Under Construction - September 2013: Utah’s Economic Loss Rule

by Snell & Wilmer

In Utah, a plaintiff must generally in be in privity with the “original contractor, architect, engineer or real estate developer” to bring an “action for defective design or construction.” Utah Code Ann. §78 B-4-513(4). This requirement is read broadly and may only be avoided through three specific exceptions: 1) plaintiffs who bring claims for personal or property damage; 2) plaintiffs who are assignees of those in privity with the original contractor, architect, engineer or real estate developer; and 3) intended beneficiaries of those in privity with the original contractor, architect, engineer or real estate developer. 

The Utah State Legislature codified the economic loss rule in 2008 when it enacted Utah Code Ann. §78B-4-513. The Utah Supreme Court, however, had previously defined the economic loss rule in American Towers Owners Association, Inc. v. CCI Mechanical, Inc., 930 P.2d 1182 (Utah 1996). In American Towers, the Utah Supreme Court applied the Economic Loss Rule in the construction context and held that “one may not recover ‘economic’ losses [for defective design or construction claims] under a theory of non-intentional tort.” Id. at 1189. “In other words, economic damages are not recoverable in negligence absent physical property damage or bodily injury.” Id. (citations omitted).

The economic loss rule in Utah is applied to all parties involved in a construction project, including subcontractors and consultants. “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 their contracts.”  SME Indus., Inc. v. Thompson, Ventulett, Stainback and Assocs., Inc., 2001 UT 54 ¶36, 28 P.3d 669, 681 (Utah 2001). 

Third party or intended beneficiaries are not precluded from bringing claims for defective design or construction if the operative contract provides them a right to enforce that contract. “Third party beneficiaries are persons who are recognized as having enforceable rights created in them by a contract to which they are not parties and for which they give no consideration.” Id. at ¶47, 28 P.3d at 684 (internal quotations omitted). “Where it appears from the promise or the contracting situation that the parties intended that a third party receive a benefit, then the third party may enforce his rights in the courts….” Palmer v. Davis, 808 P.2d 128, 131 (Utah 1991) (citations omitted). To be a third party beneficiary under Utah law, a plaintiff must show that the contract was “undertaken for [the plaintiff’s] direct benefit and the contract itself must affirmatively make this intention clear.” Id. Thus, should a beneficiary of a design or construction contract want  the right to later pursue a claim against other parties, such as subcontractors involved in the design or construction of a project, the beneficiary must insure that its rights are clear in the operative contracts. 

In Utah, the economic loss rule upholds the primacy of the contract in defective design or construction related litigation. Regardless of what role a party plays in a construction project, i.e. owner, builder, architect or engineer, that party can presumptively expect that the rights and risks it bargains for at the outset in its contracts will be the rights and risks it holds in litigation.

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