Date: Mar 13, 2025

South Dakota Limits the Economic Loss Doctrine to UCC/Product-Liability Claims and Rejects Its Use to Bar Construction-Services Negligence Absent Privity

1. Introduction

In May v. First Rate Excavate, Inc., 2025 S.D. 17 (Mar. 12, 2025), the South Dakota Supreme Court reversed a circuit court dismissal of homeowners’ negligence claims against a subcontractor alleged to have installed a foundation several feet below grade and to have performed septic and grading work in a manner that produced chronic water intrusion, septic failures, and drainage damage to the home, yard, and neighboring property.

Parties. Plaintiffs/Appellants James and Amber May (homeowners) sued Defendant/Appellee First Rate Excavate, Inc. (subcontractor). The general contractor, RES Construction, settled with the Mays under a Pierringer release and was no longer in the case.

Central issue on appeal. Whether the circuit court correctly applied the economic loss doctrine to bar the Mays’ tort claim for negligence arising from allegedly negligent construction services by a subcontractor with whom the Mays had no contract.

2. Summary of the Opinion

The Supreme Court held that South Dakota’s economic loss doctrine has not been extended beyond UCC-governed defective-goods (and related product-liability) contexts and should not be expanded to bar negligence claims arising from the negligent performance of construction services. The Court also emphasized that the doctrine is premised on a contractual relationship allocating risk; where, as here, the parties lack privity, the economic loss doctrine has no application. The Court reversed the dismissal and remanded.

The Court further criticized the circuit court for raising the economic loss doctrine sua sponte (even though it allowed briefing), reiterating that courts should act as neutral arbiters and generally allow parties to frame the issues.

3. Analysis

3.1. Precedents Cited

A. South Dakota economic loss doctrine line: UCC and defective goods

City of Lennox v. Mitek Industries, Inc., 519 N.W.2d 330 (S.D. 1994): the Court’s foundational South Dakota adoption of the economic loss doctrine in an Article 2/UCC defective-goods setting. The Court in May treated City of Lennox as defining the doctrine’s home territory—UCC sales of goods—and noted its recognized exceptions (personal injury and “other property” damage) without reaching them here.
Diamond Surface, Inc. v. State Cement Plant Comm'n, 1998 S.D. 97, 583 N.W.2d 155: reaffirmed that economic damages are not recoverable in negligence and are governed by the UCC in defective-goods disputes. In May, this case supported the Court’s characterization of the doctrine as historically tied to UCC remedies.
Jorgensen Farms, Inc. v. Country Pride Corp., Inc., 2012 S.D. 78, 824 N.W.2d 410: reiterated that “in UCC cases” South Dakota applies the economic loss doctrine to preclude tort recovery for economic losses. May relied on this “in UCC cases” phrasing to reject broader application in service/construction contexts.

B. South Dakota refusal to expand beyond UCC: professional services

Kreisers Inc. v. First Dakota Title Ltd. P'ship, 2014 S.D. 56, 852 N.W.2d 413: the key in-state constraint. Kreisers declined to extend the doctrine to negligent performance of title-company services, explaining South Dakota’s application had been “limited to commercial transactions under the Uniform Commercial Code” and warning that expansion risked foreclosing negligence actions like legal malpractice that often involve purely economic loss. May applied Kreisers directly: construction-services negligence is outside UCC goods transactions, and there was “not a principled reason” to expand the doctrine.

C. Federal district court decision rejected as inconsistent with later South Dakota cases

Taco John's of Huron, Inc. v. Bix Produce Co., LLC, No. CIV. 07-4134-KES, 2008 WL 11450655 (D.S.D. Sept. 18, 2008): the circuit court relied on this decision to apply the doctrine beyond the UCC. The Supreme Court distinguished it implicitly by emphasizing that subsequent South Dakota decisions—especially Jorgensen Farms and Kreisers— confirm a UCC-limited doctrine in this state.

