditions”], ECF No. 549.9.) Trussway was the manufacturer who supplied trusses

for the Project’s construction. (Trussway Mfg., LLC’s Br. Supp. Mot. Summ. J.

Crescent’s Negligence Claim 6 [hereinafter “Trussway’s Br. Supp.”], ECF No. 548;

Trussway’s Br. Supp. Ex. G, at 1 [hereinafter “Purchase Order”], ECF No. 549.7.)

6. In 2012, Crescent entered into a contract with general contractor AP

Atlantic, Inc. d/b/a Adolfson & Peterson Construction (“AP Atlantic”) whereby AP

Atlantic agreed to construct an apartment complex on Crescent’s property located

near UNC Charlotte. (See generally General Conditions; Trussway’s Br. Supp. Ex. J

[hereinafter “Standard Form Agreement”], ECF No. 549.10.) AP Atlantic then

entered agreements with several subcontractors to facilitate the construction of the

Project. These included (i) Madison, the subcontractor responsible for providing and

installing wood framing, including floor trusses, at the Project, (see generally

Trussway’s Br. Supp. Ex. K, ECF No. 549.11); (ii) Sears, the Project’s drywall

subcontractor, (see generally Sears Contract, Inc.’s Mot. Summ. J. Ex. B, ECF No.

301.2); and (iii) T.A. Kaiser, the subcontractor that furnished the materials,

equipment, and labor necessary to install the Project’s HVAC systems, (see generally

Br. AP Atl., Inc. and Adolfson & Peterson, Inc. Opp’n T.A. Kaiser Heating & Air, Inc.’s

Mot. Summ. J. Ex. A, ECF No. 373).

7. To fulfill its duty to procure trusses for the Project, Madison executed a

signed purchase order with Trussway (the “Purchase Order”). (Purchase Order 1.)

The Purchase Order contained the specifications, quantity, and pricing for the floor

and roof trusses Trussway would provide and set forth further terms applicable to the sale of the trusses, including an express warranty. (Purchase Order 1–2.)

Trussway contends that this warranty extends to Crescent, (Trussway’s Br. Supp.

18), while Crescent contends that it does not, (Crescent’s Opp’n Br. 10).

8. After the Project was completed, the floors in two of its apartments began

sagging. Inspections revealed that the floor trusses underneath these apartments

were defective. (Br. AP Atl., Inc. and Adolfson & Peterson, Inc. Supp. Mot. Summ. J.

Ex. D, at 108:14–21, ECF No. 323.4.) Crescent hired an engineering firm, Simpson

Gumpertz & Heger, Inc. (“SGH”), to conduct an investigation. After examining the

apartments with noticeable defects and a wider sample of other apartments, SGH

informed Crescent that it believed the floor truss defects were systemic and pervasive

throughout the Project. (Crescent Univ. City Venture, LLC’s Resp. Opp’n AP Atl.,

Inc. and Adolfson & Peterson Constr., Inc.’s Mot. Summ. J. Ex. E ¶ 14, ECF No.

414.6.)

9. Crescent and AP Atlantic had a series of discussions about possible work to

remedy the Project’s truss problems, but Crescent ultimately enlisted Summit

Contracting Group, Inc., another contractor, to perform the Project-wide repair work

Crescent requested. (Crescent Univ. City Venture, LLC’s Resp. Opp’n AP Atlantic,

Inc. and Adolfson & Peterson Constr., Inc.’s Mot. Summ. J. Ex. D ¶ 17, ECF No.

414.5.) The parties to these consolidated proceedings dispute whether Crescent’s

requested timeframe for remedial work was reasonable and whether the repair plan

Crescent developed with SGH was appropriate. B. Procedural History

10. AP Atlantic initiated litigation against Crescent on August 5, 2015 to

recover allegedly outstanding payments due from Crescent. (Compl. ¶ 23, ECF No.

1.) Crescent asserted a counterclaim against AP Atlantic for breach of contract on

multiple grounds, including the Project’s floor truss defects. (Def. Crescent Univ. City

Venture, LLC’s Answer & Countercl. Am. Compl. 38, 43–57, ECF No. 19.) The Court

refers to this original lawsuit, which bears the Mecklenburg County civil case number

15 CVS 14745, as the “Lead Action.”

11. On April 14, 2016, the Chief Justice of the Supreme Court of North Carolina

designated the Lead Action as a complex business case in accordance with Rules 2.1

and 2.2 of the General Rules of Practice for the Superior and District Courts and

assigned the case to the undersigned.

12. On August 19, 2016, Crescent began a separate Mecklenburg County action

(16 CVS 14844) (the “Crescent Action”) against AP Atlantic’s parent entity, Adolfson

& Peterson Construction, Inc. (“A&P”) (collectively, with AP Atlantic, the “AP

Parties”), to enforce a performance guaranty A&P executed in connection with AP

Atlantic’s work on the Project. The Crescent Action was designated as a mandatory

complex business case under N.C.G.S. § 7A-45.4(b) and assigned to the undersigned.

On October 10, 2016, the Court consolidated the Crescent Action with the Lead

Action. (Order Mot. Consolidate ¶ 7, ECF No. 98.)

13. By late 2017, following multiple rounds of pleadings, several settlement

agreements, voluntary dismissals, and a lengthy discovery process, Crescent and the AP Parties had resolved all of their claims against each other except for Crescent’s

claims against the AP Parties related to the Project’s truss defects. The AP Parties,

in turn, maintained derivative third-party claims against multiple first- and lower-

tier subcontractors, including Trussway, Madison, Sears, and T.A. Kaiser, asserting

that, to the extent the AP Parties were liable to Crescent, that liability was the result

of the first- and lower-tier subcontractors’ breaches of contract or negligence. In

response to this procedural posture, Crescent moved the Court to realign the parties

to the case with Crescent as the Plaintiff, AP Atlantic and A&P as Defendants, and

the remaining subcontractors as third-party or fourth-party defendants. All parties

appearing in the consolidated proceedings consented. As a result, on December 11,

2017, the Court granted Crescent’s motion and realigned the parties in accordance

with Crescent’s request. (Order Consent Mot. Realign Parties 5, ECF No. 284.)

14. The parties in the Lead and Crescent Actions filed summary judgment

motions on February 12, 2018, the court-ordered deadline for such motions. That

same day, Crescent filed a Complaint commencing a new Mecklenburg County Action

against Trussway (18 CVS 1642) (the “Trussway Action”), in which Crescent asserted

a single claim for negligence. (Compl. 1 [hereinafter “Trussway Action Compl.”], ECF

No. 3 (18 CVS 1642).) Crescent alleged that the Project’s truss defects were caused

by Trussway’s negligence in designing, fabricating, manufacturing, handling, and

storing the Project’s floor trusses. (Trussway Action Compl. ¶ 41.) Crescent further

alleged that this negligence resulted in Crescent incurring approximately $5,200,000

in costs related to the Project-wide truss repairs and approximately $2,679,592.79 in other expenses, including expenses associated with giving residents cash stipends

and offering residents temporary accommodations, transportation, and storage.

(Trussway Action Compl. ¶¶ 31–32.) Crescent also filed a motion asking the Court

to consolidate the Trussway Action with the Lead and Crescent Actions. (Mot.

Consolidate 2, ECF No. 9 (18 CVS 1642).)

