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The Development of the Economic Loss...

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The Development of the Economic Loss Rule in Utah

Early Utah cases exploring the economic loss rule arose from claims centered upon construction and construction design issues.  See, e.g., American Towers, 930 P.2d 1182 (barring under the economic loss rule a claim against an architect for negligent design and construction); SME Industries, 2001 UT 54, 28 P.3d 669 (barring a steel subcontractor’s negligence and negligent misrepresentation claims against design professionals); Fennell, 2003, UT App 291, 77 P.3d 339 (barring a property owner’s negligent misrepresentation claims against real estate owners and developers). Davencourt, 2009 UT 65, 221 P.3d 234, abrogated the holding in these cases relating to an implied warranty of workmanlike manner and habitability in the sale of a new residence.  Id. at ¶¶ 49-63.

“The Supreme Court noted that the economic loss rule is ‘particularly applicable’ to construction and design situations because parties ‘can avoid economic loss’ with contracts and are thus ‘free to adjust their respective obligations to satisfy their mutual expectations.’” West v. Inter-Financial, Inc., 2006 UT App 222, ¶ 8, 139 P.3d 1059 (quoting American Towers, 930 P.2d at 1190).  The economic loss rule allows one to recover economic losses under a contract theory, but not under a non-intentional tort theory.  At the Utah Court of Appeals explained, “The economic loss rule arises from intrinsic differences between tort and contract law.  Contract law protects expectancy interests created through agreement between the parties, while tort law protects individuals and their property from physical harm by imposing a duty to exercise reasonable care.” Maack v. Resource Design & Construction, Inc., 875 P.2d 570, 580 (Utah Ct. App. 1994) (emphasis added) (“The [plaintiff’s] claims for purely economic damages based upon allegations of negligent design and construction must fail.”)

The Utah Supreme Court applied the “economic loss rule” to bar a home owner’s association claims against the general contractor and subcontractors for negligent construction of the American Tower condominiums in Salt Lake City:

Builders who construct low quality housing that does not cause injury to persons or property may still be held liable for damages, but that liability should be defined by the contract between the parties.  The law of torts imposes no standards on the parties’ performance of the contract; the only standards are those agreed upon by the parties.  Tort law is concerned only with the safety of a product or an action.  Otherwise, the extension of tort law would result in “liability in an indeterminate amount for an indeterminate time to an indeterminate class.”East River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 871, 106 S.Ct. 2295, 2302, 90 L.Ed.2d 865, 876‑77 (1986) (noting need to keep products liability and contract law in separate spheres and to maintain realistic limitation on damages).

These rationales are particularly applicable to claims of negligent construction. Construction projects are characterized by detailed and comprehensive contracts that form the foundation of the industry’s operations. Contracting parties are free to adjust their respective obligations to satisfy their mutual expectations.   See W. Page Keeton et al., Prosser & Keeton on the Law of Torts § 92, at 659 n.15 (5th ed. 1984) (“[G]enerally…a contractor’s liability for economic loss is fixed by the terms of his contract.”).

American Towers, 930 P.2d at 1190. Allowing recovery through a negligent misrepresentation claim, instead of through the parties’ contracts and any claims arising therefrom, would undermine the sound policies of the economic loss rule:

The policy reasons supporting the economic loss rule are sound.  When a product does not perform or last as long as the consumer thinks it should, the claim pertains to the quality of the product as measured by the buyer’s and user’s expectations-expectations which emanate solely from the purchase transaction.  Thus, contract principles resolve issues when the product does not meet the user’s expectations while tort principles resolve issues when the product is unsafe to person or property

Cathco, Inc. v. Valentiner Crane Brunjes Onyon Architects, 944 P.2d 365, 368 (Utah 1997) (quoting American Towers, 930 P.2d at 1190 (emphasis added)).

