REALWorld Law


Developer's liability to end user

To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?

United States

United States

The pursuit of claims against the developer by the end user of the facility for physical damage or economic loss, and how the developer can exclude those claims, depends on whether the developer is in privity with the end user, ie whether the end user and developer have entered into a contract. If they have entered into a contract, they are in privity, and the answer likely is found in contract law. If developer and end user are not in privity, the answer likely is found in tort law. The answer also depends on the economic loss rule in the state where the action is brought. Not only can the economic loss rule be complicated, it is applied differently from state to state.

No privity

Physical damage

In most states, claims for physical damage against the developer by those who ultimately use the facility but are not in privity with the developer would sound in tort, not contract. As a tort, the claim must satisfy four elements in order to be a viable cause of action: duty, breach, causation and damage. The developer would attack each of those elements in an attempt to exclude the claim. The developer also would attempt to assert affirmative defenses that might exclude the claim, eg an expired statute of limitations or repose (which likely is far less for property damage sounding in tort than for construction defects sounding in contract).

Economic loss

In its purest application, the economic loss rule provides that parties must be in privity in order for one of the parties to assert a claim against the other for purely economic loss. However, a claim for economic loss can be brought where there is no contract, if the economic loss arises out of physical damage to other property (ie to property not the subject of a contract). Again, the economic loss rule varies from state to state in the US.


Physical damage and economic loss

Depending on the contract provisions, claims for physical damage and economic loss against the developer may be made by the end user, if the two parties are in privity and the contract so permits. The developer can limit its liability via contract provisions and insure for risks it cannot eliminate.

One method to limit liability is to negotiate a shorter liability period than allowed by the statute of limitations or repose in the state where the project is located (see limitation period). Another method, which may be beneficial to both parties, is to provide for delay damages via a liquidated damages provision; the liquidated damages likely will include economic loss by the end user (see delay).