15. On March 3, 2018, the Trussway Action was designated as a mandatory

complex business case under N.C.G.S. § 7A-45.4(a) and assigned to the undersigned.

Soon thereafter, Trussway filed a motion to dismiss Crescent’s negligence claim,

arguing that the claim was barred by the prior pending action (or prior action

pending) doctrine.

16. The Court held a hearing on the summary judgment motions filed in the

Lead and Crescent Actions, Trussway’s motion to dismiss the Trussway Action, and

Crescent’s motion to consolidate the Lead, Crescent, and Trussway Actions on May

30, 2018, at which all parties appearing in these consolidated proceedings were

represented by counsel. At the hearing, counsel for Trussway informed the Court

that consolidating the Trussway Action with the Lead and Crescent Actions would be

the least prejudicial option available to the Court, from Trussway’s perspective, in

the event the Court denied Trussway’s motion to dismiss the Trussway Action.

17. In an Order and Opinion dated July 16, 2018, the Court denied Trussway’s

motion to dismiss the Trussway Action and granted Crescent’s motion to consolidate.

Crescent Univ. City Venture, LLC v. Trussway Mfg., Inc., 2018 NCBC LEXIS 74, at

*12–16 (N.C. Super. Ct. July 16, 2018). The Court ordered that the Lead, Crescent, and Trussway Actions were “consolidated for all future proceedings, including but not

limited to trial,” that prior pleadings were deemed “filed in both actions,” and that all

disputed issues raised in the Trussway Action would be deemed “to be disputed issues

in the Lead Action.” Id. at *14–15.

18. In its subsequent Order and Opinion addressing supplemental discovery in

the Trussway Action, the Court further ordered that “[d]iscovery in the Lead Action

and Crescent Action [would] remain closed” and that further discovery allowed on

Crescent’s negligence claim in the Trussway Action would not be considered “part of

the record in the Lead Action or the Crescent Action for purposes of the pending

summary judgment motions in those actions.” Crescent Univ. City Venture, LLC v.

AP Atl., Inc., 2018 NCBC LEXIS 92, at *10 (N.C. Super. Ct. Aug. 29, 2018). The Court

also ordered that if it were to “eventually dismiss the Trussway Action, the discovery

ordered” in the Trussway Action would “be excluded from any trial of the remaining

consolidated actions.” Id.

19. Following consolidation, Trussway filed its Answer to Crescent’s Complaint.

In this Answer, Trussway “incorporate[d] by reference all of its defenses, cross-claims,

and third-party claims previously pleaded in [the Lead Action] as if fully set forth”

therein. (Trussway Mfg., Inc.’s Answer Crescent Univ. City Venture, LLC’s Compl.

9, ECF No. 460.)

20. On May 22, 2019, after the conclusion of discovery in the Trussway Action,

Trussway, Madison, Sears, and T.A. Kaiser filed the Motions for Summary Judgment.

The Court held a hearing on the Motions for Summary Judgment on July 25, 2019, at which all parties appearing in these consolidated proceedings were represented by

counsel.

21. The Motions for Summary Judgment are now ripe for resolution.

II.

LEGAL STANDARD

22. Under Rule 56 of the North Carolina Rules of Civil Procedure, summary

judgment is appropriate “if the pleadings, depositions, answers to interrogatories,

and admissions on file, together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that any party is entitled to . . . judgment

as a matter of law.” Craig v. New Hanover Cty. Bd. of Educ., 363 N.C. 334, 337, 678

S.E.2d 351, 353 (2009) (quoting N.C. R. Civ. P. 56(c)). A material fact is one that

“would constitute or would irrevocably establish any material element of a claim or

defense.” Abner Corp. v. City Roofing & Sheetmetal Co., 73 N.C. App. 470, 472, 326

S.E.2d 632, 633 (1985). “A ‘genuine issue’ is one that can be maintained by

substantial evidence.” Dobson v. Harris, 352 N.C. 77, 83, 530 S.E.2d 829, 835 (2000).

Substantial evidence is “such relevant evidence as a reasonable mind might accept

as adequate to support a conclusion and means more than a scintilla or a permissible

inference[.]” DeWitt v. Eveready Battery Co., 355 N.C. 672, 681, 565 S.E.2d 140, 146

(2002) (citations and internal quotation marks omitted).

23. On a motion for summary judgment, the moving party bears the burden of

showing that no genuine issues of material fact remain to be resolved. Camalier v.

Jeffries, 340 N.C. 699, 706, 460 S.E.2d 133, 136 (1995). “Evidence presented by the parties is viewed in the light most favorable to the non-movant.” Summey v. Barker,

357 N.C. 492, 496, 586 S.E.2d 247, 249 (2003). The trial court should grant summary

judgment against an adverse party’s claim only if the movant can prove “an essential

element of the opposing party’s claim does not exist, cannot be proven at trial, or

would be barred by an affirmative defense” or can show “through discovery that the

opposing party cannot produce evidence to support an essential element of [its]

claim.” Dobson, 352 N.C. at 83, 530 S.E.2d at 835. If the moving party meets its

burden, “the burden shifts to the nonmoving party to produce a forecast of evidence

demonstrating specific facts, as opposed to allegations, showing that [it] can at least

establish a prima facie case at trial.” Gaunt v. Pittaway, 139 N.C. App. 778, 784–85,

534 S.E.2d 660, 664 (2000). The responding party may not “rest upon

the . . . allegations or denials” within its pleading, but must put forward specific facts

showing there is a genuine issue for trial. N.C. R. Civ. P. 56(e).

III.

ANALYSIS

24. Trussway argues that the Court should enter summary judgment in its

favor because the economic loss rule bars Crescent’s negligence claim. Specifically,

Trussway contends that Crescent has not presented evidence showing the breach of

any duty other than the contractual duties imposed on Trussway by its Purchase

Order with Madison. Because Crescent has not alleged or forecast evidence showing

the breach of any separate or distinct extra-contractual duty imposed by law, Trussway asserts that Crescent may not maintain a negligence claim against it. After

careful consideration, the Court agrees.

25. “The economic loss rule addresses the intersection between contract

remedies (including warranty remedies) and tort remedies.” Kelly v. Georgia-Pacific

LLC, 671 F. Supp. 2d 785, 791 (E.D.N.C. 2009). More a recognition of “the

fundamental difference[s] between tort and contract claims,” Legacy Data Access, Inc.

v. Cadrillon, LLC, 889 F.3d 158, 164 (4th Cir. 2018) (quoting Broussard v. Meineke

Disc. Muffler Shops, Inc., 155 F.3d 331, 346 (4th Cir. 1998)), than a mechanical legal

tool, the economic loss rule is a moniker for the widely accepted principle that

“[c]ontract law, and the law of warranty . . . , is well suited to commercial

controversies [where] the parties may set the terms of their own agreements[,]” E.

River S.S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 872–73 (1986), in ways

that the law of torts, particularly negligence, is not, see Tiara Condo. Ass’n, Inc. v.

Marsh & McLennan Cos., 110 So. 3d 399, 401 (Fla. 2013) (“[W]e recognize[ ] the

economic loss rule as the fundamental boundary between contract law, which is

designed to enforce the expectancy interests of the parties, and tort law, which

imposes a duty of reasonable care and thereby encourages citizens to avoid causing

physical harm to others.” (internal quotation marks omitted)).

