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 commits the tort of negligent misrepresentation if he or she, in the course of business, fails to exercise reasonable care in providing false information, and another party relies on that information to his or her detriment. similar to near-privity, but D doesn’t need to know P specifically–>but, D could not reasonably see P’s reliance!
• 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.