Alexandria, Va – Traditional limits on tort claims protect construction subcontractors from negligence leading to damages for delay, “lost profits” and other “economic losses” experienced by construction owners or others not in privity of contract with a subcontractor. In 2004, the American Subcontractors Association (ASA) asked the Ohio Supreme Court to strike down an appeals court decision that allowed a construction owner to challenge these limits. In an October 25, 2005, decision, the high court (in a 5-2 opinion) handed subcontractors a major victory, saving the state’s construction industry from a potential tidal wave of litigation.

Historically, subcontractors are considered legally liable for purely “economic” losses (e.g., back charges, overhead, additional financing expenses, and lost profits) to their prime contractors only, since the subcontract documents outline how losses such as lost profits are to be handled, and the prime contractors have privity of contract with the subcontractors. Similarly, prime contractors are held liable for such losses only per their contractual agreements with owners. Prior to the appeals court decision challenged by ASA, Ohio had not been an exception to this rule, known as the “economic loss rule.”

In the case decided by the Ohio Supreme Court on October 26, Dublin Suites v. Shook, a construction owner sued for additional expenses and lost profits for delays allegedly incurred because of deficiencies in a subcontractor’s work. However, the subcontractor had deleted the existed between the subcontractor and the owner. An Ohio trial court ruled that an owner could not sue a subcontractor for tort claims based on economic losses, but the 10th Appellate District Court of Appeals in Ohio Reversed the trial court’s decision. Shook, the subcontractor, asked the Ohio Supreme Court to review the appeals court decision, and ASA filed a legal memorandum supporting Shook’s request on May 7, 2004.

After the court agreed to review the case, ASA filed another brief asserting that the right of clients to make claims for economic losses should fall within the four corners of the contract: “The subcontract is the embodiment of the subcontractor’s obligations and risks and provides subcontractors with certainty to what is expected of them on a project. The requirement of contractual privity as a prerequisite to a claim seeking purely economic damages ensures that the parties’ own agreement and the respective benefits of the bargain they struck are upheld.”

In a 5-2 majority opinion, the Ohio Supreme Court Agreed: When a duty in tort exists, a party may recover in tort. When a duty is premised entirely upon the terms of a contract, a party may recover based upon breach of contract. “ ‘Protection against economic losses caused by another’s failure properly to perform is but one provision other contractors may require in striking his bargain. Any duty *** in this regard is purely a creature of contract’” and can only be enforced by a party to that contract. [Citation omitted.]

ASA’s involvement in the case was made possible by the Subcontractors Legal Defense Fund. For more information, contact ASA Construction Law & Contracts Counsel Brian Cubbage at bcubbage@asa-hq.com or 703-684-3450, ext. 1311.

Founded in 1966, ASA serves 5,000 member companies and is dedicated to improving general business conditions for all subcontractors through unified and cooperative actions. ASA’s vision is to be the united voice dedicated to improving the business environment in the construction industry. ASA provides its members with advocacy, leadership, education, and networking.