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In this case, the court considered the scope of an assignee’s right to recover damages from an engineer that breached a contract made with the assignor. The engineer argued that while it may have breached a contract or duty before the assignment occurred, the assignee could not recover damages sustained after the date of the assignment. The court held that an assignee may recover damages that flow from a breach of an assigned contract regardless of when the actual damages occur. What led to this dispute was a faulty geological survey by the engineering firm that failed to adequately address the seriousness of geologic faults on the property. After much of the development had been designed, a problem with the geologic faults was determined by the State Geological Survey department. Due to those conditions, the City government required changes in the development design that resulted in the loss of the ability to build fourteen of the planned units. The question for the court was (1) whether the Developer who was assigned the property could recover damages for the loss of the 14 units due to the required redesign of the development and (2) whether the Developer who assigned the development was precluded from recovery against the engineer due to the economic loss rule. The Court ruled that the Developer who was assigned the development was not precluded from recovery, but that the economic loss doctrine prevented the Developer who assigned the development from recovering.

Facts and allegations

An individual formed a development corporation that purchased property for a residential development. That corporation entered into a contract with a geological engineering firm to obtain a geologic study of the property. It later contracted for a second report from the same engineer. The two reports “describe the geologic features of the property, make recommendations for foundation design, and include depictions of the subdivision and the planned units.”

After receiving the engineering reports the individual developer, Mr. Stewart, formed a new development company to develop the land and he testified that his original development company transferred the property to the new company and assigned all rights and claims under the engineering contracts. Sometime after design of the development commenced, the Utah Geologic Survey sent the City of Provo, Utah a letter expressing concern over some geologic faults not addressed in the surveys conducted by the engineer.

In response to the findings, the City mandated that the development be scaled back. The site revisions required by the city resulted in a loss of fourteen units, amounting to a claimed loss of over one million dollars. The original developer (assignor) and the second developer (assignee) filed suit against the engineer to recover their alleged loss. The trial court granted summary judgment for the engineer on the negligence claims, concluding that the economic loss doctrine barred any recovery in negligence.

The court also granted summary judgment against the Assignee, developer, on a breach of contract claim because the way it understood the law was that, since the engineer had fully performed its contracts with the original developer, the assignment from that developer to the new developer only transferred the assignor’s rights to pursue remedies for existing, not future, breaches of those contracts. Since the loss of the fourteen units occurred after the assignment, the court reasoned that the assignee developer could not recover those damages from the engineer because the assignor didn’t have the right to recover such damages. The court further concluded that the assignment did not establish privity between the assignee and the engineer or otherwise entitle the assignee to pursue its alleged damages.

Effect of an Assignment of property to a Developer, who then seeks to recover for claims arising out of the Property

An assignee, such as Enterprises, is somewhat restricted in the scope of the claims it seeks to bring that arise after the assignment. As a general rule “an assignee cannot stand in a better position than its assignor.” However, an assignee can nevertheless litigate claims that arise after the assignment. Such rights to litigate need to be transferred down from the assignor (SDC in this case).

Basic assignment law:

It is well recognized that the assignee stands in the shoes of the assignor. Therefore, the assignee is subject to any defenses that would have been good against the assignor; the assignee cannot recover more than the assignor could recover; and the assignee never stands in a better position than the assignor. An assignee gains nothing more, and acquires no greater interest than his assignor. In other words, the common law puts the assignee in the assignor’s shoes, whatever the shoe size.

The essential purpose of the [rule] is to protect the obligor, the party who must perform the correlative duty of the assigned right (RB & G in this case), so that the risk to the obligor is not materially enlarged over the risk created by its agreement with the assignor. In other words, the purpose behind the rule is that an assignee has rights and liabilities identical to those of its assignor.

Application to the law of assignments to this case

In reversing an appellate court decision that had affirmed the trial court summary judgment, the state supreme court held that although an assignee cannot stand in a better position than the assignor, that fact does not prevent the assignee from bringing a suit to recover damages stemming from the alleged breach of the contract that occurred after the assignment of the contract. The court found that it doesn’t matter when the claim arose, but rather whether the assignee has a right to bring suit under the rights conveyed to it in the contract. Therefore, the Court determined that the second developer, as an assignee, had a right to bring suit for the loss of the fourteen units. The correct inquiry, says the court, must look at the assignor’s rights and liabilities under the contract rather than solely whether a claim for damages arose before or after the date of the assignment.

The developers argued that if the assignment did not enable breach of contract claim to be filed against the engineer, as had been concluded by the trial judge, then the original developer (assignor) should be able to sue the engineer for negligence since the assignor had lost its privity of contract with the engineer pursuant to the assignment to the second developer. It is important to note here that the assignee did not appeal the dismissal of its negligence claim. Only the original developer (assignor) appealed that issue, arguing that its own action against the engineer for negligence should be permitted to go forward. Its theory was that since it had assigned its contract rights to the assignee, it no longer itself had privity of contract with the engineer and could therefore sue the engineer in a tort action for a breach of an independent duty. It argued “that an engineer who issues a faulty geological report may be liable in negligence despite an absence of damage to other property.” The state supreme court disagreed.

Court’s Explanation of the Economic Loss Rule

The economic loss rule serves two purposes. First, it bars recovery of economic losses in negligence actions unless the plaintiff can show physical damage to other property or bodily injury. Second, the economic loss rule prevents parties who have contracted with each other from recovering beyond the bargained-for risks. In essence, the economic loss rule “marks the fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care.”

Application of the Economic Loss Doctrine to the Facts of This Case

The state supreme court concluded that when the assignor originally negotiated its contract with the engineer it had an opportunity to bargain for the allocation of risk and benefits with the engineer and should not now be able to circumvent its bargain by claiming that it had assigned the contract to someone else and could sue for negligence as if it had no contract. The court reasoned that “an assignor who contracts with an obligor cannot subsequently invoke an assignment of the contract to escape the implications of the economic loss rule. Petitioners are incorrect in their argument that when [assignor] assigned the contracts to [assignees], all prior history between [assignor] and [engineer] vanished.” The court held that “ a party cannot simply avoid the implications of the economic loss rule by claiming that it assigned the underlying contract.” Sunridge Development Corp. v. RB & G Engineering, Inc., 230 P.3d 1000, (Utah, 2010).

About the author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is also founder and president of ConstructionRisk, LLC, a consulting firm providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report (2010) at www.ConstructionRisk.com.