26. Originating in the products liability context, the economic loss rule, in its

simplest form, holds that “purely economic losses are not ordinarily recoverable under

tort law.” See, e.g., 2000 Watermark Ass’n v. Celotex Corp., 784 F.2d 1183, 1185 (4th

Cir. 1986) (collecting cases and noting that “historically the only tort action available to the disappointed purchaser suffering an intangible commercial loss was an action

for fraud”). Under the economic loss rule, when a product does not meet its

purchaser’s needs or injures itself, and the product’s owner thereby suffers only

economic loss, no action in negligence will lie against the seller or the product’s

manufacturer. See E. River S.S. Corp., 476 U.S. at 871 (holding manufacturers have

“no duty under either a negligence or strict products-liability theory to prevent a

product from injuring itself”); Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 1965)

(“[I]n actions for negligence, a manufacturer’s liability is limited to damages for

physical injuries and there is no recovery for economic loss alone.”).

27. Put another way, before tort liability will be imposed, particularly liability

for negligence, the majority of courts require a personal injury or an injury to personal

property. See 2000 Watermark Ass’n, 784 F.2d at 1186. Personal property, however,

does not simply mean any property beyond the immediate good or product sold.

Rather, courts consistently hold “that when a component part of a product or a system

injures the rest of the product or the system, only economic loss has occurred.” Wilson

v. Dryvit Sys., Inc., 206 F. Supp. 2d 749, 753 (E.D.N.C. 2002), aff’d, 71 Fed. App’x 960

(2003); see E. River S.S. Corp., 476 U.S. at 867–68.

28. North Carolina expressly adopted the economic loss rule in Chicopee, Inc. v.

Sims Metal Works, Inc., 98 N.C. App. 423, 391 S.E.2d 211 (1990), in which our Court

of Appeals held the rule barred a plaintiff from recovering economic losses from a

manufacturer of component parts. Id. at 432, 391 S.E.2d at 217 (“The majority of

courts which have considered this question have held that purely economic losses are not ordinarily recoverable under tort law. We adopt this rule[.]” (citing 2000

Watermark Ass’n, 784 F.2d at 1185)). Prior to Chicopee, however, North Carolina

courts endorsed the principles underlying the economic loss rule, recognizing that

“[o]rdinarily, a breach of contract does not give rise to a tort action by the promisee

against the promisor.” N.C. State Ports Auth. v. Lloyd A. Fry Roofing Co., 294 N.C.

73, 81, 240 S.E.2d 345, 350 (1978), rejected in part on other grounds, Trs. of Rowan

Tech. Coll. v. J. Hyatt Hammond Assocs., Inc., 313 N.C. 230, 328 S.E.2d 274 (1985).

These decisions recognized that a tort action will not lie against a promisor “for his

simple failure to perform his contract, even though such failure was due to negligence

or lack of skill.” Id. at 83, 240 S.E.2d at 351; see Spillman v. Am. Homes of Mocksville,

Inc., 108 N.C. App. 63, 65, 422 S.E.2d 740, 741–42 (1992) (“[A] tort action does not lie

against a party to a contract who simply fails to properly perform the terms of the

contract, even if that failure to properly perform was due to the negligent or

intentional conduct of that party, when the injury resulting from the breach is

damage to the subject matter of the contract.”).

29. As this Court has previously noted, the variations of North Carolina’s

economic loss rule represented by Ports Authority and Chicopee have been applied by

this State’s courts in both the products liability context and in breach of contract cases

more broadly. Artistic S. Inc. v. Lund, 2015 NCBC LEXIS 113, at *22–23 (N.C. Super.

Ct. Dec. 9, 2015). Those cases citing Ports Authority to apply the rule more broadly

have held that “[t]o state a viable claim in tort for conduct that is also alleged to be a

breach of contract, ‘a plaintiff must allege a duty owed . . . by the defendant separate and distinct from any duty owed under a contract.’ ” Akzo Nobel Coatings, Inc. v.

Rogers, 2011 NCBC LEXIS 42, at *48 (N.C. Super. Ct. Nov. 3, 2011) (quoting Kelly,

671 F. Supp. 2d at 791); see also Kaleel Builders, Inc. v. Ashby, 161 N.C. App. 34, 41–

42, 587 S.E.2d 470, 476 (2003) (holding general contractor’s failure to properly

perform under a construction contract did not give rise to an injury in tort). The

differing ways in which courts have discussed the economic loss rule in these different

contexts, however, has caused some confusion about when and how the economic loss

rule may affect claims in litigation. The instant case requires the Court to address

this confusion.

30. Trussway relies primarily on Ports Authority to argue that the economic loss

rule precludes Crescent from recovering against Trussway in negligence. The Court

thus begins its analysis with that decision.

31. In Ports Authority, a state agency contracted with a general contractor for

the construction of two buildings. Ports Auth., 294 N.C. at 81, 240 S.E.2d at 350. The

general contractor engaged a subcontractor to perform roofing work. Id. After the

buildings were completed, their roofs began to leak. Id. The agency, i.e., the owner,

brought suit and asserted a claim for breach of contract against the general contractor

and a claim for negligence against both the general contractor and the roofing

subcontractor. 1 Id. (noting that the claim against the general contractor and

subcontractor alleged that they had “negligently failed to allow the roofs . . . to dry

properly before applying the roofing material or failed to allow the roofing material

1The owner also sued the manufacturer of the roofing materials and an insurance company under a guaranty bond related to the work. Id. itself to dry properly before installing it” and that “the leaks in the roofs were caused

by this negligent failure to exercise proper care and workmanship in the construction

of the roofs”).

32. The Supreme Court of North Carolina first reviewed the owner’s attempt to

assert a negligence claim against the general contractor. The Court noted that while

North Carolina case law had recognized four general exceptions 2 to the ordinary rule

that “a breach of contract does not give rise to a tort action by the promisee against

the promisor,” no case had ever allowed a tort action “against a promisor for his

simple failure to perform his contract, even though such failure was due to negligence

or lack of skill.” Id. at 81–83, 240 S.E.2d at 350–51. Reviewing the owner’s complaint,

2 The Supreme Court of North Carolina described these four exceptions as cases in which a promisor would be held “liable in a tort action for a personal injury or damage to property proximately caused by his negligent, or wilful, act or omission in the course of his performance of his contract,” and categorized the exceptions specifically as follows:

(1) The injury, proximately caused by the promisor’s negligent act or omission in the performance of his contract, was an injury to the person or property of someone other than the promisee.

(2) The injury, proximately caused by the promisor’s negligent, or wilful, act or omission in the performance of his contract, was to property of the promisee other than the property which was the subject of the contract, or was a personal injury to the promisee.

(3) The injury, proximately caused by the promisor’s negligent, or wilful, act or omission in the performance of his contract, was loss of or damage to the promisee’s property, which was the subject of the contract, the promisor being charged by law, as a matter of public policy, with the duty to use care in the safeguarding of the property from harm, as in the case of a common carrier, an innkeeper or other bailee.

(4) The injury so caused was a wilful injury to or a conversion of the property of the promisee, which was the subject of the contract, by the promisor.

