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About a year after building a new home, the owners noticed cracks forming in the foundation and walls.  They learned that the soil under the house was unstable.   They then filed suit against the geotechnical services firm that ten years previously authored a geotechnical report for the developer.  The suit alleged various negligence-based tort claims. The district court dismissed those claims, concluding that they were barred by the economic loss rule. That decision was affirmed on appeal for the reasons explained herein. Haynes v. Intermountain GeoEnvironmental Services, Inc., 446 P.3d 594 (Utah 2019).

The geotechnical firm (“IGES”) moved, pursuant to rule 12(b)(6) of the Utah Rules of Civil Procedure, to dismiss all of Plaintiffs’ claims against it, arguing that the tort claims were barred under both the statutory and common law version of Utah’s economic loss rule, and that Plaintiffs were not third-party beneficiaries of any contract with IGES.

By filing tort claims against IGES for faulty soils recommendations, Plaintiffs sought to blame IGES for damage to their house, moving expenses, and emotional distress, as well as diminution in value of their land. Given their nature, the court concluded that “these are actions “for defective design or construction,” as that term is used in the statutory version of the economic loss rule. Utah Code Ann. § 78B-4-513. Moreover, these are not claims for damage to “other property.”

In Utah, there is a statutory version of the economic loss rule that was enacted in 2008, and applies only to “action[s] for defective design or construction.” See Utah Code Ann. § 78B-4-513. There is also a common-law version of the economic loss rule that continues to apply in situations that are beyond the scope of the statute.

“Utah’s statutory economic loss rule provides that “an action for defective design or construction is limited to breach of the contract,” Utah Code Ann. § 78B-4-513(1), and that, in general, “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 the real estate developer,” id. § 78B-4-513(4). The statute contains an exception, however, for “damage to other property.” Id. § 78B-4-513(2). IGES contends that Plaintiffs’ tort claims against it constitute “action[s] for defective design or construction,” and are therefore barred by the statutory economic loss rule. Plaintiffs resist this characterization, and in addition assert that the “other property” exception applies in any event. We conclude that Plaintiffs’ tort claims constitute actions for defective design and construction, as that term is used in the statute, and that the “other property” exception does not apply.”

The plaintiff sought to avoid the economic loss doctrine by asserting that their suit was not one “for defective design or construction.” They argued that their tort claims against IGES are not for defective design or construction, and point out that IGES’s 2004 report was issued before any relevant structure—including their house—was designed or constructed, and they argued that the report “was a professional opinion on a state of facts concerning a lot later purchased by Plaintiffs,” and further argued that “IGES is being sued because its opinion about the stability of the slope was wrong, not because it improperly designed a structure.”

In rejecting those attempted distinctions, the court stated that it found meaningful the statute’s use of the word “for,” and see its use as a signal that—in order to determine if an action is truly one seeking redress in connection with defective design or construction—we should pay close attention to the claimed cause of the specific damages sought in the action…. Thus, to answer the question presented, we must examine the relief sought by Plaintiffs against IGES, as well as Plaintiffs’ basic underlying theory of causation.

The court considered the categories of damages claimed and concluded:

“The first three of Plaintiffs’ four categories of claimed damages clearly are aimed at seeking redress “for defective design or construction.” Under Plaintiffs’ own version of events, IGES’s allegedly faulty slope stability recommendations led to Plaintiffs purchasing the lot, then constructing a house upon it, then to the house settling and cracking, and then to emotional distress and moving expenses. Indeed, the entire point of commissioning a geotechnical report in this case was to determine whether houses could safely be built in the proposed subdivision and, if so, what sort of foundation and support those houses would need.

Accordingly, the bulk of Plaintiffs’ lawsuit against IGES can comfortably be categorized as “an action for defective design or construction.” A lawsuit that seeks recovery from a design professional—including a geotechnical engineer—for the diminution in value of (or costs to repair) a structure that has settled or sustained damage as a result of subsidence will nearly always be properly categorized as a lawsuit seeking recovery for defective design or construction.  Therefore, to the extent Plaintiffs seek damages related to the structure itself—including claims for diminution in its value, repair costs, moving expenses incurred for having to leave the structure, or emotional distress related to living in it—their claims constitute actions for defective design or construction, and are covered by Utah Code section 78B-4-513(1).

Plaintiffs’ fourth category of damages—a claim for damage to the lot—presents a closer question. With regard to this category of damages, Plaintiffs’ claims do not directly implicate any actual structure; instead, Plaintiffs seek recovery of damages to the land itself. Although it is not entirely clear, at this stage of the proceedings, what this claim is designed to encompass—after all, IGES did not create whatever slope stability issues might inhere in Plaintiffs’ lot—Plaintiffs appear to be asserting that the value of their lot has diminished now that it is known that construction on the property will be problematic. Though Plaintiffs do not phrase it in exactly this way, they appear to be claiming that, when they purchased their lot, they did so in reliance on IGES’s recommendations, and paid a price for the lot commensurate with it being readily buildable, and that the lot is no longer worth what they paid for it because of the slope stability issues that have since come to light. Ultimately, however, we view this portion of the claim as one for defective design or construction also.”

For these reasons, the court found the statutory economic loss doctrine applied to all of plaintiff’s theories of the case, and the case must be dismissed accordingly.

 

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. 7 (Sep 2020).

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