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Primary Exception to the Economic Loss...

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Primary Exception to the Economic Loss Rule: Special Relationships Creating an Independent Duty

There are at least two special relationship exceptions to the economic loss rule.  A professional relationship is the first exception to the application of the economic loss rule.  Generally speaking, professionals, who owe an independent duty to their client and non-contracting parties, cannot invoke the economic loss rule to bar their client’s tort claims.  This type of general statement, however, creates the issue as to whether sophisticated parties have bargained for a limitation of consequential damages recoverable from the professional, in exchange for lower professional fees.  Also, when suing a professional for breach of contract, generally the plaintiff is required to prove a breach of the governing professional standard of care, the same proof necessary to prove negligence. Note, however, that not every breach of contract claim is based upon a breach of the professional’s standard of care.

The Court in Steiner Corp. v. Johnson & Higgins of California, 196 F.R.D. 653 (D. Utah 2000), refused to extend the economic loss rule to bar a malpractice claim against an actuarial firm which handled aspects of employer’s retirement plan.

Actions against professionals often involve purely economic loss without any accompanying personal injury or property damage. Extending the economic loss rule to these cases would effectively extinguish such causes of action. Attorneys and other professionals might support a rule which would serve as a complete bar to claims of malpractice and consequently eliminate the necessity of paying malpractice insurance premiums. However, this court does not believe that the Utah Supreme Court intended such a result and refuses to render an “Erie guess” that the Utah high court would so extend the reach of the rule. . . .

Id. at 658.  In deciding the Steiner Corp. case, Judge Greene was correct in refusing to render an “Erie guess.”

Two years later, the “independent duty” exception to the economic loss rule was developed in Utah in Hermansen v. Tasulis, 2002 UT 52, 48 P.3d 235 and later in West v. Inter-Financial, Inc., 2006 UT App 222, 139 P.3d 1059.  The Utah Supreme Court set forth the “independent duty” analysis holding that “[w]hen an independent duty exists, the economic loss rule does not bar a tort claim.”  Hermansen v. Tasulis, 2002 UT 52, ¶ 17, 48 P.3d 235, 240. This, of course, is a year after the decision in SME Industries, 2001 UT 54, 28 P.3d 669, applying the economic loss rule to bar claims design professionals (e.g., an architect or engineer).

Professionals owe such duties of care, not because of contractual relationships, but because they are in the business of supplying the type of information contained in the misrepresentation:

[W]hen or if “information is given in the capacity of one in the business of supplying such information, that care and diligence should be exercised which is compatible with the particular business or profession involved.   Those who deal with such persons do so because of the advantages which they expect to derive from this special competence.   The law, therefore, may well predicate on such a relationship, the duty of care to insure the accuracy and validity of the information.”

Hermansen, 2002 UT 52 at ¶ 17 (quoting v. Commonwealth Land Title Co., 666 P.2d 302 (Utah 1983)).

In West v. Inter-Financial, Inc., 139 P.3d 1059 (Utah Ct. App. 2006), the plaintiffs sued the Defendant appraiser for negligent misrepresentation due to an error contained within an appraisal. Id. at 1060.  The West Court noted the limitations placed upon negligent misrepresentation claims by the economic loss rule quoting SME Industries:

“[T]o maintain the fundamental boundary between tort and contract law, we hold that when parties have contracted, as in the construction industry, to protect against economic liability, contract principles override the tort principles enunciated in section 552 of the Restatement (Second) of Torts and, thus, economic losses are not recoverable.”

West, 2006 UT App 222 at ¶ 11 (quoting SME Industries, Inc. v. Thompson, 2001 UT 54, ¶ 42, 28 P.3d 669, 683-84 (Utah 2001)).  The West Court allowed the plaintiffs’ negligent misrepresentation claim because appraisers legally owe an independent duty of care to their clients: 

“We conclude that the Wests’ negligence and negligent misrepresentation claims are not barred as a matter of law because real estate appraisers, like other real estate professionals, are not shielded by the economic loss rule and have an independent duty to non‑contracting parties.”

Id. at ¶ 29. On the other hand, in contrast to Hermansen, a Real Estate Purchase Contract (“REPC”) does not create a special relationship eliminating the application of the economic loss rule, Gibbons v. National Real Estate Investors, LC, 2011 WL 6069236 *5 (D. Utah, Dec. 6, 2011); Mountain Dudes, LLC v. Split Rock, Inc., Nos. 2:08–cv–940–CW, 2011 WL 1549425 *5 (D. Utah, Apr. 21, 2011),  nor do Covenants, Conditions and Restrictions.Mountain Dudes at *5.

Under Utah law, the issue is whether the professional “owe[s] an independent duty to non-contracting buyers, thereby removing them from the rubric of the economic loss rule.”  West, 2006 UT App 222 at ¶ 19.   The United States Court of Appeals for the Tenth Circuit, applying Colorado law, adopted a more complex analysis.  In Standard Bank, PLC v. Runge, Inc., 443 Fed. App’x. 347 (10th Cir. 2011), the Court addressed the factual scenario where a professional engineer firm negotiated limitations of its liability for consequential damages to $50,000, unless the owner was willing to pay a higher fee for an increase in its level of liability.  The contract also established the engineering firm’s duty under the contract with the owner as the same duty it would owe under a negligence standard:  “in accordance with the standard of care of its profession” meaning “generally accepted professional practices, in the same or similar localities, related to the nature of the work accomplished, at the time the services are performed.” Id. at 348.

The interesting twist is that a third party brought the lawsuit for negligent misrepresentation and professional negligence against the engineering firm.  The Court relied upon a three-part test the Colorado Supreme Court developed in BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004), to determine whether the economic loss rule applies to a contract with an engineer:

“(1) whether the relief sought in negligence is the same as the contractual relief; (2) whether there is a recognized common law duty of care in negligence; and (3) whether the negligence duty differs in any way from the contractual duty.” BRW, Inc., 99 P.3d at 74.

Id. at 352. The Standard Bank court found that the economic loss rule barred the third-party’s claim against the engineering firm:  “The relationships here were governed by a set of interrelated contracts between sophisticated commercial entities, all of which had the opportunity to allocate risk and loss through negotiation of their separate contracts.” Id. at 353.  The third party did not have a contract with the engineering firm.  This ruling, therefore, left the third party with no viable claim against the engineering firm.

Perhaps, depending on the facts, a principal-agent relationship could create a source of independent duty outside of the contract, allowing the application of the economic loss doctrine. Clearone Commc’ns, Inc. v. Jas Forwarding, No. 2:09–CV–450–TS; 2009 WL 3248120 (D. Utah Oct. 7, 2009).  Simply alleging that an agent breached his duty to his principal, however, it not sufficient.  The Plaintiff must demonstrate that the breached “duties, rights, or obligations [of the agent are] independent of those imposed upon [it] under contract.” Salt Lake City Corp. v. Erm–West, Inc., Case No. 2:11–CV–1174 TS; 2013 WL 5873292 (D. Utah, Oct 30, 2013); see also UBS Bank USA v. Ibby, LLC, 2009 WL 4884383 (D. Utah Dec. 10, 2009) (holding the tort claims of negligence and negligent misrepresentation did not stem directly from the limited fiduciary duty and thus were not barred by the economic loss rule).

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


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