Utah Courts Expand the Reach of the Economic Loss Rule in Construction Disputes

Snell & Wilmer

Snell & WilmerUtah courts continue to strengthen both the common law and statutory economic loss rule by limiting what duties are independent of those in a typical buyer/seller contractual relationship and thus limiting the common law exception for the economic loss rule.

Under the common law economic loss rule, a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for a breach of the same duty. Nevertheless, courts have recognized an exception to the general rule: "When an independent duty exists, the economic loss rule does not bar a tort claim because the claim is based on a recognized independent duty of care and thus does not full within the scope of the rule.” Hermansen v. Tasulis, 2002 UT 52, ¶ 17, 48 P.3d 235. The Utah legislature codified the economic loss rule, and with respect to actions “for defective design or construction,” those claims are limited to breach of contract claims “by a person in privity of contract with the original contractor, architect, engineer, or the real estate developer.” Utah Code Ann. § 78B-4-513(1), (4). Two recent Utah court opinions further clarified the boundaries for both the common law exception to the economic loss rule, and the statutory rule’s limits for defective design claims.

First, the Utah Court of Appeals in Throp v. Charlwood found that a homeowner’s tort-based claims against the previous owner were based on duties that completely overlapped with the duties arising from the contract, and therefore the exception did not apply. 2021 UT App 118. Charlwood purchased a house in 2005 that was built in 1991, completely remodeled and expanded the house, and sold it to Throp in 2007. The parties’ Real Estate Purchase Agreement (“REPC”) expressly incorporated the Seller Property Condition Disclosure Form, but indicated that Throp’s “obligation to purchase under [the] Contract … IS NOT conditioned upon [his] approval of the content of all the Seller[‘s] Disclosures.” Ten years after Throp took possession of the property, he discovered that the deck was constructed in a defective manner, and other latent problems with the property. Throp sued Charlwood, asserting claims for defective construction, negligent misrepresentation, and fraudulent misrepresentation. The district court granted Charlwood’s motion to dismiss, holding that the economic loss rule barred Throp’s claims.

On appeal, Throp argued that his misrepresentation claims should survive because they arose from two duties Charlwood owed Throp, both of which are independent of those in the REPC: 1) the duty of sellers of real property owners to disclose material known defects that cannot be discovered by reasonable inspection of an ordinary prudent buyer; and 2) the duty of developer-and contractor-sellers to disclose information known to them concerning real property when the information is material to the condition of the property. The Court of Appeals disagreed, holding that the duty of sellers is not independent of the duties provided in the REPC because the REPC expressly incorporated the Seller’s Disclosures, and therefore the duty of sellers completely overlapped the duties in the REPC. The Court further found that Charlwood was not a developer- or contractor-seller merely because he completely remodeled the home, and therefore did not owe Throp such a duty. Because his tort-based claims were not based on duties independent of those in the REPC, the economic loss rule barred Throp’s misrepresentation claims.

Second, the Utah Supreme Court in Hayes v. Intermountain GeoEnvironmental Services, Inc. held that a homeowner's negligence claim against a geotechnical engineering firm that provided a geotechnical report for the property was essentially an action for defective design, which is limited by the economic loss statute to those in contractual privity with the firm and no common law exception was available. 2021 UT 62. Shortly after moving into their new home, the Hayes noticed the walls and foundation cracking and later found that it was caused by failures in the soil about 65 feet beneath their home. The Hayes sued Intermountain GeoEnvironmental Services, Inc. (“IGES”), who contracted with the Hayes’ builder to provide the geotechnical report for the project. The Hayes alleged that IGES, who collected boring samples up to only 50 feet below the surface for its report, negligently concluded that the soil was safe for the project. IGES moved to dismiss, arguing that the economic loss rule barred the Hayes’ claims, which the district court granted and the Utah Court of Appeals affirmed on appeal.

On appeal to the Utah Supreme Court, the Hayes argued that their claim did not fall under the statutory economic loss rule for defective design because IGES did not engage in “design or construction.” Utah Code Ann. § 78B-4-513(1). The Supreme Court disagreed, and its analysis turned on the definition of “design.” The Court found that the legislature’s intended definition of “design” included geotechnical engineers because a geotechnical report is a necessary component of the structural design of the home, is therefore integral to the design of the project itself, and is therefore subject to the economic loss statute. Hayes further argued that the Court of Appeals erred by not considering whether IGES owed them an independent duty. The Supreme Court again disagreed, finding that because Hayes’ claims were essentially for defective design, the economic loss statute controlled, and therefore no common law exception was available to them. The Supreme Court noted that in the area of design and construction, the “legislature requires parties to protect their financial interest through contracts. Beyond that, we are not at liberty to graft into the statute an exception that our legislature chose not to include.” Hayes, 2021 UT 61, ¶ 37. Because no independent duty exception is included in the economic loss statute, the Court declined to analyze a possible independent duty IGES may have owed Hayes and affirmed the lower court’s ruling.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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