Negligence and Economic Harm

Question 1

Nycal Corp v. KPMG

Answer 1

Professional Services - 4 Approaches to Liability
• F: P buys Gulf stock relying on D’s audit report that was prepared for Gulf with information provided to them by Gulf; 2 years later Gulf goes bankrupt; P sues for economic harm
• H: Recovery denied because D did not breach any legal duty owed to P; here D neither intended to influence the transaction nor knew of Gulf’s negotiations w/ P
• Court discusses 4 approaches to determining liability:
o Privity – no contract, no liability
o Near privity – NY standard, establishing “sufficient relationship” D has to be aware that the product/service will be used for a particular transaction and know who the 3rd party is and that they’ll rely on it.
▪ E.g. accountant knows that report would be used for specific deal
▪ Not effective test here b/c report was just annual report not specific
o Foreseeability – very rarely used; accountant liable to any person who D could reasonably have foreseen would obtain and rely on the D’s opinion, including known and unknown investors. Not adopted b/c of crushing liability concern
o Restatement (R2d) §552 approach: court here adopts
▪ D has actual knowledge that client would use the report for a particular class of persons and know of the particular transaction that the info was designed to influence similar to near-privity, but D doesn’t need to know P specifically
▪ Information in report will influence specific or substantially similar transaction
• Court says investor (P here) needs to do their due diligence

Question 2

LAN/STV v. Martin K. Eby

Answer 2

Economic Loss Rule
• F: DART contracted with an architecture firm, LAN/STV, to prepare plans for construction. DART then contracted with Eby to construct according to LAN/STV’s plans. Eby and LAN/STV had no contract. 80% of LAN/STV’s plans were incorrect, resulting construction delays and increased expenses incurred by Eby.
• H: The economic-loss rule precludes a general contractor from recovering construction-delay damages from an architect in the absence of a contractual agreement.
• Risks of economic loss cases should be confined to contracts, not torts

Notes After
• Chapman v. Dallas Plumbing: recovery for damage done to house from negligent plumbing work not barred by pure economic loss rule because there was property damage, not just economic loss.
• Sullivan v Pulte Home: Home buyer allowed to sue original builder for negligent construction

Question 3

532 Madison Avenue Gourmet Foods v. Finlandia Center

Answer 3

• F: construction related disasters, P’s sole injury is lost income; partial collapse of wall during construction causes large street closure (42nd to 57th between 5th and Park)
• H: No recovery for pure economic loss here (there was no physical property damage or personal injury)
• Can’t satisfactorily draw lines of who can recover and who cannot; hard to delineate an area
• Also argues no social loss – people just shop elsewhere

Question 4

Economic Loss Rule

Answer 4

Bars recovery in a tort action for a purely economic loss, for example damages inflicted on a defective product itself when there is no personal injury or damage to other property, because such a claim can be better brought under a breach of contract action.