SME Industries, Inc. v. Thompson, 2001 UT 54, 28 P.3d 669, is an application of the “economic loss doctrine” in a construction setting.  In that case, Salt Lake County entered into a contract with Thompson, Ventulett, Stainback and Associates, Inc., and Robert Veale (collectively “TVSA”) for architectural services, i.e., drafting the plans, drawings and specifications, associated with remodeling and expansion of the Salt Palace Center.  TVSA contracted with Gillies, Stransky, Brems & Smith and Jonathan Bradshaw (collectively “GSBS”) to provide local architectural services for the project (the “TVSA‑GSBS contract”), and Reaveley Engineers & Associates, Inc., and Earl S. Eppich (collectively “Reaveley”) to provide structural engineering services for the project (the “TVSA‑Reaveley contract”).   Neither GSBS nor Reaveley contracted directly with the County.  TVSA, GSBS and Reaveley constituted the design team.

Hughes‑Hunt, a joint venture, submitted a bid to the County to become the general contractor and, in furtherance of that purpose, received a bid from SME Industries, Inc. (“SME”), to furnish, fabricate, and erect the structural steel for the project.  SME encountered significant problems with the plans and specifications for the structural steel for the project, causing delays and other economic damages.  After the project was completed, SME submitted a claim to Hughes-Hunt for over $2 million in damages. SME claimed that the design team’s responses to SME’s Requests for Information were consistently late and often inaccurate.

After receiving SME’s claim, Hughes-Hunt forwarded it to the County, which submitted it to the design team.  The design team recommended that it be rejected.  Despite this recommendation, the County reached a settlement with Hughes-Hunt, paying Hughes-Hunt $150,000 and assigning all of the County’s claims against the design team to Hughes-Hunt.  Hughes-Hunt then settled with SME, paying SME $150,000 and assigning to SME all of its direct and assigned claims against the design group.

SME filed a complaint in the District Court against TVSA, GSBS, and Reaveley, seeking delay damages and other economic losses it allegedly sustained as a result of its work on the project.  SME’s lawsuit asserted its direct claims against TVSA, GSBS, and Reaveley, as well as the assigned claims that the County and/or Hughes‑Hunt had against defendants. Specifically, SME sought recovery under a total of five legal theories:

  • Breach of the County‑TVSA contract;
  • Breach of express and implied warranties allegedly contained in the County‑TVSA contract; 
  •  Negligent interference with advantageous economic interests against TVSA;
  •  Professional negligence against TVSA, GSBS, and Reaveley;  and
  •  Breach of third‑party beneficiary claims arising out of the County‑TVSA, TVSA‑GSBS, and TVSA‑Reaveley contracts.

TVSA, GSBS, and Reaveley filed Motions to Dismiss, which the District Court granted, holding among other things that the “economic loss doctrine” barred SME’s assigned and direct claims.

SME argues that the rationale enunciated in American Towers for extending the economic loss rule outside the products liability context is inapplicable in this case because American Towers involved remote purchasers’ claims against an architect, not, like the instant case, a subcontractor’s professional malpractice claim against an architect. However, all parties to a construction project, not just the buyers and developers at issue in American Towers, resort to contracts and contract law to protect their economic expectations.   Indeed, this is particularly true with contractors and subcontractors whose fees are founded upon their “expected liability exposure as bargained and provided for in the[ir] contract[s].” Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wash.2d 816, 881 P.2d 986, 992 (1994) (en banc).   Protection against economic losses caused by another’s failure to properly perform, including an architect or design professional, is but one provision a contractor, subcontractor, or sub‑subcontractor may require in striking his or her bargain.  Accordingly, contractors’ negligence claims against architects ‑‑ like the owners’ negligence claims against architects in American Towers ‑‑ are akin to the types of commercial situations to which the economic loss rule was meant to apply. See id. at 990 (noting that the “economic loss rule was developed to prevent disproportionate liability and allow parties to allocate risk by contract” (emphasis added)).

Moreover, in view of the contractual foundation of the construction industry, and the ability of contractors and subcontractors to negotiate toward the risk distribution that is desired or customary, other jurisdictions have specifically applied the economic loss doctrine to bar contractors’ and subcontractors’ malpractice claims against architects and design professionals.   See, e.g., Fleischer v. Hellmuth, Obata & Kassabaum, Inc., 870 S.W.2d 832, 837 (Mo. Ct. App. 1993) (rejecting contractor’s negligence claim against architect under economic loss rule); Floor Craft Floor Covering, Inc. v. Parma Cmty. Gen. Hosp. Ass’n, 54 Ohio St.3d 1, 560 N.E.2d 206, 212 (1990) (same);  Bernard Johnson, Inc. v. Continental Constructors, Inc., 630 S.W.2d 365, 374 (Tex. App. 1982) (same);  Blake Constr. Co. v. Alley, 233 Va. 31, 353 S.E.2d 724, 727 (1987) (same);  Berschauer/Phillips Constr. Co., 881 P.2d at 992 (same);  Rissler  & McMurry Co. v. Sheridan Area Water Supply Joint Powers Bd., 929 P.2d 1228, 1235 (Wyo. 1996) (same).

