Under Construction - September 2013: New Mexico’s Economic Loss Rule—It Exists, but Its Limits are To Be Determined

by Snell & Wilmer
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In Utah International, Inc. v. Caterpillar Tractor Co., 108 N.M. 539, 775 P.2d 741 (Ct. App. 1989), the New Mexico Court of Appeals adopted, for the first time, the economic loss rule in New Mexico. The defendant designed, manufactured and sold a coal hauler to plaintiff that caught on fire, damaging the hauler only. Plaintiffs brought an action for negligence and strict liability, and sought purely economic damages for replacement of the hauler and loss of use. The Court held:

In commercial transactions, when there is no great disparity in bargaining power of the parties, economic losses from injury of a product to itself are not recoverable in tort actions; damages for such economic losses in commercial settings in New Mexico may only be recovered in contract actions. We so hold in order to allow commercial parties to freely contract and allocate the risk of defective products as they wish. The buyer may bargain for additional warranties from the seller and pay a higher price, or may forego warranty protection entirely in order to obtain a lower purchase price.

Id. at 542, 775 P.2d at 744. Thus, in New Mexico, when two parties of relatively equal economic strength negotiate a contract and later have claims, New Mexico courts should not allow tort claims to proceed between the parties and should instead limit recovery to contract remedies.

Subsequently, New Mexico courts have considered the economic loss rule in other situations and limited its application to some degree. In In re: Consolidated Vista Hills Retaining Wall Litigation v. Shollenbarger Wood Treating, Inc., 119 N.M. 542, 893 P. 2d 438, 447 (1995), the New Mexico Supreme Court upheld the basic ruling from Utah International, but indicated that the economic loss rule did not apply to indemnification “because parties are still bound by their contractual agreements (including indemnification agreements) and because allowing indemnification ... would in no way blur the line between contract and tort.” 

In a 1997 case, the court held that the economic loss rule bars claims under a theory of strict liability for damages for not only the product being sold, but also to the building the product was housed in and its contents, because the particular dangers were reasonably foreseeable at the time the contract was entered. Spectron Dev. Lab. v. Am. Hollow Boring Co., 1997-NMCA-025, 936 P.2d 852. The claims in the Spectron case arose out of a unique set of circumstances where the plaintiff was an expert on the use of the “light-gas gun” and thus knew the potential damages it would suffer if the gun was defective. As a result, the Court reasoned the Plaintiff was in a unique situation to negotiate terms related to any potential damages in negotiating the contract. 

And, in a recent series of opinions, the U.S. District Court for the District of New Mexico held that the economic loss rule applied to service contracts because service contracts, like those for the sale of goods, involved the same sorts of commercial benefits from the economic loss rule. However, the Court also found that the economic loss rule would not bar a claim for professional negligence if the party providing the service was a “professional” who failed to meet an “independent duty of care.” See Farmers Alliance Mut. Ins. Co. v. Naylor, 452 F.Supp. 2d 1167, 1174 (D.N.M. 2006); Farmers Alliance Mut. Ins. Co. v. Naylor (Naylor II), 480 F.Supp. 2d 1287, 1289 (D.N.M. 2007). The Court reasoned that in such instances, it was likely the professional providing the service had a better understanding of the potential risks to the other party than the party receiving the services did, and thus that there was unequal bargaining power. Thus, whether the economic loss rule will apply in a service contract setting to bar tort claims is determined by a number of factors, including whether the “service” provided involved using professional judgment.

With this said, there are still a number of open issues related to the economic loss rule in New Mexico. How aggressively will New Mexico courts enforce the economic loss rule when it is being applied to a consumer? Who constitutes a consumer of a particular good or service, and when is there equal bargaining power? What about smaller or less sophisticated businesses? What if the contract involves non-commercial parties? As you can see, while the general rule is that it is likely the economic loss rule will apply to most commercial construction matters in New Mexico, it is not clear if it will apply to other situations.

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