Id. at 82, 240 S.E.2d at 350–51 (citations omitted). the Court observed that the owner alleged that the general contractor had agreed to

“construct buildings, including roofs thereon, in accordance with agreed plans and

specifications” and “did not so construct the roofs.” Id. at 83, 240 S.E.2d at 351. If

that was the case, the Court wrote, it would be “immaterial whether [the general

contractor’s] failure was due to its negligence, or occurred notwithstanding its

exercise of great care and skill.” Id. The Supreme Court explained its reasoning:

In either event, the promisor would be liable in damages. Conversely, if the roofs, as constructed, conformed to the plans and specifications of the contract, the promisor, having fully performed his contract, would not be liable in damages to the plaintiff even though he failed to use the degree of care customarily used in such construction by building contractors. Thus, the allegation of negligence by [the general contractor] in the second claim for relief set forth in the complaint is surplusage and should be disregarded.

Id. The Court thus concluded that “the only basis for recovery against [the general

contractor], alleged in the complaint,” was a “breach of contract[,] and the Court of

Appeals was in error in its view that the complaint” alleged “an action in tort[.]” Id.

33. After dealing with the appellants’ remaining contentions, the Supreme

Court turned to the owner’s challenges to the trial court’s decision to dismiss the

roofing subcontractor from the action. Id. at 86, 240 S.E.2d at 353. In reviewing the

trial court’s decision, the Court again applied the principles underlying the economic

loss rule:

Although the complaint states that the plaintiff seeks recovery against [the subcontractor] “in tort for the negligent installation of the roofs on these two buildings,” it alleges that the [subcontractor] was the roofing subcontractor of . . . the general contractor, and that [the subcontractor] failed properly to apply the roofing material, in consequence of which failure the roofs leaked. This is simply an allegation that [the subcontractor] did not properly perform its contract with [the general contractor.] Id. at 87, 240 S.E.2d at 353. As a result, the Court concluded that the owner did not

“allege a cause of action in tort[.]” Id. The Court then held that the owner could not

sue the subcontractor for breach of contract either, concluding that the owner was

only an incidental beneficiary of the contract between the general contractor and the

roofing subcontractor. Id. Because there was no basis for pursuing the subcontractor

in contract or tort, the Court affirmed the trial court’s dismissal of the owner’s action

against the subcontractor.

34. Ports Authority would thus appear to favor Trussway and control the Court’s

decision in this case, where Crescent, the owner and developer of a commercial

construction project, seeks to recover against Trussway, a subcontracting party, for

negligence in the performance of duties Trussway undertook as part of an agreement

to service the construction project.

35. Crescent vigorously disagrees, however, and argues that Trussway should

be liable in negligence to Crescent because the loss Crescent suffered in the

performance of Trussway’s contract with Madison was an injury to the property of

someone other than the promisee (i.e., Madison), the first of Ports Authority’s four

identified instances in which a party’s breach of contract may give rise to a tort claim.

(Crescent’s Opp’n Br. 9); see Ports Auth., 294 N.C. at 82, 240 S.E.2d at 350. Crescent

also argues that Ports Authority’s holding was not that the owner in that case was

unable to assert a negligence claim against the roofing subcontractor, but simply that

the owner did not correctly plead a negligence claim concerning the leaking roof. The

Court disagrees with both assertions. 36. As an initial matter, if the first of Ports Authority’s exceptions was

applicable in this case, it would have been applicable in Ports Authority itself, where

the promisee under the roofing subcontractor’s agreement was the general contractor,

not the owner of the buildings. See Ports Auth., 294 N.C. at 87, 240 S.E.2d at 353. In

that case, however, our Supreme Court clearly held that the owner’s claim against

the roofing subcontractor, which alleged the subcontractor “negligently failed” to

properly install the roofs, merely alleged a breach of the contract under which the

subcontractor was performing its services. Id. at 81, 87, 240 S.E.2d at 350, 353.

Because a negligence claim does not lie “against a promisor for his simple failure to

perform his contract,” the Court held that the owner could not assert a tort claim for

the negligent installation of the roof. Id. at 83, 87, 240 S.E.2d at 351, 353. The ruling

did not turn upon a technicality in the owner’s pleading but rather upon the Court’s

holding that the subcontractor’s failure to perform his contract, even if “due to

negligence or lack of skill,” did not give rise to a negligence claim. Id.

37. In the context of a commercial construction project, this holding makes

sense. When an owner/developer contracts for the construction of a building, the

subject matter of the bargain struck is the structure to be built. Where a

subcontractor’s negligence in performing under a subcontract causes a defect in a

portion of that structure, any damage caused to the structure as a whole does not

extend beyond the subject matter of the owner’s bargain. The owner suffers nothing

but economic loss. Cf. Kelly, 671 F. Supp. 2d at 793 (holding only economic loss

occurred when a product used in constructing a home caused damage to that home); Wilson, 206 F. Supp. 2d at 753–54 (holding damage caused to home by exterior

cladding was only economic loss); Land v. Tall House Bldg. Co., 165 N.C. App. 880,

885, 602 S.E.2d 1, 4 (2004) (holding damage caused to home by exterior cladding was

only economic loss); Warfield v. Hicks, 91 N.C. App. 1, 9–10, 370 S.E.2d 689, 693–94

(1988) (holding claim for negligent construction could not be maintained where

contractor supplied defective beams for use in construction of home).

38. In such circumstances, where the owner/developer, general contractor, and

subcontractors have negotiated for specific allocations of risk and have the

opportunity to insure themselves against possible defects, allowing one party to

circumvent the collective bargain by way of an action in negligence would put that

party’s interests above the interests of the others and undermine a crucial aspect of

the construction industry. See Blake Constr. Co. v. Alley, 353 S.E.2d 724, 727 (Va.

1987) (“The parties involved in a construction project resort to contracts and contract

law to protect their economic expectations. Their respective rights and duties are

defined by the various contracts they enter. Protection against economic losses

caused by another’s failure properly to perform is but one provision the contractor

may require in striking his bargain.”). As the Washington Supreme Court has noted,

the consequences of such an approach are unappealing:

We . . . maintain the fundamental boundaries of tort and contract law by limiting the recovery of economic loss due to construction delays to the remedies provided by contract. We so hold to ensure that the allocation of risk and the determination of potential future liability is based on what the parties bargained for in the contract. We hold parties to their contracts. If tort and contract remedies were allowed to overlap, certainty and predictability in allocating risk would decrease and impede future business activity. The construction industry in particular would suffer, for it is in this industry that we see most clearly the importance of the precise allocation of risk as secured by contract. The fees charged by architects, engineers, contractors, developers, vendors, and so on are founded on their expected liability exposure as bargained and provided for in the contract. . . .

. . . If we held to the contrary, a party could bring a cause of action in tort to recover benefits they were unable to obtain in contractual negotiations.

Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 881 P.2d 986, 992–93

(Wash. 1994). Accordingly, the Court concludes that this case does not fall under the

first of Ports Authority’s exceptions to the general rule that a breach of contract does

not give rise to a tort action.

39. Viewing this case through the Chicopee product liability line of cases also

supports the conclusion that Crescent may not recover from Trussway in negligence.

“Under North Carolina law, when a defective component of a larger system causes

damage to the rest of the system, only economic loss has occurred, and the economic

loss rule still applies.” Kelly, 671 F. Supp. 2d at 793. Here, where Trussway

manufactured “an integral component,” Wilson, 206 F. Supp. 2d at 754, of the Project,

these cases would hold that Crescent has suffered only economic loss and is thus

prohibited from bringing a suit in negligence. See id.; Tall House Bldg. Co., 165 N.C.

