An individual, Mr. Charlwood, purchased a house, remodeled it, and then sold it to Mr. Thorp, the Purchaser. Ten years later The Purchaser noticed issues with the property, including a deck that was apparently structurally failing. Purchaser sued Seller for defective construction, negligent misrepresentation, and fraudulent misrepresentation. Trial court dismissed the suit based on the economic loss doctrine barring the claims, and the court awarded prevailing party attorneys fees to the Seller. The court determined that the economic loss rule barred Thorp’s claims because they were “not premised upon any independent duty that exists apart from the REPC.” The court further ruled “that there is no legal or factual basis to support [Thorp’s] theory that [Charlwood] assumed the role of a contractor-seller and the potentiallyheightened duties that go along with this role.”
This decision was affirmed on appeal. In doing so, the court explained, “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.” Put differently, “[t]he economic loss rule prevents recovery of economic damages under atheory of tort liability when a contract covers the subject matter of the dispute.” “A principal reason behind the rule is that“when a party is merely suing to recover the benefit of its contractual bargain, there is no inherent unfairness in limiting that party to a breach-of-contract claim.” In this case, the court held that the negligence and fraud theories both merely raised issues that were addressed in the breach of contract claim and did not create an independent tort action. The court also enforced the prevailing party attorneys fees clause to award the Seller attorneys fees for both the trial and the appeal. Thorp v. Charlood, 501 P.3d 1166 (Utah 2021).
On appeal, Thorp argued the district court erred in ruling that the economic loss rule barred his claims for negligentmisrepresentation and fraudulent misrepresentation. Regarding his negligent misrepresentation claim, he contends that Charlwood owed common law duties that were “independent of the contracts that buyers and sellers make.” He alsocontends that the rule did not apply to his claim for fraudulent misrepresentation on the theory that this claim did not completely overlap with a breach of contract claim.
A. Negligent Misrepresentation
The court, citing several previous court decisions stated: “The economic loss rule applies where a duty exists that overlapswith those contemplated in a contract. See (“[W]here the party’s tort claim is a mere duplication of its breach of contractclaim, there is no exception to the economic loss rule. The tort claim is barred.”); (“[T]ort claims … are barred by theeconomic loss rule if those claims are grounded in the same duties that exist by virtue of the parties’ contract.”).Conversely, “when a duty exists that does not overlap with those contemplated in a contract, the economic loss rule doesnot bar a tort claim because the claim is based on a recognized independent duty of care and thus does not fall within the scope of the rule.”
Purchaser argued that Seller owed two distinct duties that were independent of the contract.
Duty 1: Duty of Sellers of Real Property.
This is a duty to “disclose material known defects that cannot be discovered by reasonable inspection by an ordinary prudent buyer.” But the court found that the Seller had a contractual obligation to disclose the same information and the contract and negligence counts of the complaint therefore overlapped – thus making the economic loss rule applicable.
Duty 2: Duty of Developer-Sellers and Contractor-Sellers.
This duty is that of the seller-developer to “disclose information known to [them] concerning real property … when that information is material to the condition of the property purchase by buyer.” This argument failed because the Seller was not original builder of the home on the Property. And there was no contract for construction services to be provided by the Seller to the Buyer. For these reasons, the court concluded that the Buyer failed to demonstrate that the terms “developer-seller” and “contractor-seller”, as contemplated by a common law duty, “applied to the those who take to remodel and sell and already existing home.”
B. Fraudulent Misrepresentation.
Fraud-based torts are also subject to the economic loss rule. “If the ‘bad acts’ (even intentional ones) are covered by acontract, they remain in the realm of contract law.” “Accordingly, the economic loss rule bars even intentional torts where the claim “overlaps completely with a contract claim” because a breach of contract claim would allow the wronged partyto recover for the same conduct.” As further explained by the court,
“Thorp asserts that the economic loss rule does not bar his claim for fraudulent misrepresentation because he “does not plead an overlapping contract claim in the Verified Complaint that is ‘entirely duplicative’ ofhis tort claims. Rather, [he] pleads claims that arise from duties independent of the REPC (or any other contract).” Because we concluded above that the duties he pleaded were duplicative of the REPC, weconclude that Thorp’s fraudulent misrepresentation claim also “overlaps completely with a contract claim” and is accordingly barred by the economic loss rule.”
Prevailing Party Attorneys Fees
The trial court had jurisdiction to award attorneys fees. The legal right to attorneys fees was established by the contract. Utah law requires the court to apply the contractual attorney fee provision and do so strictly in accordance with the terms of the contract.
The relevant provision of the REPC states, “In the event of litigation or binding arbitration to enforce this Contract, the prevailing party shall be entitled to costs and reasonable attorney fees.” Here, the issue presented is whether Charlwood’s invocation of the economic loss rule to defend against Thorp’s tort claims was an action “to enforce” the REPC. Thorpargues that Charlwood’s invocation of the economic loss rule “is premised merely on the ‘existence’ of a contract and notthe enforcement of any contractual obligation.”
The court explained that:
“Although Thorp ultimately brought causes of action sounding in tort, his complaint relied on specific provisions of the Seller’s Disclosures (and the REPC, more generally) in bringing those claims.” “Furthermore, by arguing that the economic loss rule barred Thorp’s tort claims, Charlwood necessarily sought to enforce specific terms ofthe REPC. First, the very nature of Charlwood’s argument involved establishing that a valid contract existed and thatthrough application of the economic loss rule, the terms of that contract should be enforced to bar Thorp’s non-contractual claims. Second, the economic loss rule required Charlwood to establish that the terms of the REPCoverlapped with the alleged common law duties of disclosure that Thorp was alleging were violated. And inholding that the economic loss rule applies in this case, the district court concluded that “the alleged misrepresentations” on which Thorp’s tort claims were based “are all governed by the [Contract].”
For these reasons the court affirmed the award of attorneys fees both at the trial level and also for attorneys fees incurred in handling the appeal.
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. 24, No. 9 (November 2022).
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