Opinion ID: 2525492
Heading Depth: 2
Heading Rank: 4

Heading: sme's tort claims against tvsa, gsbs, and reaveley

Text: ¶ 31 SME's third claim for relief alleges negligent interference with advantageous economic interests against TVSA. SME's fourth claim alleges professional negligence against all members of the design team. The trial court dismissed all such direct and assigned claims, reasoning that the economic loss rule prevented SME from recovering purely economic damages in tort. ¶ 32 The economic loss rule is a judicially created doctrine that marks the fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care. See American Towers Owners Ass'n, Inc. v. CCI Mech., Inc., 930 P.2d 1182, 1190 (Utah 1996). Simply put, the economic loss rule holds that economic damages are not recoverable in negligence absent physical property damage or bodily injury. [8] Id. at 1189; see also W. Page Keeton et al., Prosser & Keeton on the Law of Torts § 92, at 657 (5th ed.1984); 86 C.J.S. Torts § 26 (1997). Economic loss has been defined as [d]amages for inadequate value, costs of repair and replacement of the defective product, or consequential loss of profits  without any claim of personal injury or damage to other property . . . as well as the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.' American Towers, 930 P.2d at 1189 (quoting Maack v. Resource Design & Constr., Inc., 875 P.2d 570, 579-80 (Utah Ct.App.1994) (citation omitted)). ¶ 33 In the instant case, SME does not deny that its tort claims against the design team seek to recover what we have termed economic loss. Nevertheless, SME argues that its tort claims should be allowed because the economic loss rule is rooted in products liability law, and therefore should not be extended to bar professional negligence claims brought by contractors or subcontractors against design professionals. ¶ 34 Although SME correctly notes that the genesis of the economic loss rule is found in the law of products liability, it ignores the fact that the economic loss rule has been applied in other contexts. Indeed, in American Towers, this court applied the economic loss rule to bar a tort claim by a condominium owners' association against the architects who designed the plumbing and mechanical systems of the condominium complex. Id. at 1192. In doing so, this court did not classify the condominium units at issue as products. To the contrary, while the American Towers opinion traced the economic loss rule to its roots in products liability law, it specifically noted that the condominium owners' claims involved allegations of negligent design and construction of improvements to real property, not the negligent manufacturing of a product. Id. at 1190 (emphasis added). ¶ 35 In extending the economic loss rule outside the products liability context, American Towers explained that the rationales underlying the doctrine are particularly applicable in the construction setting: Construction projects are characterized by detailed and comprehensive contracts that form the foundation of the industry's operations. Contracting parties are free to adjust their respective obligations to satisfy their mutual expectations. For example, a developer can contract for low-grade materials that meet only minimum requirements of the building code. When the developer sells those units, a buyer should not be able to turn around and sue the builder for the poor quality of construction. Presumably the buyer received what he paid for or he can bring a contract claim against his seller. Meanwhile, if the developer has a problem with the builder, he too will have a contract remedy. A buyer can avoid economic loss resulting from defective construction by obtaining a thorough inspection of the property prior to purchase and then by either obtaining insurance or by negotiating a warranty or reduction in price to reflect the risk of any hidden defects. Id. (citations omitted). Recognizing these realities, we concluded in American Towers that relief for defeated economic expectations under a design or construction contract was to come from the contract itself, not from third parties. Id. We reasoned that to conclude otherwise would essentially impose the plaintiffs' economic expectations upon parties whom the [plaintiffs] did not know and with whom they did not deal and upon contracts to which they were not a party. Id. at 1192; see also Maack, 875 P.2d at 581 (holding owner's tort claim against architect barred by economic loss rule); Schafir v. Harrigan, 879 P.2d 1384, 1388 (Utah Ct.App. 1994) (applying the economic loss rule outside the context of negligent manufacture); accord Ramerth v. Hart, 133 Idaho 194, 983 P.2d 848, 851 (Idaho 1999) (stating that [t]he economic loss rule applies to negligence cases in general; its application is not restricted to products liability cases). ¶ 36 Despite the above, SME argues that the rationale enunciated in American Towers for extending the economic loss rule outside the products liability context is inapplicable in this case because American Towers involved remote purchasers' claims against an architect, not, like the instant case, a subcontractor's professional malpractice claim against an architect. However, all parties to a construction project, not just the buyers and developers at issue in American Towers, resort to contracts and contract law to protect their economic expectations. Indeed, this is particularly true with contractors and subcontractors whose fees are founded upon their expected liability exposure as bargained and provided for in the[ir] contract[s]. Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wash.2d 816, 881 P.2d 986, 992 (1994) (en banc). Protection against economic losses caused by another's failure to properly perform, including an architect or design professional, is but one provision a contractor, subcontractor, or sub-subcontractor may require in striking his or her bargain. Accordingly, contractors' negligence claims against architectslike the owners' negligence claims against architects in American Towers are akin to the types of commercial situations to which the economic loss rule was meant to apply. See id. at 990 (noting that the economic loss rule was developed to prevent disproportionate liability and allow parties to allocate risk by contract  (emphasis added)). ¶ 37 Moreover, in view of the contractual foundation of the construction industry, and the ability of contractors and subcontractors to negotiate toward the risk distribution that is desired or customary, other jurisdictions have specifically applied the economic loss doctrine to bar contractors' and subcontractors' malpractice claims against architects and design professionals. See, e.g., Fleischer v. Hellmuth, Obata & Kassabaum, Inc., 870 S.W.2d 832, 837 (Mo.Ct.App.1993) (rejecting contractor's negligence claim against architect under economic loss rule); Floor Craft Floor Covering, Inc. v. Parma Cmty. Gen. Hosp. Ass'n, 54 Ohio St.3d 1, 560 N.E.2d 206, 212 (1990) (same); Bernard Johnson, Inc. v. Continental Constructors, Inc., 630 S.W.2d 365, 374 (Tex.App.1982) (same); Blake Constr. Co. v. Alley, 233 Va. 31, 353 S.E.2d 724, 727 (1987) (same); Berschauer/Phillips Constr. Co., 881 P.2d at 992 (same); Rissler & McMurry Co. v. Sheridan Area Water Supply Joint Powers Bd., 929 P.2d 1228, 1235 (Wyo.1996) (same). ¶ 38 Therefore, consistent with our prior analysis in American Towers, and the foregoing authority from other jurisdictions, we hold that the general rule in this jurisdiction prohibiting the recovery of purely economic loss in negligence is applicable to a contractor's or subcontractor's negligence claim against a design professional (e.g., an architect or engineer). [9] ¶ 39 Alternatively, assuming the economic loss rule does extend to tort suits against design professionals, SME requests that this court apply section 552 of the Restatement (Second) of Torts to permit a subcontractor to bring a tort cause of action alleging purely economic damages against a design professional for negligent misrepresentation. [10] ¶ 40 Specifically, section 552 states: Information Negligently Supplied for the Guidance of Others (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. (2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. (3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them. Restatement (Second) of Torts § 552 (1977). ¶ 41 We acknowledge, as SME notes, that this court has under certain circumstances recognized that economic losses are recoverable in tort under section 552. See, e.g., Price-Orem Inv. Co. v. Rollins, Brown & Gunnell, Inc., 713 P.2d 55, 59 (Utah 1986) (holding that a third party had standing to bring, and had sufficiently stated, a cause of action for negligent misrepresentation against a surveyor); Milliner v. Elmer Fox & Co., 529 P.2d 806, 808 (Utah 1974) (citing a tentative draft of section 552 for the proposition that third parties may bring negligent misrepresentation claims against accountants). We also acknowledge that courts in other jurisdictions have allowed the recovery of economic losses in the construction industry under section 552. See, e.g., Gulf Contracting v. Bibb County, 795 F.2d 980, 982 (11th Cir.1986) (per curiam) (applying Georgia law); Village of Cross Keys, Inc. v. United States Gypsum Co., 315 Md. 741, 556 A.2d 1126, 1133-35 (1989); John Martin Co. v. Morse/Diesel, Inc., 819 S.W.2d 428, 432-34 (Tenn.1991). ¶ 42 However, despite the above, several other jurisdictions considering this issue have concluded that, in the context of construction litigation regarding the alleged negligence of design professionals, a tort for negligent misrepresentation alleging damages based purely on economic loss is not available. For example, in Berschauer/Phillips, considering circumstances nearly identical to those before us, the Washington Supreme Court refused to apply section 552 to permit a subcontractor not in privity of contract to bring a tort cause of action against a design professional. 