App. at 885, 602 S.E.2d at 4; Chicopee, Inc., 98 N.C. App. at 431–32, 391 S.E.2d at

216–17 (holding where plaintiff contracted with intermediary to manufacture drying

ranges, and intermediary contracted with manufacturer to manufacture portions of

the drying ranges, plaintiff could not recover economic losses from manufacturer for

negligence). In short, both series of North Carolina’s cases discussing the economic

loss rule cut against Crescent’s argument. 40. The above points are perhaps best summarized by reference to Anderson

Elec., Inc. v. Ledbetter Erection Corp., 503 N.E.2d 246 (Ill. 1986), a case involving a

defendant that provided both services (as in Ports Authority) and manufactured goods

(as in Chicopee) as part of work done for a property owner and featuring an

arrangement of contracts similar to the case sub judice. Id. at 247.

41. In Anderson Electric, the Illinois Supreme Court held that an owner that

contracted for the installation of filtration units at its electric facility and suffered

economic loss could not sue the manufacturer of the units for negligence. Id. at 249.

The manufacturer both supplied the filtration units and contracted with the installer

to inspect the units as they were installed. Id. at 247. The owner, however,

contracted only with the installer, not the manufacturer. Id. The lack of privity

between the owner and manufacturer was immaterial to the court, which held that

“[a] plaintiff seeking to recover purely economic losses due to defeated expectations

of a commercial bargain cannot recover in tort, regardless of the plaintiff’s inability

to recover under an action in contract.” Id. at 249. Because the owner’s economic

losses “arose solely from disappointed commercial expectations[,] in that [the owner]

lost the anticipated profits of its contract with” the installer, the court affirmed the

lower court’s dismissal of the owner’s negligence claim. Id. 3

42. The Court finds the reasoning in Anderson Electric persuasive and in

accordance with Ports Authority, Chicopee, and the above-cited decisions from other

3 The court also observed, in passing, that its decision did not leave the owner without an available remedy, because the owner had a breach of contract action pending in the trial court against the installer. Id. jurisdictions. All of these cases compel the conclusion that Crescent has suffered

nothing more than a disappointment, albeit an allegedly costly disappointment, in its

commercial expectations arising from its contract with AP Atlantic. Put another way,

Crescent has suffered only economic loss. Crescent may not recover for this economic

loss by way of a negligence action against Trussway. The law instead recognizes

Crescent’s pending contract claim against AP Atlantic as the proper means by which

Crescent must seek relief. See Ports Auth., 294 N.C. at 83, 240 S.E.2d at 351;

Chicopee, Inc., 98 N.C. App. at 431–32, 391 S.E.2d at 216–17.

43. Crescent vehemently argues against this result and contends that case law

subsequent to Ports Authority makes clear that “the economic loss rule does not

operate to bar a negligence claim in the absence of a contract between the parties,”

quoting Lord v. Customized Consulting Specialty, Inc., 182 N.C. App. 635, 637, 643

S.E.2d 28, 29 (2007). (Crescent’s Opp’n Br. 6.) In particular, Crescent argues that

the Supreme Court of North Carolina’s decision in Oates v. JAG, Inc., 314 N.C. 276,

333 S.E.2d 222 (1985), and the North Carolina Court of Appeals’ decision in Lord both

recognize a cause of action in negligence against construction contractors or

subcontractors by owners in the absence of contractual privity. The Court disagrees

that either case can be read so broadly.

44. Although it did not reference Ports Authority or the economic loss rule

directly, in Oates the Supreme Court of North Carolina again considered the

principles expressed in Ports Authority, this time allowing a negligence claim based

upon economic loss to stand. Id. at 281, 333 S.E.2d at 226. In Oates, the plaintiff- homeowners, who were not the original purchasers of their home, alleged that they

discovered “numerous defects” in their home’s construction after purchase that

required correction, prompting them to bring a suit against the home’s builder to

recover their economic loss. Id. at 277–78, 333 S.E.2d at 224. After having their

action dismissed, the homeowners appealed to the Court of Appeals, which affirmed

the trial court’s decision “on the sole ground that plaintiffs did not buy the home from

[the builder] and that there had never been a contractual relationship between” the

homeowners and the builder. Id. at 278, 333 S.E.2d at 224.

45. The Supreme Court of North Carolina reversed the Court of Appeals,

concluding that the lower courts had placed too great an emphasis on an implied

warranty theory and that the homeowner’s action sounded in negligence. See id. at

279, 333 S.E.2d at 225. Addressing the effect of the lack of privity between the

homeowners and the builder, the Court adopted the language of a Florida appellate

court decision, Navajo Circle, Inc. v. Development Concepts Corp., 373 So. 2d 689 (Fla.

Dist. Ct. App. 1979):

[T]he absence of contractual privity between plaintiff and defendant does not affect plaintiff’s tort claim, provided plaintiff can establish the existence of a duty between the parties, and defendant’s breach of such duty, with the proximate result that plaintiff suffered the damages of which it complains . . . .

The duty owed by a defendant to a plaintiff may have sprung from a contractual promise made to another; however, the duty sued on in a negligence action is not the contractual promise but the duty to use reasonable care in affirmatively performing that promise. The duty exists independent of the contract. Existence of a contract may uncontrovertibly establish that the parties owed a duty to each other to use reasonable care in performance of the contract, but it is not an exclusive test of the existence of that duty. Whether a defendant’s duty to use reasonable care extends to a plaintiff not a party to the contract is determined by whether that plaintiff and defendant are in a relationship in which the defendant has a duty imposed by law to avoid harm to the plaintiff.

Oates, 314 N.C. at 279, 333 S.E.2d at 225 (quoting Navajo Circle, Inc., 373 So. 2d at

691).

46. Thus, whether the Oates homeowners could maintain a negligence claim

against the builder did not turn on their contractual privity, but on whether the

homeowners and the builder were “in a relationship in which the [builder had] a duty

imposed by law to avoid harm to the” homeowners. See id. Having reached this

question, the Court was persuaded that the builder owed the homeowners a duty of

reasonable care, citing the reasoning in another Florida appellate decision, Simmons

v. Owens, 363 So. 2d 142 (Fla. Dist. Ct. App. 1978):

We must be realistic. The ordinary purchaser of a home is not qualified to determine when or where a defect exists. Yet, the purchaser makes the biggest and most important investment in his or her life and, more times than not, on a limited budget. The purchaser can ill afford to suddenly find a latent defect in his or her home that completely destroys the family’s budget and have no remedy for recourse. This happens too often. The careless work of contractors, who in the past have been insulated from liability, must cease or they must accept financial responsibility for their negligence. In our judgment, building contractors should be held to the general standard of reasonable care for the protection of anyone who may foreseeably be endangered by their negligence.