D. Persuasive authorities limiting the doctrine to goods/products or rejecting services expansion

McCarthy Well Co., Inc. v. St. Peter Creamery, Inc., 410 N.W.2d 312 (Minn. 1987): cited to clarify that “commercial transaction” means Article 2/UCC transactions; when the UCC does not apply, the doctrine does not apply. May used Minnesota’s clarification to reinforce South Dakota’s own UCC-based approach (also noting Minnesota’s later statutory limitation, Minn. Stat. Ann. § 604.101).
Grams v. Milk Prods., Inc., 699 N.W.2d 167 (Wis. 2005) (citing Insurance Co. of N. Am. v. Cease Elec. Inc., 688 N.W.2d 462 (Wis. 2004)): Wisconsin declined to apply the doctrine to service contracts, reasoning that there is no comprehensive UCC-like body of law for services. May cited this to support the intuition that the doctrine’s function is to prevent tort “end-runs” around UCC/warranty allocations, not to broadly displace negligence law for services.
Tiara Condo. Ass'n, Inc. v. Marsh & McLennan Cos., Inc., 110 So. 3d 399 (Fla. 2013): Florida’s retreat from an “unprincipled extension” of the rule and limitation to products liability context. May used this as a cautionary example: expansion proved “unwise and unworkable,” spawning exceptions and confusion.
Grynberg v. Questar Pipeline Co., 70 P.3d 1 (Utah 2003) and Giles v. Gen. Motors Acceptance Corp., 494 F.3d 865 (9th Cir. 2007): cited for the proposition that the doctrine becomes difficult and confusing when applied outside products liability, where torts like fraud or conversion may be designed to remedy purely economic losses without contractual privity.

E. Privity, negligence elements, and related procedural/settlement authorities

C & W Enters., Inc. v. City of Sioux Falls, 2001 S.D. 132, 635 N.W.2d 752: cited on when privity can exist between an owner (“first party”) and subcontractor (approval plus reciprocal contractual duties). May used this to underscore that the record presented no contract between the Mays and First Rate—so the doctrine’s contract-based rationale fails.
Blaha v. Stuard, 2002 S.D. 19, 640 N.W.2d 85 (quoting Stevens v. Wood Sawmill, Inc., 426 N.W.2d 13 (S.D. 1988)): used to rebut any suggestion that lack of privity defeats a negligence claim; privity is not an element of negligence.
Pierringer v. Hoger, 124 N.W.2d 106 (Wis. 1963); Schick v. Rodenburg, 397 N.W.2d 464 (S.D. 1986); Allsop Venture Partners III v. Murphy Desmond SC, 991 N.W.2d 320 (Wis. 2023) (quoting Imark Indus., Inc. v. Arthur Young & Co., 436 N.W.2d 311 (Wis. 1989)): addressed in a footnote to explain the nature of the Mays’ settlement with RES and reservation of claims against nonsettling parties. The circuit court viewed the settlement as the Mays “stepp[ing] out of the privity chain”; the Supreme Court’s holding makes that framing legally irrelevant to economic loss doctrine applicability.
Ally v. Young, 2023 S.D. 65, 999 N.W.2d 237 (quoting United States v. Sineneng-Smith, 590 U.S. 371 (2020)): cited to criticize the circuit court’s sua sponte injection of a new defense and to reaffirm the party-presentation principle and judicial neutrality.

3.2. Legal Reasoning

A. Doctrinal boundary: UCC/product liability versus services/construction negligence

The Court treated the economic loss doctrine as a boundary rule designed to prevent contracting parties—particularly in UCC goods transactions—from recasting disappointed commercial expectations as tort claims. It relied on its own repeated description of the doctrine as operating “in UCC cases” and its prior refusal in Kreisers Inc. v. First Dakota Title Ltd. P'ship to export the doctrine to service settings.

Critically, the Court found “not a principled reason” to extend the doctrine to negligent performance of construction services. Echoing the rationales in Grams v. Milk Prods., Inc. and Insurance Co. of N. Am. v. Cease Elec. Inc., it observed that the doctrine’s coherence depends on a comprehensive statutory/warranty framework (like the UCC) for allocating economic risk. Construction services do not fit that model in the same way, and other jurisdictions’ experience shows that expansion breeds confusion and exceptions (as recognized in Tiara Condo. Ass'n, Inc. v. Marsh & McLennan Cos., Inc.).