881 P.2d at 993. Although it acknowledged that section 552 is recognized in Washington, the court stated: There is a beneficial effect to society when contractual agreements are enforced and expectancy interests are not frustrated. In cases involving construction disputes, the contracts entered into among the various parties shall govern their economic expectations. The preservation of the contract represents the most efficient and fair manner in which to limit liability and govern expectations in the construction business. . . . . . . . [Therefore,] [w]e hold that when parties have contracted to protect against potential economic liability, as is the case in the construction industry, contract principles override the tort principles in § 552 and, thus, purely economic damages are not recoverable. Id. (emphasis added). ¶ 43 Similarly, in Rissler & McMurry, the Wyoming Supreme Court, again considering nearly identical facts to those before us, also rejected the application of section 552 in the construction setting: [W]e hold that when the plaintiff has contracted to protect against economic liability caused by the negligence of the defendant, there is no claim under [section 552 of the Restatement (Second) of Torts] for purely economic loss. We believe that this ruling not only encourages the parties to negotiate the limits of liability in a contractual situation, but it holds the parties to the terms of their agreement. 929 P.2d at 1235; see also Williams & Sons Erectors, Inc. v. South Carolina Steel Corp., 983 F.2d 1176, 1181 (2d Cir.1993) (finding under New York law, section 552 not adopted to permit a contractor to recover from an architect); Floor Craft Floor Covering, Inc. v. Parma Cmty. Gen. Hosp. Ass'n, 54 Ohio St.3d 1, 560 N.E.2d 206, 212 (1990) (holding that subcontractor could not recover economic losses against design professional under section 552). ¶ 44 We find the reasoning of the Berschauer/Phillips and Rissler & McMurry courts to be persuasive. Like the above courts, we have consistently emphasized the importance of the parties' right to negotiate the terms of a contract, limited only by statutory prohibitions or public policy. See, e.g., American Towers, 930 P.2d at 1190; Bekins Bar V Ranch v. Huth, 664 P.2d 455, 459 (Utah 1983); Biesinger v. Behunin, 584 P.2d 801, 803 (Utah 1978). We have also consistently recognized that parties must abide by the terms of their respective contracts. See, e.g., Geisdorf v. Doughty, 972 P.2d 67, 71 (Utah 1998); Johnson v. Carman, 572 P.2d 371, 373 (Utah 1977); Diamond T. Utah, Inc. v. Canal Ins. Co., 12 Utah 2d 37, 40, 361 P.2d 665, 667 (1961); Shell Oil Co. v. Stiffler, 87 Utah 176, 184-85, 48 P.2d 503, 507 (1935). Were we to recognize a cause of action under section 552, however, parties could essentially sidestep contractual duties by bringing a cause of action in tort to recover the very benefits they were unable to obtain in contractual negotiations. Moreover, we see no principled reason why the application of section 552 would not extend liability beyond contractors and subcontractors to an unlimited number of materialmen and workmen who suffer economic injury as a result of a design professional's alleged negligence, which is precisely the type of situation the economic loss rule was designed to prevent. Therefore, to maintain the fundamental boundary between tort and contract law, we hold that when parties have contracted, as in the construction industry, to protect against economic liability, contract principles override the tort principles enunciated in section 552 of the Restatement (Second) of Torts and, thus, economic losses are not recoverable. ¶ 45 Turning to the facts of this case, the gravamen of SME's negligence claims is dissatisfaction with the plans and specifications prepared by the design team. Indeed, SME acknowledges that its tort claims seek purely economic damages, unaccompanied by any claim of personal injury or damage to other property. Moreover, although SME did not contract with TVSA, GSBS, or Reaveley for the design of the project and therefore had no opportunity to negotiate directly with the design team regarding the limits of liability, it did have the opportunity to allocate the risks associated with the costs of the work when it entered into a subcontract agreement with Hughes-Hunt, which proved to be an adequate contractual remedy considering the fact that SME settled with Hughes-Hunt for $150,000 and the assignment of Hughes-Hunt's claims. Therefore, we conclude that the trial court correctly dismissed SME's direct and assigned negligence claims against the design team under the economic loss rule. To allow the claim[s] would be to impose [SME's] economic expectations upon parties whom [SME] did not know and with whom [it] did not deal and upon contracts to which [it] was not a party. American Towers, 930 P.2d at 1192. Accordingly, SME's recovery of economic losses is limited to those damages recoverable from Hughes-Hunt, and to any assigned contractual claims that survive this appeal on remand.