Oates, 314 N.C. at 280–81, 333 S.E.2d at 225–26 (quoting Simmons, 363 So. 2d at

143). On the basis of “the reasoning . . . in Simmons,” the Supreme Court stated its

holding: “a subsequent purchaser can recover in negligence against the builder of the

property if the subsequent purchaser can prove that he has been damaged as a

proximate result of the builder’s negligence.” Id. at 281, 333 S.E.2d at 226. 47. Contrary to Crescent’s argument, the Supreme Court of North Carolina’s

decision in Oates did not turn on the availability of a contract or warranty remedy

against the builder. See id. at 280, 333 S.E.2d at 225 (stating that the homeowners

had an actionable negligence claim “regardless of the validity of any claim based on

breach of an implied warranty”). As the Court explained, a plaintiff’s ability to

maintain a negligence claim depends upon whether the plaintiff “can establish the

existence of a duty between the parties, and [the] defendant’s breach of such duty,

with the proximate result that [the] plaintiff suffered the damages of which it

complains[.]” Id. at 279, 333 S.E.2d at 225 (quoting Navajo Circle, Inc., 373 So. 2d at

691). The duty of care giving rise to a negligence claim “exists independent of” any

contract, and whether such a duty is owed is “determined by whether that plaintiff

and defendant are in a relationship in which the defendant has a duty imposed by

law to avoid harm to the plaintiff.” Id. In other words, duties imposed by contract

and duties of care imposed by law are separate, and a claim for negligence may only

be maintained where a duty of care has been breached. This is the same principle

expressed in more recent case law considering the economic loss rule. See Akzo Nobel

Coatings, Inc., 2011 NCBC LEXIS 42, at *48 (“To state a viable claim in tort for

conduct that is also alleged to be a breach of contract, ‘a plaintiff must allege a duty

owed . . . by the defendant separate and distinct from any duty owed under a

contract.’ ” (quoting Kelly, 671 F. Supp. 2d at 791)).

48. Instead, Oates turned upon our Supreme Court’s decision to impose a duty

of care upon residential homebuilders for the benefit of subsequent home purchasers who suffer economic loss. This duty of care did not exist simply because the

homeowners lacked a contractual remedy, but rather was imposed due to policy

concerns. As the Supreme Court of Virginia has noted while discussing the economic

loss rule, when the law imposes a duty of care upon a party, it reflects a judgment

that others have an interest which is entitled to protection and which the party

should be required to protect:

A duty to use ordinary care and skill is not imposed in the abstract. It results from a conclusion that an interest entitled to protection will be damaged if such care is not exercised. Traditionally, interests which have been deemed entitled to protection in negligence have been related to safety or freedom from physical harm. Thus, where personal injury is threatened, a duty in negligence has been readily found. Property interests also have generally been found to merit protection from physical harm.

Blake Constr. Co., 353 S.E.2d at 726; accord Barnes v. Caulbourne, 240 N.C. 721, 725,

83 S.E.2d 898, 901 (1954) (stating that a party’s legal duty in negligence “varies

according to subject matter and relationships”). These same considerations are

generally not present when a party suffers the “mere deterioration [of a product] or

loss of [a] bargain,” as courts believe such losses involve “a failure to meet some

standard of quality [which] . . . must be defined by reference to that which the parties

have agreed upon.” Blake Constr. Co., 353 S.E.2d at 726. 4

4 The Supreme Court of Virginia is hardly alone in making this point. See, e.g., 2000 Watermark Ass’n, 784 F.2d at 1186 (“The distinction that the law makes between recovery in tort for physical injuries and recovery in warranty for economic loss is hardly arbitrary. It rests upon an understanding of the nature of the responsibility a manufacturer must undertake when he distributes his products. He can reasonably be held liable for physical injuries caused by defects by requiring his products to match a standard of safety defined in terms of conditions that create unreasonable risks of harm or arise from a lack of due care. This is reasonable because the cost of injury may be an overwhelming misfortune to the person injured. It is a needless misfortune since the risk of that injury can be insured by the manufacturer and distributed among the public as a cost of doing business. This rationale, 49. Thus, in allowing the subsequent-purchaser homeowners in Oates to sue

their home’s builder, our Supreme Court recognized a limited exception to the

economic loss rule after concluding that subsequent purchasers of residential homes

should be entitled to protection under tort law for their economic losses. See Oates,

314 N.C. at 280–81, 333 S.E.2d at 225–26 (reasoning that “[t]he ordinary purchaser

of a home is not qualified to determine when or where a defect exists” but is making

“the biggest and most important investment in his or her life” and can “ill afford to

suddenly find a latent defect in his or her home that completely destroys the family’s

budget and have no remedy for recourse”).

50. The Court therefore concludes that Oates should not be read as necessarily

tying the availability of a negligence claim to the availability of contractual remedies

or a lack thereof, as Crescent suggests. To the contrary, Oates reaffirmed Ports

Authority’s approach of treating matters of contract and matters of tort separately.

The Court also disagrees with Crescent that Oates imposed a duty of care on

subcontractors or contractors generally for the benefit of all owners or developers.

Had it done so, Oates would have overruled Ports Authority. See Ports Auth., 294

N.C. at 83, 87, 240 S.E.2d at 351, 353 (holding general contractor and subcontractor

not liable in negligence for breaches of contract). Nothing in Oates, however,

“suggests [such] an intent[.]” Warfield, 91 N.C. App. at 10, 370 S.E.2d at 694.

Instead, the Court concludes Oates should be read as imposing a duty of care on

however, does not justify requiring the consuming public to pay more for their products so that the manufacturer can insure against the possibility that some of his products will not meet the business needs of his customers.”). residential builders in favor of subsequent homebuyers because of the particular

vulnerabilities of, and the limited avenues of recovery otherwise available to, such

individuals. See Oates, 314 N.C. at 280–81, 333 S.E.2d at 225–26; Warfield, 91 N.C.

App. at 10, 370 S.E.2d at 694 (characterizing Oates as recognizing a means of redress

for subsequent homebuyers).

51. Similarly, the Court concludes that the Lord decision does not apply to the

facts of this case. In Lord, the plaintiffs were homeowners who bought their home

directly from the builder. Lord, 182 N.C. App. at 637, 643 S.E.2d at 29. The builder

obtained trusses for the construction from a manufacturer. Id. at 637–38, 643 S.E.2d

at 29. After the homeowners discovered problems with these trusses, they sued the

builder and manufacturer. Id. at 638, 643 S.E.2d at 30. A jury found against the

homeowners on their claims against the builder, but awarded damages based upon

the manufacturer’s negligence in designing or manufacturing the trusses. Id. The

manufacturer appealed, arguing that the economic loss rule barred the homeowners’

claims. Id. at 639, 643 S.E.2d at 30.

52. The Court of Appeals disagreed with the manufacturer’s arguments. The

court began by noting that the economic loss rule “encourages contracting parties to

allocate risks for economic loss themselves,” and observing that there was no contract

between the homeowners and the manufacturer. Id. at 639–40, 643 S.E.2d at 30–31.

The court also noted that it believed the holding of Oates was relevant and applicable,

repeating the passages that Oates adopted from Navajo Circle and Simmons

concerning the necessity of a duty of care in negligence actions and the unacceptability of leaving homeowners without a remedy against building

contractors. Id. at 641, 643, 643 S.E.2d at 32–33. The court then held that the

manufacturer had a duty to use reasonable care in performing its subcontract with

the builder to provide reliable trusses for the homeowners’ residence. Id. at 643, 643

S.E.2d at 33. As a concluding point, the court added the sentence Crescent now

latches onto: “Because there was no contract between the [homeowners] and the

[manufacturer], we further find that the economic loss rule does not apply and

therefore does not operate to bar the [the homeowners’] negligence claims.” Id.

53. Lord does not offer Crescent the support it desires. As an initial point, to

the extent Crescent argues Lord imposes a duty of care, actionable in negligence,

upon subcontractors to perform their contracts in the commercial construction

context, that result would be inconsistent with the Supreme Court’s decision in Ports

Authority, and this Court would be bound to follow the decision of the higher court.

