Economic Loss Rule / Construction Defects
Utah Supreme Court Discusses the Economic Loss Rule and a Builder's Duty to a Homebuyer in a Construction Defect Case
Kyle L. Shoop, Esq. and Rick N. Haderlie, Esq.
October 10, 2012
Utah Supreme Court: In a construction defect case, the Utah Supreme Court held that the economic loss rule prevents recovery of economic damages within the scope of the parties’ contract but allows for recovery of damages to other property or for bodily injury.
The dispute arose when the Reighards purchased a house from Defendant Steven Yates. Mr. Yates constructed the house at issue and resided in it for approximately 2½ years prior to selling it to the Reighards. Mr. Yates had served as general contractor during construction. The parties entered into a standard REPC, which included a “Seller’s Property Condition Disclosure” signed by Mr. Yates. The document included a section for “mold,” “other moisture conditions,” and “exterior and exterior features.” In his disclosures, Mr. Yates represented that he was not aware of any moisture-related damage to the walls, floor, or ceiling; was not aware of any mold on the interior of the house; and was not aware of any problems with any portion of the exterior of the house like moisture damage behind stucco.
A year after purchase of the house, mold was discovered in the basement. The Reighards called a mold remediation company, which removed and replaced most of the stucco, windows, and drainage on the house. Ms. Reighard believed that the mold was the cause of health problems her family had been experiencing. The Reighards filed a complaint against Yates, seeking damages related to seven causes of action. Before the case was submitted to the jury, Yates moved for a directed verdict, and all but three causes of action, including negligence and breach of contract, were dismissed.
The jury returned a verdict awarding the Reighards $10,000 in property damage, $0 for medical expenses, $0 for loss of use and enjoyment of residence, $0 for other economic losses, and $2,500 in noneconomic damages, including pain and suffering. Both the Reighards and Yates appealed.
Among the bases for Yates’ appeal was his contention that, as a builder, he did not owe a duty to the Reighards. In a related challenge, Yates argued that the trial court erred when it determined that the economic loss rule does not bar the Reighards’ recovery for property damage.
Economic Loss Rule
The Court first addressed Yates appeal as to the application of the economic loss rule. The economic loss rule prevents recovery of economic damages under a theory of non-intentional tort when a contract covers the subject matter of the dispute. When the rule is applied, the contract is the exclusive means of obtaining economic recovery. Thus, “when a conflict arises between parties to a contract regarding the subject matter of that contract, the contractual relationship controls, and parties are not permitted to assert actions in tort in an attempt to circumvent the bargain they agreed upon.”
However, the Court recognized that the economic loss rule does not apply when there is damage to “other property,” i.e. property that is outside the scope of a contract and unaffected by the contract bargain. Yet, when property is contemplated in the scope and subject matter of the contract, the parties can only recover for damage to that property through contract remedies.
The Court interpreted the REPC as the parties’ contract and found that its subject matter was the house and any moisture-related damage to the house. Thus, any tort duties that Yates owed the Reighards regarding the house overlapped with Yates’ contractual duties. The economic loss doctrine thus precluded the Reighards from recovering an award for damage to the property, and the $10,000 jury verdict for property damage was overturned.
A Builder/Seller’s Duty to a Homebuyer
As to Yates’ next argument that, as a builder, he did not owe a duty in tort to the Reighards, Yates argued that the jury’s non-economic damages award should thus be overturned. Yates relied primarily on the Davencourt at Pilgrims Landing Homeowners Ass’n decision, which held that a builder did not owe a duty to a homeowners association to act without negligence in the construction of a home because the parties lacked the legal relationship necessary to find a duty.
The Court, however, noted previous decisions wherein a builder was held to owe extracontractual duties to homebuyers, based upon certain considerations including whether the defendant is best situated to take reasonable precautions to avoid injury. The Court thus found that Yates owed a duty to the Reighards not to expose them to an unreasonable risk of physical injury. This duty was based upon the parties having established a legal relationship through privity of contract.
The Court ruled that a builder/seller owes a duty of reasonable care to keep homebuyers from unreasonable risks of physical harm. This ruling was based upon the fact that a builder/seller could anticipate a general risk of physical injury to homebuyers, has a high degree of knowledge and expertise, and is in a position to take precautions to avoid such injury. The Court therefore upheld the jury’s award of $2,500 for noneconomic injuries and $0 for medical expenses.
Reighard v. Yates, 2012 UT 45 (Utah Supreme Court, decided July 27, 2012, not yet released for publication in the permanent law reports).
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