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A homeowner’s house developed large cracks in its foundation and walls due to settling, lateral movement of the foundation, and an unstable slope of the building lot. It filed suit against a geotechnical engineering firm that had ten years earlier prepared a site condition report for the subdivision developer. The suit brought tort claims for negligence, negligent misrepresentation, and negligent infliction of emotional distress. A third party beneficiary claim was also asserted. The engineer’s motion to dismiss the third party beneficiary claim was granted without even discussing it because it was apparently so obvious to the court that the homeowner wasn’t an intended beneficiary of the contract. The court also dismissed all the tort claims because these claims were barred under Utah statutory economic loss rule. Hayes v. International GeoEnvironmental Services, Inc., 446 P.3d 594 (UT 2019).

The general principle of common law is that “the economic loss rule prohibits tort claims for purely economic losses.” In addition, the state of Utah adopted a statute expressly barring economic loss claims in “actions for defective design or construction.”   The statute provides that “an action for defective design or construction is limited to breach of the contract [and in general that] an action for defective design or construction may be brought only by a person in privity of contract with the original contractor, architect, engineer, or thee real estate developer.”

There is an exception to the rule, however, for damage to “other property.” The homeowner in this case argued that the “other property” exception applied. That argument was rejected by the court. It found that regardless of whether it could be argued that there was damage to the house separate from damage to the building lot, this was tied to the same legal action theories for the defects that created the damage.   The key, the court said, was to consider what relief was sought by the plaintiffs as well as what was the plaintiff’s basic underlying theory of causation.

As explained by the court,

“A common-sense understanding of Plaintiffs’ action is that they claim to have suffered damages arising from something that went wrong—a defect—in the design and construction of their house. Even if the architect or the builder did not cause this defect, it is nonetheless a defect in the design and construction of the house, and the action is one “for defective design or construction.”

The court concluded that the plaintiffs’ claims for damages and diminution in value of their house, as well as decreased value of their building lot, must be characterized as “an action for defective design or construction” that was barred by the economic loss statute.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 22, No. 2 (Feb 2020).

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