See Dep’t of Transp. v. Charlotte Area Manufactured Hous., Inc., 160 N.C. App. 461,

472, 586 S.E.2d 780, 786 (2003). Furthermore, Lord did not express any intent to

overrule Chicopee or the general rule adopted therein that economic loss is not

recoverable in negligence. Instead, the Court concludes that Lord should be read as

another policy-based decision imposing a duty of care upon building contractors for

the benefit of residential homeowners suffering economic loss. This is apparent from

the case law on which Lord relies.

54. Lord borrowed its statement linking the economic loss rule to the presence

of a contract from Ellis-Don Construction, Inc. v. HKS, Inc., 353 F. Supp. 2d 603 (M.D.N.C. 2004), Lord, 182 N.C. App. at 642, 643 S.E.2d at 32, a case in which the

Middle District of North Carolina concluded that the economic loss rule would not

bar a negligence claim by a general contractor against a developer-hired architect

with which the general contractor did not have contractual privity, Ellis-Don Constr.,

Inc., 353 F. Supp. 2d at 605–07. The Middle District reached that conclusion relying

on established North Carolina precedent holding that “in the absence of privity of

contract an architect may be held liable to a general contractor and his subcontractors

for economic loss resulting from breach of a common law duty of care.” Id. at 605

(quoting Davidson & Jones, Inc. v. County of New Hanover, 41 N.C. App. 661, 666,

255 S.E.2d 580, 583–84 (1979)). These decisions recognized a duty of care imposed

upon architects for the benefit of construction contractors in the absence of

contractual privity because of the “parties’ working relationship,” citing the “ ‘power

of economic life or death’ an architect holds over a contractor[.]” Id. (first quoting

Davidson & Jones, Inc., 41 N.C. App. at 667, 255 S.E.2d at 584; then quoting Shoffner

Indus., Inc. v. W.B. Lloyd Constr. Co., 42 N.C. App. 259, 266, 257 S.E.2d 50, 55

(1979)).

55. Thus, in referencing Ellis-Don and Oates, Lord drew upon examples of cases

in which courts applying North Carolina law had imposed a duty of care to prevent

economic loss, partially motivated by the lack of remedies otherwise available to the

respective plaintiffs. Compare Davidson & Jones, Inc., 41 N.C. App. at 667, 255

S.E.2d at 584 (“We hold that an architect in the absence of privity of contract may be

sued by a general contractor or the subcontractors working on a construction project for economic loss[.]”), with Oates, 314 N.C. at 280, 333 S.E.2d at 226 (“The purchaser

can ill afford to suddenly find a latent defect in his or her home that completely

destroys the family’s budget and have no remedy for recourse.”). Lord is another such

case. The court made this point expressly, citing Oates and stating, “Here, too, we

merely recognize a means of redress for those purchasers who suffer economic loss or

damage from improper construction but who . . . have no basis for recovery in

contract.” Lord, 182 N.C. App. at 642, 643 S.E.2d at 32 (internal quotation marks

omitted).

56. Reading Oates and Lord in light of Ports Authority and Chicopee, it is

apparent that the absence of a contractual remedy in either case did not thereby

automatically provide the homeowners with the ability to bring a claim in negligence.

Rather, the homeowners’ negligence claims in both Oates and Lord survived because

the respective courts, motivated by the inadequacy of any contractual remedy

available, concluded that the residential building contractor or manufacturer in

question owed a duty of care to the homeowners to avoid causing them economic loss.

See Oates, 314 N.C. at 280, 333 S.E.2d at 226 (reasoning that contractors “must accept

financial responsibility for their negligence” because “too often” an “ordinary

purchaser of a home” will have his or her budget destroyed by a latent defect and

“have no remedy for recourse”); Lord, 182 N.C. App. at 642–43, 643 S.E.2d at 32–33

(repeating the language in Oates concerning residential homeowners and stating that

such reasoning was compelling). 57. Oates and Lord represent exceptions to the general rule implicit in the

holdings of Ports Authority and Chicopee—that ordinarily, a party does not owe

another a legal duty of care to avoid causing the other purely economic loss and, thus,

a claim for negligence will ordinarily not arise from pure economic loss. See Ports

Auth., 294 N.C. at 83, 240 S.E.2d at 351 (stating that there is no North Carolina case

allowing a tort action against a party for “his simple failure to perform his contract,

even though such failure was due to negligence or lack of skill”); Chicopee, Inc., 98

N.C. App. at 432, 391 S.E.2d at 217 (adopting the rule that “purely economic losses

are not ordinarily recoverable under tort law”); see also E. River S.S. Corp., 476 U.S.

at 871.

58. Crescent argues that Lord’s holding cannot be limited to the context of

residential homebuyers by citing Hospira Inc. v. AlphaGary Corp., 194 N.C. App. 695,

671 S.E.2d 7 (2009), a case in which the North Carolina Court of Appeals concluded

that the economic loss rule did not prevent a sophisticated business from suing a

manufacturer in tort because the two were not in privity of contract. Id. at 704–05,

671 S.E.2d at 14. The Court disagrees. Post-Hospira, the Court of Appeals appears

to have disavowed this view of the economic loss rule, again adopting the position

that “a viable tort action ‘must be grounded on a violation of a duty imposed by

operation of law, and the right invaded must be one that the law provides without

regard to the contractual relationship of the parties.’ ” Rountree v. Chowan County,

252 N.C. App. 155, 160, 796 S.E.2d 827, 831 (2017) (emphasis added) (quoting

Asheville Contracting Co. v. City of Wilson, 62 N.C. App. 329, 342, 303 S.E.2d 365, 373 (1983)). This statement of the law is consistent with the Supreme Court of North

Carolina’s explanation of the distinctions between contractual duties and duties of

care imposed by law in Ports Authority and Oates. The Court therefore concludes

that it cannot follow Hospira’s contrary holding in this case.

59. For these reasons, the contractual relationship, contractual remedies, or

lack of either between Crescent and Trussway are immaterial in determining

whether the economic loss rule bars Crescent’s negligence claim. Instead, the true

question the Court must answer is whether Trussway owed Crescent a duty of care

to avoid causing Crescent purely economic loss. The default answer under the

economic loss rule, as shown in Ports Authority and Chicopee, is that Trussway did

not. The Court concludes this default answer is the correct one in this case, which

does not present a set of circumstances warranting a policy-based exception to the

economic loss rule, as found in Oates or Lord.

60. Unlike a residential homebuyer, Crescent had extensive bargaining power

and sway in determining how risk would be allocated between itself, AP Atlantic, and

the various subcontractors AP Atlantic employed to work on the Project. This power

resulted from Crescent’s status as a sophisticated developer and the terms of the

agreement between Crescent and AP Atlantic.

61. The agreement between Crescent and AP Atlantic was set forth in multiple

standard forms, including the American Institute of Architects’ (“AIA”) Document

A102 – 2007 Standard Form of Agreement Between Owner and Contractor (the

“Standard Form Agreement”), which granted Crescent certain rights to oversee the subcontracting process. (Standard Form Agreement 1.) Under Article 10 of the

Standard Form Agreement, Crescent was given the power to “designate specific

persons or business entities from whom” AP Atlantic would “obtain bids.” (Standard

Form Agreement § 10.1.) AP Atlantic was obligated to deliver the bids it received to

Crescent, and Crescent was invested with the authority to “determine, with the

advice of [AP Atlantic], which bids [would] be accepted.” (Standard Form Agreement

§ 10.1.) AP Atlantic was also required to provide Crescent with a template of the

form subcontract AP Atlantic proposed using on the Project, and Crescent’s written

approval was required before that subcontract could be used. (Standard Form

Agreement § 10.3.) Once AP Atlantic obtained signed copies of all subcontracts or

purchase orders it made or issued, it was required to provide copies of those

documents to Crescent. (Standard Form Agreement § 10.3.)

