A recent Utah Appellate Court upheld the dismissal of a homeowners' claims against a geotechnical engineer because the homeowners did not have a contract with the geotechnical engineer and therefore their claims were barred by the economic loss rule. See Hayes v. Intermountain Geoenvironmental Services, Inc., 2019 UT App 112, 2019 WL 2621931. In Utah, the economic loss rule only allows lawsuits for defective design or construction to be based on a breach of contract. Such a claim cannot be brought under a general negligence or tort theory where there is no contract. Many states have a similar, but often not identical, economic loss rule.
In this case, the plaintiff homeowners purchased land from a developer and constructed a home. The defendant geotechnical engineer prepared a report for the developer concluding that the parcel of land was stable and suitable for development. Fourteen months after construction had concluded, cracks were observed in the foundation of the home and the home began to settle rendering it unlivable. Because the homeowners did not have a contract with the geotechnical engineer, they could not file a breach of contract claim against the geotechnical engineer. As a result, the homeowners tried to bring a claim under a general negligence theory against the geotechnical engineer for their damages. The trial court and appellate court agreed that the homeowners were barred from asserting a negligence claim due to the economic loss rule.
This case serves as a reminder that, in many states, recovery of purely economic losses based on theories of tort are generally not recoverable. Developers and parties to a construction project should document their agreements in writing. Likewise, a purchaser of a construction project should receive assignments of the developer’s and/or seller’s written contracts with third-parties involved in the development.
Please contact the author, Patrick Johnson, (firstname.lastname@example.org) or any other member of Saul Ewing’s Construction Practice Group if you have any questions or need assistance with a construction or development contract.