The Negligent Misrepresentation Exception to Economic Loss Rule: The Information v. Tangible Product Dichotomy

The economic loss rule bars recovery in tort where the claim is essentially one for breach of contract.  Lincoln Park West Condominium Association v. Mann, Gin, Ebel & Frazier, 136 Ill.2d 302, 307 (1990)(economic loss rule generally).  “Economic loss” means (i) damages for inadequate value, (ii) costs of repair and replacement of the defective product, (iii) consequent loss of profits without any claim of personal injury or damage to other property or (iv) the diminution in the value of the product caused by its defect.   Id.

Where a contract governs the parties’ relationship, the proper remedy for a breach is generally a breach of contract action; not a negligence claim.  A crude example: plaintiff enters into contract for defendant to supply 50 pieces of computer hardware.  Defendant fails to do so.  Plaintiff’s remedy is a breach of contract suit; not a negligence action.

The main exceptions (meaning, situations where the economic loss rule won’t defeat a tort claim) to the economic loss rule are (1) the fraud exception: the claim is based on defendant’s fraudulent conduct; (2) the sudden or dangerous occurrence exception: plaintiff’s claim results from a calamitous event (like a flood or explosion); (3) the “extra-contractual” exception: attorneys and accountants owe clients fiduciary duties that go beyond the scope of the contract; and (4) the negligent misrepresentation exception: a tort claim will lie against a defendant who makes a negligent misrepresentation and who is in the business of providing information for the guidance of others in their business transactions. 

In Stewart Title Guaranty Company v. Inspection and Valuation International, Inc., 2013 WL 5587293 (N.D.Ill. 2013), the Court found that the negligent misrepresentation exception did not apply to deficient construction management services on a hotel renovation project.

The plaintiff – assignee of mortgage lender on hotel development – sued a construction manager for negligence in failing to properly monitor the hotel development.  A written contract required the construction manager to manage all aspects of the project.  The plaintiff alleged the defendant failed to properly supervise the project and misrepresented the project’s status, budget issues and quality of the work.

The defendant moved to dismiss the negligent misrepresentation claim based on the economic loss rule.  The defendant’s key argument was that since a written contract governed the parties’ relationship (the construction management contract), the plaintiff’s remedy was a breach of contract action; not a claim for negligence claim. 

Held: motion to dismiss granted.  Plaintiff’s negligent misrepresentation claim is barred by economic loss rule.

Why?

The negligent misrepresentation exception to the economic loss rule applies where (1) defendant is in business of supplying information for the guidance of others in their business dealings; (2) defendant provided information that constitutes a misrepresentation; (3) defendant supplied information for guidance in plaintiff’s business dealings.  *5.

The critical question in determining whether the exception applies is whether the parties’ relationship will culminate in the creation of a tangible product.  If it does, the economic loss rule will bar recovery.  If it doesn’t (meaning, the end product is intangible “services”), the plaintiff may have a viable negligence claim.  

The First District sided with the defendant and held that, as part of its contractual management duties, the defendant was hired to cull engineering and architectural drawings, plans and data and incorporate that information into a tangible product – namely, the renovated hotel.  Any information supplied by the defendant was incidental to and merged into the building itself. 

The Court rejected plaintiff’s argument that defendant was an information-producing “consultant” to the project whose main role was to “advise” the plaintiff.  The Court ruled that since any information provided by defendant was incorporated into the hotel structure, any information provided was insignificant.

Comments: Where the main purpose or end result of a given contract is a palpable product – as opposed to advice giving, consulting or information – the economic loss rule will apply and defeat a tort suit.  The Court does acknowledge though that in certain instances, a contract involving an architect, engineer or contractor – usually quintessential tangible product contracts – can meet the  negligent misrepresentation test if the contract is purely for consulting/advising.