62. Crescent and AP Atlantic’s agreement was also governed by the AIA’s

Document A201 – 2007 General Conditions of the Contract for Construction (the

“General Conditions”). (General Conditions 1.) The General Conditions required AP

Atlantic to ensure that each subcontractor was bound by the terms of the contract

documents between Crescent and AP Atlantic and required each subcontract to

“preserve and protect the rights of [Crescent] and [the architect] under the [c]ontract

[d]ocuments with respect to the [w]ork to be performed by the [s]ubcontractor so that

[the] subcontracting thereof [would] not prejudice such rights[.]” (General Conditions

§ 5.3.) AP Atlantic was also required to make sure each subcontractor entered “into

similar agreements with [its respective] [s]ub-subcontractors.” (General Conditions § 5.3.) In the event Crescent terminated its agreement with AP Atlantic for cause, it

had the option to accept the automatic assignment of the subcontracts to itself and

assume AP Atlantic’s rights and obligations thereunder. (General Conditions § 5.4.)

63. These undisputed facts of record show that Crescent possessed the power to

fully negotiate the allocation of the risk it faced in its agreement with AP Atlantic

and that Crescent was given full opportunity to protect itself from economic loss

incurred as a result of its bargain, whether such loss was due to AP Atlantic’s conduct

or the subpar performance of a subcontractor. Crescent is presently pursuing its

bargained-for remedies against AP Atlantic in an action in these consolidated

proceedings. While these remedies may be subject to a waiver of Crescent’s

consequential damages for breach of contract that would not apply to a negligence

claim against Trussway, (see General Conditions § 15.1.6.), and thus may not allow

Crescent to recover the entirety of its claimed economic loss, the economic loss rule

advises that Crescent should be left to the results of its bargain. See E. River S.S.

Corp., 476 U.S. at 875 (“We were informed that these charterers could not have

asserted the warranty claims. Even so, the charterers should be left to the terms of

their bargains, which explicitly allocated the cost of repairs.” (citation omitted)); 2000

Watermark Ass’n, 784 F.2d at 1186; Anderson Elec., Inc., 503 N.E.2d at 249; Ports

Auth., 294 N.C. at 83, 240 S.E.2d at 351; Chicopee, Inc., 98 N.C. App. at 431–32, 391

S.E.2d at 216–17; Blake Constr. Co., 353 S.E.2d at 727; Berschauer/Phillips Constr.

Co., 881 P.2d at 992–93. 64. In making this point, the Court strives to be clear—Crescent’s ability to

bring a contractual claim against AP Atlantic does not trigger the application of the

economic loss rule in this case. The economic loss rule applies “without regard to the

contractual relationship of the parties.” Rountree, 252 N.C. App. at 160, 796 S.E.2d

at 831 (quoting Asheville Contracting Co., 62 N.C. App. at 342, 303 S.E.2d at 373).

Instead, the Court highlights Crescent’s power in the bargaining process and its

contractual remedy against AP Atlantic to distinguish this case from those exceptions

to the economic loss rule recognized in Oates and Lord. The general rule applies here,

and the general rule holds that “purely economic losses are not . . . recoverable under

tort law.” Chicopee, 98 N.C. App. at 432, 391 S.E.2d at 217.

65. Accordingly, the Court concludes that Crescent’s allegations and forecast

evidence, even viewed in the light most favorable to Crescent, do not show that

Trussway breached a duty of care imposed by operation of law or that Crescent has

suffered anything other than economic loss. Thus, the Court further concludes that

no genuine issue of material fact remains as to Crescent’s negligence claim against

Trussway and that summary judgment in Trussway’s favor is appropriate on that

claim.

66. The Court reaches this conclusion fully aware that the reasoning herein may

leave developers like Crescent—or more broadly, remote purchasers or owners—

without a remedy in either contract or tort in certain circumstances. This is a risk

those engaged in commerce take. From a policy perspective, the negative

consequences of holding parties to their fairly negotiated bargains is minimal when compared to the harm caused when the law of negligence is allowed to circumvent

parties’ agreements. As aptly observed by the Wisconsin Supreme Court:

[A]llowing remote commercial purchasers to recover in tort for what is a commercial contract claim would perversely encourage those purchasers to bargain for no warranty or insurance in exchange for a reduced purchase price because they could rely on tort remedies as their “warranty.” Withdrawing application of the economic loss doctrine in this situation would encourage a remote commercial purchaser, who had been willing to assume the full risk of economic loss, to purchase the goods “as is” in exchange for a lower price; to roll the dice and hope the product does not fail; and to reap initially the financial benefit of a low purchase price. If the product does fail down the road, the commercial purchaser could still reach all the way back through intervening transactions, contracts, and warranties to sue the original manufacturer in tort. This would grant a commercial purchaser more than the benefit of the bargain to which it and the seller or manufacturer agreed and on which the purchase price was negotiated and paid.

Daanen & Janssen, Inc. v. Cedarapids, Inc., 573 N.W.2d 842, 848 (Wis. 1998)

(citations omitted).

67. In light of the Court’s dismissal of Crescent’s negligence claim against

Trussway, the Court concludes that it need not reach the issues raised by the

remaining motions for summary judgment. Trussway’s third-party claims and

crossclaims asserted against other parties in the Trussway Action do not seek

affirmative damages, but rather indemnity and contribution in the event Trussway

is found liable on Crescent’s negligence claim. Accordingly, because the Court now

enters summary judgment in Trussway’s favor on Crescent’s negligence claim,

Trussway’s claims are moot and should be dismissed. See Spearman v. Pender Cty.

Bd. of Educ., 175 N.C. App. 410, 413, 623 S.E.2d 331, 333 (2006) (holding dismissal

of underlying claims against defendant mooted claims for indemnity and contribution against third-party defendants); see also In re Peoples, 296 N.C. 109, 147, 250 S.E.2d

890, 912 (1978) (“Whenever, during the course of litigation it develops that . . . the

questions originally in controversy between the parties are no longer at issue, the

case should be dismissed[.]”). The Court will therefore deny as moot Madison’s,

Sears’, and T.A. Kaiser’s Motions for Summary Judgment relating to these claims.

IV.

CONCLUSION

68. WHEREFORE, the Court hereby ORDERS as follows:

a. Trussway’s Motion is GRANTED. Crescent’s negligence claim against

Trussway is dismissed with prejudice.

b. Trussway’s claims asserted in the Trussway Action are dismissed as

moot.

c. Madison’s Motion is DENIED as moot.

d. Sears’ Motion is DENIED as moot.

e. T.A. Kaiser’s Motion is DENIED as moot.

f. Consistent with the Court’s August 29, 2018 Order and Opinion—and

in the exercise of the Court’s discretion—evidence obtained through

discovery in the Trussway Action shall be excluded from any trial of the

remaining consolidated actions.

SO ORDERED, this the 14th day of August, 2019.

/s/ Louis A. Bledsoe, III Louis A. Bledsoe, III Chief Business Court Judge