Therefore, consistent with our prior analysis in American Towers, and the foregoing authority from other jurisdictions, we hold that the general rule in this jurisdiction prohibiting the recovery of purely economic loss in negligence is applicable to a contractor’s or subcontractor’s negligence claim against a design professional (e.g., an architect or engineer).

Id. at 681-82 (emphasis added; footnote omitted).  The Court affirmed the District Court’s conclusion that “the economic loss rule bars SME’s direct and assigned negligence claims against the design team.”  Id. at 685-86.

In Grynberg v. Questar Pipeline Co., 2003 UT 8, 70 P.3d 1 (applying Wyoming law), owners of working interests in natural gas wells brought claims against gas purchaser for breach of contract, negligent or intentional misrepresentation, fraud, conversion, negligence, and breach of fiduciary duty. These claims, however, all were based upon whether Questar adhered to formulas set forth in the contracts between the parties. The Court clarified the application of the economic loss rule:  “the economic loss rule does not bar tort claims when those tort claims are based on a duty independent of those found in the contract.”  Id. at ¶ 51.

In affirming the dismissal of the Grynberg’s claims based upon negligent or intentional misrepresentation, fraud, conversion, negligence, and breach of fiduciary duty, the Court stated,

The Grynbergs have provided no authority for the proposition that Wyoming recognizes independent tort duties of the sort alleged here when the contract prescribes identical duties. The fact that the exact same conduct is described in both the contract and tort claims, and the exact same facts and circumstances are at play, is indicative of the overlapping duties in this case. Furthermore, we are influenced by the nature of the parties and contracts at issue: here are two sophisticated business parties agreeing to buy and sell goods in a commercial contract. Strict application of the economic loss doctrine is even more appropriate in cases involving the Uniform Commercial Code. . . .

Id. at ¶ 53.  The threshold question, therefore, in analyzing the application of the economic loss rule is whether the contract covers the subject matter of the tort claims.

Town of Alma v. Azco Constr. Co.  10 P.3d 1256, 1258 (Colo. 2000), is cited favorably in Grynberg v. Questar Pipeline Co., 2003 UT 8, 70 P.3d 1.  In the Town of Alma case, the court in examined the application of the economic loss rule to the Plaintiff’s claim for negligence in the Defendant’s installation of leaky pipes. While noting the “independent duty” analysis, the Town of Alma Court determined that the Plaintiff’s negligence claim was barred by the economic loss rule, explaining:

Limiting tort liability when a contract exists between parties is appropriate because a product’s potential nonperformance can be adequately addressed by rational economic actors bargaining at arm’s-length to shape the terms of the contract.  For example, a buyer may demand additional warranties on a product while agreeing to pay a higher price, or the same buyer may choose to assume a higher level of risk that a product will not perform properly by accepting a more limited warranty in exchange for a lower product price. 

Id. at 1262 (emphasis added).

In Mountain Dudes, LLC v. Split Rock, Inc., Nos. 2:08–cv–940–CW, 2011 WL 1549425 *5 (D. Utah, Apr. 21, 2011), the buyer purchased a house using a REPC.  The property was subject to recorded CC&Rs.  The buyer sued for negligence for the removal of two arches from the common area subject to CC&Rs. Utilizing the economic loss doctrine, the Court dismissed the negligence claim, in part, finding that the “removal of a feature that did not comply with the design code is a risk that was contemplated in the CC&Rs. Beyond the removal the arches, which were found to be out of compliance, there was no property damage in this case.”  Id. 

©2014 Mark A. Larsen, Jonathan O. Hafen, Michael A. Stahler, and Steven R. Glauser
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