B. Independent ground: absent privity, the doctrine’s rationale collapses

Even if one assumed broader scope, the Court emphasized the doctrine’s premise: a contract between the parties allocating risk and providing contract remedies. Quoting Kreisers Inc. v. First Dakota Title Ltd. P'ship, the Court reiterated that the prohibition is designed to prevent “those in contractual privity” from circumventing their bargain. Where the parties admittedly lacked any contract, there was no risk-allocation agreement to protect and no contract remedy to preserve.

The Court also addressed First Rate’s attempt to flip the privity point—arguing that lack of privity should bar the claim—by restating basic negligence doctrine: privity is not an element of negligence (citing Blaha v. Stuard and Stevens v. Wood Sawmill, Inc.). The question becomes whether a duty exists, not whether the plaintiff can sue in contract.

C. Procedural integrity: courts should not become advocates for unraised defenses

The circuit court raised economic loss doctrine sua sponte, motivated in part by perceived policy concerns about predictability in construction litigation and about plaintiffs “intentionally sever[ing]” a privity chain via settlement. The Supreme Court cautioned that—even when briefing is allowed—introducing new defenses on the court’s own initiative risks abandoning neutrality and undermining the party-presentation system (citing Ally v. Young and United States v. Sineneng-Smith).

This aspect of the decision functions as a process holding: trial courts should generally decide the defenses actually presented, not redesign the case to test broader theories.

3.3. Impact

Clear state-law limit on the economic loss doctrine. May cements that, in South Dakota, the doctrine remains confined to UCC defective-goods transactions (and the Court’s opinion groups it alongside product liability), and it should not be used to bar negligence claims arising from negligent services such as construction work.
Construction litigation: negligence claims against subcontractors remain viable (subject to duty, causation, limitations, etc.). Owners may pursue tort claims for negligent performance against subcontractors even without contractual privity, rather than being forced into contract-only theories. This is especially significant where the owner lacks a direct contract with the sub and where contractual remedies against the general contractor have been exhausted or settled.
Privity-focused arguments shift back to duty analysis. Defendants may still contest whether a subcontractor owes a duty to homeowners in the specific circumstances, but they cannot rely on economic loss doctrine as a categorical bar simply because the damages are “economic.”
Limits on sua sponte defense creation. The Court’s reliance on Ally v. Young signals that trial courts should be cautious about injecting unpleaded defenses. Litigants can cite May to resist dismissals grounded on theories the defendant did not raise.
Downstream effects on settlement dynamics. The circuit court’s concern that plaintiffs could settle “up the chain” and then sue “down the chain” in tort is not adopted as a basis to expand the doctrine. Parties may respond by adjusting indemnity, insurance, and tender practices rather than expecting economic loss doctrine to police those dynamics.

4. Complex Concepts Simplified

Economic loss doctrine: A judge-made rule that, in certain settings (classically UCC goods/product cases), prevents a plaintiff from recovering purely financial losses in negligence when the dispute is essentially about failing to get the benefit of a bargain that contract/warranty law is designed to govern. In South Dakota after May, it does not apply to negligent construction services claims like this one.
UCC (Uniform Commercial Code) Article 2: The statutory regime governing sales of goods, including warranties and remedies. The Court views the economic loss doctrine as tied to this framework.
Privity of contract: A direct contractual relationship. The Court stressed that economic loss doctrine assumes privity (a contract allocating risk between the parties), but negligence claims do not require privity—only a duty, breach, causation, and damages.
“Other property” exception: In some UCC defective-goods cases, even if economic loss doctrine applies, it may not bar tort recovery when the defective product damages property other than the product itself. The Court did not decide this issue because it found the doctrine inapplicable altogether.
Pierringer release: A settlement device allowing a plaintiff to settle with some defendants while preserving claims against others, typically allocating responsibility for the settling party’s share. The circuit court viewed it as “severing” a privity chain; the Supreme Court held economic loss doctrine did not apply regardless.
Sua sponte: When a court raises an issue on its own rather than in response to a party’s motion or argument. The Supreme Court warned this can compromise judicial neutrality.

5. Conclusion

May v. First Rate Excavate, Inc. establishes an important South Dakota boundary: the economic loss doctrine remains confined to UCC defective-goods/product-liability terrain and should not be expanded to bar negligence claims arising from the negligent performance of construction services—particularly where the plaintiff and defendant lack contractual privity. The decision also reinforces procedural discipline by cautioning trial courts against raising and deciding new defenses sua sponte.