In Hayes v.
Intermountain GeoEnvironmental Services, Inc., 2019 WL 2621931 (Utah Ct.
App. June 27, 2019), the Utah Court of Appeals upheld the economic loss rule, finding
a property owners’ tort claims against a geotechnical engineer were barred. In
2004, a developer hired Intermountain GeoEnvironmental Services, Inc. (“IGES”)
to conduct a geotechnical investigation for a proposed subdivision. IGES concluded
construction could proceed and the developer sold the lots to a third-party, who
later sold an individual lot to Kim and Nancy Hayes (the “Hayes”) for
construction of a home.
After
construction of the house, the Hayes observed cracks in its foundation and
walls. The Hayes’ engineering expert concluded the foundation had excessive settling
and lateral movement as a result of a defective slope on the property that was
not identified by IGES as problematic.
The Hayes
sued IGES for negligence, negligent misrepresentation, negligent infliction of
emotional distress and third-party beneficiary breach of contract, arguing IGES
failed to identify the defective slope. IGES filed a motion to dismiss on the
basis the Hayes’ claims were barred by Utah’s economic loss rule.
Under Utah
law, the economic loss rule prohibits one from suing in tort to recover for
economic losses arising from defective designs or construction, if the parties are
not in privity. Utah’s statutory economic loss rule provides that an individual
seeking economic loss arising from defective designs or construction must be
recovered, if at all, pursuant to contract law. Utah Code Ann.
§ 78B-4-513(1).
The trial
court granted the motion, finding the Hayes’ claims were barred by the economic
loss rule, as the Hayes were not in privity of contract with IGES or the
developer and the damages sought were purely economic in nature. On appeal, the Utah Court of Appeals affirmed
the trial court’s order, holding Hayes’ claims constituted an action for defective
design or construction and the exceptions to the statutory economic loss rule
did not apply. The Court noted the Hayes could have sought to recover economic
losses from the contractor who built the house, the architect who designed the
house, or any other person or entity with whom they had a direct contractual
relationship, but could not recover these damages from entities with whom they
did not have privity of contract.
The economic loss rule continues to be a major issue in the architect and engineering litigation world. The economic loss rule tends to be slightly different in every state, with some states adopting a strict version such as Utah and others rejecting the idea outright. Design and construction entities not in direct contractual privity with the owner should begin their evaluation of any damage claim by analyzing the potential impact of the jurisdiction’s version of the economic loss rule.
